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Monetary Tightening Easing Market Expectations Spread, Will the Stock Market Continue to Stabilize?
The stock market continues to stabilize despite falling real estate prices and paralyzing some bond markets.
The US Nasdaq index rose 10% for two days on the 10th and 11th, and continued to be stable last week.
Expectations that the pace of interest rate hikes by the US Federal Reserve will be slowed improved investor sentiment as consumer price inflation in the US was found to be lower than expected last month.
The U.S. Consumer Price Index (CPI) for October, announced by the U.S. Department of Labor on the 10th, rose 7.7% from a year ago and 0.4% from a month ago.
The annual consumer price inflation rate fell 0.5%p from last September, and the month-on-month increase rate of the consumer price index was the same as in September.
What the market paid attention to was the rate of increase in consumer prices compared to the previous month.
The month-on-month inflation rate in October was 0.4%, the same rate as last September, but investors paid attention to the fact that it was 0.2%p lower than the 0.6% expected by the market.
In particular, the core inflation rate, which excludes food and energy, which are highly volatile, halved from a 0.6 percent increase in September to a 0.3 percent increase in October.
With an increase of 6.6%, the annual core inflation rate, which was the highest since 1982, fell to 6.3%.
By item, prices of daily necessities excluding food and energy fell 0.4% on average.
Used cars and trucks fell 2.4%, clothing 0.7% and medical services 0.6%.
The financial market interpreted the rise in consumer prices as having passed the peak, as the rate of increase in consumer prices, which prompted the Fed to raise the base rate by 0.75 percentage points for the third consecutive year, showed a higher-than-expected increase in September.
As a result, the US Federal Reserve's rate of increase in the base rate will be eased from a giant step of 0.75%p to a big step of 0.5%p, and expectations that the upper end of the US base rate, which is expected in the first half of next year, will also decrease from 5.5% to 5.0%. has spread
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The Economist "October inflation rate is a false signal... Employment and consumption are still hot"
The British Economist reported in an article on the 15th that the rate of consumer price inflation in the United States in October caused false expectations that the Fed would slow monetary tightening as inflation had passed its peak and returned to stability, and that it would be a 'head fake'. rated as highly probable.
Just as the U.S. Federal Reserve misjudged that the inflation that began last fall would be temporary, and investors were disappointed in July after expecting the Fed to slow its rate hike, the U.S. Consumer Price Index in October was also misinterpreted. that it is doing
The Economist reported that although the economy is showing signs of slowing down due to rapid interest rate hikes around the world, the United States and other developed countries are still having a job shortage and consumption is not decreasing.
Goldilocks, in which economic growth continues without inflation, was a thing of the past. It means that even if there is a long way to go to achieve the 2% inflation target, it is too far.
U.S. jobs added 261,000 in October, down from 315,000 in September, but well above analysts' expectations of 191,000.
The unemployment rate also rose 0.2%p from September to 3.7%, but remains at a historically low level.
The wage increase rate was also 4.7%, far exceeding the 3% level before Corona 19.
Currently, there are 1.9 jobs per job seeker.
It is an analysis that the number of jobs is increasing, but the number of people working is not increasing significantly.
Analysts say that personal consumption is not decreasing due to the pockets of consumers, such as the estimated disposable income that Americans have accumulated over the past two years, when Corona 19 was prevalent, reaching $2 trillion.
According to the US Department of Commerce on the 16th of last month, retail sales in October rose 1.3% from the previous month.
This is the highest rate of increase in the last 8 months.
The Economist diagnosed that none of wages, expected inflation, and inflation are showing signs of slowing down.
In the case of the United States, the inflation that started with used cars is spreading to other items, and in Japan, the inflation that started with food is spreading to other fields as well.
The Economist reported that, as a result of analyzing the top 36 countries in terms of income, the proportion of products with a price increase of 4% or more increased from 60% in June last year to 67%.
Even in Japan, where inflation is low, a third of the commodities analyzed rose by 4% or more.
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In the case of wages, which act as a omnidirectional inflation factor, the rate of increase in the United States reached 6% and then declined somewhat, and it is analyzed that the rate of increase in wages in the United Kingdom has passed its peak.
But wage growth in the eurozone, which averaged 5%, is accelerating.
In the case of Germany's steelmaker Metal, the union is demanding an 8% wage increase, and wages in New Zealand, Norway and Sweden continue to rise.
Britain's October consumer price inflation rate announced on the 16th was 11.1%, the highest since October 1981, right after the second oil shock, in 40 years.
