The Fed's interest rate hike expectations have suddenly cooled, and U.S. stocks are about to "turn from bears to bulls"?

　　First Financial Author: Fan Zhijing

　　In the past week, U.S. stocks ushered in a long-awaited rebound, ending the continuous decline since the second quarter.

　　The Fed has once again become a "savior". After the release of the minutes of the May meeting, the three major stock indexes all rose by more than 5% in the remaining half week.

　　Meanwhile, the department store retailer's upbeat earnings outlook, strong consumer spending and signs of peaking inflation also partly eased fears of a sharp economic slowdown.

As the path of monetary policy is further clarified, many institutions believe that the rebound will continue.

For individual investors who buy the dip, bigger returns are expected.

　Fed rate hike expectations cool

　　Since the Federal Reserve announced on May 4 that it would raise interest rates by 50 basis points for the first time in nearly 20 years and was about to start a plan to shrink its balance sheet, concerns about the outlook for the U.S. economy have increased, and they are worried that aggressive monetary policy will lead to stagflation or even recession.

The minutes of the latest meeting showed the Fed reiterated its firm commitment to restoring price stability and will assess the impact of policy on the economy later this year.

　　Bob Schwartz, senior economist at Oxford Economics, said in an interview with a reporter from China Business News that the message conveyed by the minutes of the meeting was not as tough as the outside world expected, and the Fed plans to raise interest rates by 50% in the next two meetings. basis point.

Then with nearly eight weeks between the July-September meetings, Fed officials will have plenty of time to observe the economy's performance and map out the direction of future policy paths.

　　Data showed U.S. consumer spending remained buoyant, raising hopes of a soft landing for the economy.

U.S. personal spending rose 0.9% in April, and inflation-driven price increases only accounted for a small portion of the increase in spending.

Wage growth has acted as a cushion for consumption growth, and a tight labor market has forced employers to pay more to retain workers.

Bank of America CEO Brian Moynihan said recently that many Americans have not spent all their stimulus money.

Many customers now have more money than they did a year ago.

"For consumers at large, balances continue to hold steady, with spending levels up 10 per cent in the first few weeks of May compared to May last year," he said.

　　At the same time, signs of a peak in prices continued to emerge.

As the inflation indicator that the Fed is most concerned about, the growth rate of the core personal consumer price index (PCE) in the United States fell to 4.9% in April, the second consecutive month of decline after a lapse of nearly two years. The energy price factor also reduced the monthly rate of inflation. to an 18-month low of 0.2%.

　　Stabilizing the economy and easing price pressures also gave the Fed more room for policy.

Money market interest rate futures show that the Fed's Fed funds rate at the end of the year is expected to fall by 25 basis points from last week, to 2.5% to 2.75%.

Bank of America sees a subtle but significant change in the Fed's communication approach, with the option to moderate or even pause rate hikes later in the year given the challenging macro backdrop, tighter financial conditions and a potential softening of inflation.

　　Schwartz told reporters that the Fed still needs to be vigilant about inflation.

The University of Michigan's consumer confidence index is at its lowest level since 2011, and more and more households behind the maintenance of consumption have expressed dissatisfaction with prices and concerns about the economic outlook.

He believes that although the risk of recession is low in the short term, with the normalization of interest rates, the road ahead for the U.S. economy will not be smooth. When interest rates continue to approach the neutral level, the pressure to slow down will gradually emerge. It is expected that the U.S. GDP growth rate in 2023 will fall back to 1.8%, which also poses a challenge to the Fed's future policy choices.

　Can the bulls chase after the victory?

　　After nearly two months of continuous adjustment, the three major U.S. stock indexes ushered in a short holiday with a weekly gain of more than 6%.

The Dow and S&P 500 both had their best weekly performances since November 2020 last week, according to Dow Jones Market Statistics.

　　The retail department store sector has become one of the hot spots in the market in the past week.

In the context of the decline in the performance of large supermarket chains such as Walmart and Target, American consumers have significantly increased their spending on department stores and discount chains. Macy's, DollarGeneral, and DollarTree rose more than 20 percent for the week. %.

At the same time, star technology stocks that have been silent for a long time rebounded sharply, driving market sentiment. Apple and Microsoft both rose by more than 8% in a single week.

　　The market sentiment still needs to be recovered. According to the market sentiment survey of the American Association of Individual Investors (AAII) as of May 25, the proportion of optimism about the short-term market fell below 20% again after three weeks, and at the same time, the market was bearish. For the fourth time in the past five weeks, the proportion has exceeded 50%.

　　But the extremes in sentiment could mean that a bargain-hunting opportunity is emerging.

　　According to data released by Bank of America Global on the 26th, the Bofa Bull & Bear Indicator (Bofa Bull & Bear Indicator) fell further into the buying range, while net inflows to the US stock market last week reached the highest level in nearly 10 weeks.

Although bottom-hunting continued to encounter setbacks, the pace of retail investors buying on dips has not changed this year.

Research firm VandaResearch said individual investors are buying stocks with enthusiasm similar to the hype of meme stocks in 2021.

Retail investors bought $76 billion worth of stocks in the three months ended May 24.

　　In the derivatives market, investors are also gearing up for a further rebound.

According to the data provided by Charles Schwab to the first financial reporter, in the past week, the open interest of VIX call options and put options increased by 7.2% and 14.6% month-on-month, respectively, at the same time, the S&P 500 index call options and put options open interest The volume increased by 4.7% and 3.3% month-on-month respectively.

Both show that many funds are betting that the short-term U.S. stock market will stabilize and rebound.

　　However, Wall Street institutions are still divided on the future market space.

Citigroup and JPMorgan Chase believe that U.S. stocks are expected to continue their rebound, while Morgan Stanley and BlackRock have warned that this year's lows may not yet be seen.

　　Morgan Stanley chief strategist Michael Wilson said in a report that it is too early to be bullish given the risks to U.S. economic growth are just emerging.

The biggest risk areas include a decline in consumers' ability and willingness to spend, rising pressure on earnings, excess inventory and a cyclical downturn in tech spending.

　　BlackRock takes a neutral stance on U.S. stocks, arguing that the ongoing rally in risk assets is not driven by a sustained catalyst.