Author: Fan Zhijing
U.S. stocks ended the third quarter in a new round of selling, and the "curse" was staged again in September, with the three major stock indexes falling to their lowest levels in nearly two years.
With policy expectations still aggressive, investors worry that future interest rate hikes will further weigh on the U.S. economy, while spillover effects may spread to the world, triggering volatility risks in currency and bond markets.
However, on the other hand, trading in the derivatives market has heated up, and a large number of funds have been gambled by the stock index to rebound.
Fed reinforces hawkish stance
At the Fed meeting last month, the Federal Open Market Committee (FOMC) decided to raise interest rates by 75 basis points for the third time in a row.
At the same time, policy expectations in the Economic Outlook Summary SEP have become increasingly hawkish.
It is worth noting that the important consensus within the Fed on inflation has also been reflected in public speeches over the past week.
While Fed Chairman Jerome Powell did not comment on monetary policy last week, speeches by new Fed Vice Chairman Lael Brainard set a hawkish tone for policy at this stage.
Monetary policy is likely to remain restrictive until it is determined that inflation has moderated amid "very high" price pressures, she said.
Bob Schwartz, senior economist at Oxford Economics, said in an interview with a reporter from China Business News that the Fed's attitude shows that they are determined to implement a restrictive monetary policy until inflation returns to the 2.0% target as soon as possible.
After hitting this cycle high early next year, rates are expected to remain steady until slower growth and lower inflation make room for a rate cut in 2024.
The latest data also provided support for the Fed's actions. First of all, inflation pressure is still high. As one of the most concerned inflation indicators, the US personal consumption expenditures price index PCE rose more than market expectations in August.
Second, the labor market is healthy. The latest jobless claims fell to 193,000, the lowest level since April this year. This is exactly the opposite of what the Fed wants to see. The hot employment environment may become a potential risk to push up inflation.
On October 7th, the United States will announce the September non-farm payrolls report. Once the employment data exceeds expectations, it may further aggravate concerns about excessive policy tightening.
Schwartz told reporters that consumers are still supporting the economy.
Despite high and rising prices, personal consumption rose slightly, helped by a strong job market and rising incomes.
The Fed is clearly not going to be happy with the price indicators in the latest income and spending report, so they have a strong incentive to keep raising rates until the inflation trend is broken.
Policy expectations also continued to push up U.S. bond yields, with the 2-year U.S. bond yield, which is closely related to interest rates, standing at 4.2%, while the benchmark 10-year U.S. bond yield exceeded the 3.8% mark.
FedWatch, a CME rate watch tool from CME Group, shows that the probability of a 75 basis point hike in November and a 50 basis point hike in December are both slightly more than 50%.
Schwartz believes the Fed is expected to raise rates by an additional 125 basis points by the end of the year amid persistently high inflation pressures.
He sees a modest rebound in U.S. economic growth in the second half of the year, but continued high inflation, more aggressive Fed monetary policy tightening, negative spillovers from slowing global economic activity, and weak corporate earnings will propel the U.S. economy into 2023. Entering a mild recession in half a year.
At the same time, heightened financial market volatility also poses downside risks to the growth outlook.
Oversold rebound is approaching but risks remain
Affected by persistently high inflation, the Federal Reserve's aggressive stance on raising interest rates since August has pushed U.S. stocks further into a bear market, with the three major stock indexes falling for the third consecutive quarter.
The performance of individual stocks continued to be sluggish.
With 96 companies in the S&P 500 hitting new 52-week lows, according to financial data provider FactSet, Art Hogan, chief market strategist at B. Riley Wealth, said: “If we’re going to stop the decline, we need to look at What you've got is a significant reduction in inflation, but it's not there yet. So that's not going to change what's been driving the stock market down, and it's not going to change the reaction of investor sentiment."
In addition to concerns about monetary policy, multiple performance warnings have also attracted widespread attention.
In the past week, both Nike and Carnival have mentioned inflation-related profit pressures in their earnings reports.
Micron Technology, the largest U.S. memory chip maker, saw its revenue fall by about 20% year-on-year last quarter to $6.64 billion, the first drop since the 2020 pandemic, and issued weak guidance.
At the same time, the operations of big tech stocks have also been affected by economic pressures.
Apple abandoned plans to ramp up production of the iPhone 14 this year due to slowing demand, and the company now expects iPhone sales to remain around 90 million in the second half of the year, roughly the same as in 2021.
Meta Platform, the parent company of Facebook, announced that Meta would freeze hiring, restructure people and teams, cut costs and shift priorities.
In the volatile environment of the stock index, the CBOE fear index VIX closed at 31.62 last week, staying above the 30 mark for the second consecutive week.
Derivatives trading is active again. According to data provided by Charles Schwab, the average daily trading volume of U.S. stock options since September has reached 43.3 million, approaching the historical peak set in November last year.
Randy Frederick, managing director of trading and derivatives at Charles Schwab, sees a 13.3% month-on-month increase in VIX call open interest and a 25% increase in put open interest in the Fear Index over the past week. 5 times to 10 times the level, showing that with the volatility running at a high level, funds began to play oversold and rebound.
Historical data shows that U.S. stocks are expected to usher in a stabilization and recovery in October, especially after a sharp sell-off.
Dow Jones Market Data statistics found that since the inception of the S&P index, there have been 11 cases in which the S&P has fallen by 7% or more in September, and the following October the index has risen by an average of 0.53% and a median of 1.81%.
But a potential rebound doesn't mean the risks are gone.
Michael Hartnett, chief investment strategist at Bank of America Securities, said the NYSE composite index, which includes U.S. stocks, depositary receipts and real estate investment trusts, has fallen below a number of key technical support levels, including 200-week moving average, 2018 and 2020 highs, and more.
The current loss situation could force the fund to sell more assets to raise cash, leading to a "sell-off."
Hartnett expects the S&P 500 to test 3,333 points first this year, after which the U.S. stock market will usher in a brief rebound, but the real low will not be reached until the first quarter of next year, when the U.S. recession and credit shock will lead to Yields, USD and Fed hawkishness have inflection points from their peaks.