While gas (130%) and electricity (66%) prices soared, food and non-alcoholic beverage prices rose 16.4%, the highest since 1977.
Expected inflation is also showing no signs of slowing down.
A Cleveland Fed survey last month found that average people in middle-income countries expect prices to rise by 5% in the next year.
The expected one-year inflation rate for U.S. companies is 7%, the highest since the study began in 2018.
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Uncertainty still... "Unintended damage is inevitable in catching inflation"
On the 2nd, US Fed Chairman Jerome Powell announced the third giant step, saying that tightening monetary policy to control inflation still has a long way to go.
Powell, who classified monetary tightening into three categories: speed, breadth, and duration of interest rate hikes, said, “It is true that interest rates have been raised fast enough so far, but the duration and extent of interest rate hikes are still uncertain.”
The pace of interest rate hikes can be slowed down, but it is currently impossible to say for how long and how much further they will be raised.
The British economist diagnosed that the US Fed's monetary tightening came too late, and inflation has already risen so much that it is unlikely that monetary tightening will have a stabilizing effect without causing unintended damage.
Powell, chairman of the U.S. Federal Reserve, also said, “The possibility of a soft landing in which prices stabilize without triggering an economic recession is low.”
It is observed that raising interest rates to a level that will trigger a significant economic recession and rising unemployment will be inevitable in order to catch inflation, which has already risen as it is expected to rise.
Considering that the central bank's financial and monetary policy is transmitted to the real economy through the financial market, the recent stabilization of the financial market is a result contrary to the Fed's intention and could lead to an increase in the possibility of further monetary tightening in the future. analysis is also available.
The central bank's financial and monetary policy, which regulates the base rate and the money supply, has far-reaching effects, but it is not known when and how the effect will appear.
No one can predict with certainty when the unemployment rate will suddenly soar and the economy will plunge into a panic, but given the current situation, it seems highly likely that strong financial tightening will continue for some time.
The bankruptcy of FTX, the world's third-largest virtual currency exchange, which occurred on the 11th following the Terra and Luna incidents that occurred in May, is interpreted as a signal that the bubble burst due to a sharp interest rate hike is underway everywhere.
The market capitalization of virtual currencies around the world, which was close to $3 trillion in November last year, has shrunk to $830 billion as of the 20th.
It shows how quickly a bubble that formed rapidly at a level similar to that at the beginning of last year can burst.
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“10 years to recover stock prices during a financial crisis… Careful judgment needed”
Ray Dalio, founder of US hedge fund Bridgewater, analyzes 48 financial crises in which GDP shrank by 3% or more over the past 100 years. Navigating Big Debt Crises) revealed that even during the Great Depression in the 1930s, there were rallies in bear markets, in which stock prices rebounded six times according to the policies of the government and central bank.
Stocks have rebounded from 16% to 48% during this period, but stocks have fallen up to 89% from their peak during the Great Depression.
During the financial crisis, stock prices fell by an average of 50%.
According to Bridgewater's report, when a recession occurs due to leverage (deleveraging), which raises interest rates and shrinks credit supply, it takes an average of five to 10 years for economic activity to return to previous levels and for stock prices to return to previous levels. It took an average of 10 years.
The term 'lost decade' is derived from this phenomenon.
It was in March that the US Federal Reserve began to raise interest rates, and it was in June that it began to shrink the money supply.
It is now eight months since the bubble caused by ultra-low interest rates and huge excess liquidity began to burst, and the leverage reduction of central banks is highly likely to continue for a considerable period of time.
The Bank of Korea is expected to hold a Monetary Policy Committee meeting on the 24th and raise interest rates again.
The U.S. Federal Reserve is also expected to hold its Federal Open Market Committee meeting on the 13th and 14th of next month and raise interest rates by more than 0.5%p.
The saying that inflation can be controlled only when the real interest rate is higher than the inflation rate is gaining momentum.
Last month, the consumer price increase rate in the United States is estimated at 7.7%, and the expected inflation rate is around 5%.
In other words, to control inflation, the benchmark interest rate should be raised at least above the expected inflation rate of 5%.
James Bullard, president of the Federal Reserve Bank of St. Louis, said on CNBC last Thursday, "The current base rate is not enough to control inflation," suggesting that the appropriate base rate is between 5% and 7%.
Monetary tightening to control inflation is highly likely to continue for a considerable period of time, and the possibility of bringing about an unexpected crisis cannot be ruled out.
This is a time when prudent and conservative investors are required to make judgments.