Looking at flowers in the fog? Investors panic as the Fed stays in suspense

　　Author: Fan Zhijing

　　After the Fed's interest rate meeting, the volatility of the U.S. stock market, which performed strongly at the beginning of the year, has increased.

The latest comments from Fed Chairman Jerome Powell sent a similar signal to last week, acknowledging progress in fighting inflation while suggesting that the goal is still a long way off.

As the market re-anchors the terminal interest rate target pricing above 5%, concerns about the economy may become a flashpoint for market turmoil.

　　End point for Fed rate hikes still unclear

　　After six days, Federal Reserve Chairman Powell once again appeared in front of the public eye.

As an annual routine, his speech at the Economic Club of Washington this year was particularly eye-catching.

Turning to the outlook for prices, the Fed chairman said U.S. inflation should come down significantly this year and sidestepped the topic of terminal interest rates.

This statement once triggered a short-term rise in US stocks on Tuesday.

　　But the Fed remained cautious, with Powell reiterating that "it will take some time" to get inflation back to its 2% medium-term target.

The January non-farm payrolls report reassessed the outlook for the current rate hike cycle.

Federal funds rate futures show that the terminal interest rate target has risen to above 5.10%, and the implied rate cut space was once narrowed to 15 basis points.

　　Boris Schlossberg, a macro strategist at BK Asset Management, an asset management agency, said in an interview with a reporter from China Business News that the Fed still has not released any signal of policy shift, and the current situation is in line with their responsibilities and goals. At the same time, the labor market remains healthy, which will also support the continuity of policy in the short term.

　　JPMorgan economist Michael Feroli wrote that Powell's statement was "very similar" to the tone after last week's Fed meeting.

"It's a data-dependent stance, and he's emphasizing what conditions need to be more or less constrained. Because the Fed is looking at the economy's response to rate hikes, especially whether inflation continues to decline since the middle of last year.

　　There are still six weeks before the next meeting, and there will be a lot of economic data released during the period. For the Fed, it is far from the time to make a decision.

Policymakers are open to shocks in both directions.

Tighter monetary policy may be approved if continued strong job growth leads to higher wages and prices, but a continued cooling in inflation could also influence policy decisions.

In statements so far this week, only a few officials, including New York Fed President Williams, have talked about specific targets for terminal interest rates.

　　A reporter from China Business News noticed that two weeks before the January meeting, there were still differences within the Fed on raising interest rates by 25 basis points and 50 basis points. It was not until the December CPI data came out that the committee reached a consensus.

Given that the Fed needs to assess the cumulative effects of monetary policy, a final decision may also not be clear until the eve of the March meeting.

　　At present, the trend of commodity disinflation is basically formed, and the price pressure related to rent is expected to turn around in the middle of the year, while the rising trend of service inflation does not seem to have an obvious inflection point, and the continued hot labor market seems to be a hidden danger.

Schlossberg analyzed to reporters that the new crown epidemic has largely changed the structure of the US labor market, including factors such as population aging, early retirement, and weak immigration, which have dragged down labor supply and made it difficult for the employment participation rate to return to pre-epidemic levels. level.

He believes that these changes may signal that the labor market is slow to respond to the Fed's restrictive policies, thereby increasing uncertainty.

　　To the Fed's relief, wage growth is gradually slowing.

Data from the U.S. Department of Labor showed that in the fourth quarter of last year, the quarter-on-quarter increase in corporate wages and benefits expenditures further slowed down.

The Federal Reserve's Beige Book of economic conditions also showed that the increase in labor supply eased the overall extremely tight situation.

Many Fed officials would like to see further relaxation in the labor market, with slower wages leading to lower demand and lower prices.

Schlossberg believes that the Federal Reserve has reached a consensus on raising interest rates by 25 basis points in March, but the subsequent policy path is still unclear.

Before the Fed sees more signs of falling labor costs, it is likely to continue to push for 1-2 rate hikes, and then keep the rate for a longer period of time to see the actual effect.

　　US stocks may face profit-taking

　　After experiencing a rebound at the beginning of the year, the latest changes in the Fed's policy stance, corporate earnings reports and economic outlook have shaken market confidence. The VIX, a measure of investor sentiment, has rebounded, and profit-taking pressure is gathering.

　　The economic recession is still the biggest risk point for US stocks in the eyes of institutions in the first half of the year.

Signs of loose economic momentum can be seen everywhere except in the labor market.

Real estate and manufacturing, which account for nearly a quarter of U.S. GDP, continued to slump. The New York Fed's manufacturing index fell to a new low since the epidemic in January.

As the main driving force of the U.S. economy, the cooling signal of the consumer side began to sound the alarm. In December last year, the monthly rate of retail sales in the United States fell by 1.1% month-on-month. The traditional holiday season at the end of the year was not busy.

　　Consumption data released by the Federal Reserve this week showed that U.S. consumers’ credit consumption increased by $11.6 billion in December last year, and the growth rate fell to 2.9%, the smallest increase since 2021.

In terms of inflation, credit increment is regarded as an important indicator. Consumers tend to open their wallets when the economy is good, and reduce unnecessary spending when the economy is bad.

　　As the Fed’s interest rate hike cycle continues, the pressure on demand from the economic slowdown will eventually be reflected in corporate performance, which in turn will impact market valuations and the stock market will fall sharply.

In a report released this week, JPMorgan strategist Marko Kolanovic wrote that under economic pressure, companies will face difficult choices of laying off workers or deteriorating profit margins. "Disinflation is not worth it now. Celebrating. Interest rates are in a restrictive state, which will put more pressure on the economy. And rising wages will still be a drag on corporate profit margins, which may lead to more layoffs."

　　Morgan Stanley chief equity strategist Wilson (Michael Wilson) said that the rally in U.S. stocks since the New Year will end, and investors are fighting against the Fed.

He believes that due to the Fed's reluctance to shift to a more moderate stance, the reality of the worst corporate earnings recession since 2008 is being mispriced again, and U.S. stocks will hit a new low for this round of adjustment at the end of the first quarter or early in the second quarter.