The Fed's expected rate cut encounters a "cold wave". Can U.S. stocks start a new trend?

Market expectations for the Federal Reserve to cut interest rates in March are gradually cooling down. Economic resilience and the caution of Federal Reserve officials have made the prospect of a policy turning point unclear, and U.S. stocks briefly fluctuated.

However, after a brief downturn, technology stocks once again became the "engine" of the rebound, and the S&P 500 index successfully exceeded the historical high set in January 2022. As the three major stock indexes regain their losses during the year, Charles Schwab believes that U.S. stocks are expected to make further gains in the coming week, but they need to be wary of the impact of U.S. bond yields on risk appetite.

Interest rate cut expectations cool down

U.S. economic data continued to show resilience last week. Retail sales increased by 0.6% in December last year, significantly better than market expectations. Given that consumer spending accounts for 2/3 of the economy, some analysts believe that this shows that the current economy is strong and supports the view of a "soft landing" or even a "no landing".

In terms of the labor market, the number of initial jobless claims fell further to 187,000, the lowest since September 2022. At the same time, the number of people continuing to apply for unemployment benefits also fell back to 1.8066 million, and the tight labor supply situation continues to exist. People are more optimistic about the economic outlook. The University of Michigan Consumer Survey showed that the confidence index rose to the highest reading since July 2021 in January.

The Federal Reserve's latest Beige Book of Economic Conditions stated that most regions reported "little change" in economic activity in the recent period, with employment levels stable and prices rising moderately.

Bob Schwartz, senior economist at Oxford Economics, said in an interview with China Business News that in the past few months, driven by the strong labor market, slowing inflation, and expectations that the Federal Reserve will soon shift to interest rate cuts, Financial conditions are loose and the possibility of economic recession has declined. "Although the pace of spending will be under pressure in the future, there is reason to believe that consumers will open their wallets."

The recent strong data has led Federal Reserve officials to frequently lower their expectations for an interest rate cut as early as March. Atlanta Fed President Bostic does not expect a rate cut earlier than the third quarter of this year. Chicago Fed President Goolsby emphasized on the eve of the silence period that if progress continues to be made on inflation, the Fed may begin to cut interest rates this year, "but we don't want to make a commitment before the work is completed."

Affected by this, U.S. bond yields stabilized and rebounded. The 2-year U.S. bond, which is closely related to interest rate expectations, rose 27 basis points on the week to 4.07%, and the benchmark 10-year U.S. bond rose 19.6 basis points to nearly 4.15%. Federal funds rate futures show that the probability of a rate cut in March has dropped below 60%, making May a popular option, and traders have also adjusted the room for rate cuts to five times throughout the year.

Jim Reid, chief strategist at Deutsche Bank, said: "The big question facing the market right now is whether the direction of interest rates will mark a more challenging year for the year. After a series of relatively 'hawkish' central bank comments and retail sales After being surprisingly strong, easing expectations are cooling down." However, he believes that without the impact of economic risks, the prospect of interest rate cuts this year is still optimistic.

Schwartz told China Business News that lower inflation expectations are encouraging news for the Fed. Strong wage growth and declining inflation mean that real wage growth will continue to support consumption. "As economic growth slows down in the future, this will support the shift to interest rate cuts this year." He analyzed that the Fed still needs to remain cautious to ensure that monetary policy does not become too strict and achieve a soft landing through rebalancing of the labor market. Schwartz reiterated his previous view that the conditions for a rate cut in March are not yet met.

Market gains may need to deal with resistance from U.S. debt

After weeks of waiting, the S&P 500 last week hit a new all-time high set two years ago. After TSMC and AMD released positive results, investors' optimism about artificial intelligence drove chip manufacturers and large-cap technology stocks to attack across the board, and the Nasdaq and the Dow also recovered their losses during the year. According to statistics from Dow Jones Markets, the Nasdaq is less than 6% away from its all-time high.

Institutions continue to be optimistic about the prospects of the technology industry. Bank of America's January fund manager survey showed that more than two-thirds (68%) of funds said they believe the Federal Reserve will be the most important driver of global bond yields in the next year. Technology and biotech companies will be the main beneficiaries of lower interest rates, with cheap access to capital likely to boost innovation-driven growth companies that invest heavily in research and development.

Matt Stucky, chief portfolio manager at Northwestern Mutual Wealth Management, said stock market investors are still "priced" for a soft landing in the U.S. economy, and "more confident consumers will continue to spend." , and keep the economy resilient."

However, some institutions believe that the hot market has hidden worries. Goldman Sachs strategist Cecilia Mariotti wrote in a report that the bank's own indicators show that stock market positioning and market sentiment have risen to quite bullish levels, which would usually limit further gains. On the other hand, since 2024, the scale of capital inflows into the U.S. stock market has slowed.

London Stock Exchange (LSEG) capital flow statistics show that investors are still worried about the unclear outlook for the Federal Reserve's policy. As expectations for a March interest rate hike have cooled, U.S. stock funds experienced a net outflow of US$9.53 billion last week, and the scale of selling in the past two weeks has exceeded US$20 billion. At the same time, U.S. money market funds with safe-haven properties sold a net $22.83 billion, the first weekly outflow in four weeks.

After the S&P 500 index successfully broke through, Keith Lerner, co-chief investment officer of Truist Advisory Services, was optimistic about the market outlook. "There is still underlying bidding in the market and the lack of intense selling." He further said, "At present, the economy, earnings and credit markets continue to show resilience. The market rebound is a bid for a soft landing. Of course, if there is no soft landing, We will face challenges."

Charles Schwab wrote in its market outlook that the power of technology stocks once again acted as a locomotive, providing enough power to lead the S&P 500 index to break through resistance and reach new highs. As U.S. Treasury yields rise and money leaves interest-rate-sensitive sectors such as utilities, real estate and small-cap stocks, the technology sector has received more attention from investors.

The agency mentioned that the market seems to expect the Federal Reserve to cut interest rates 5 to 6 times in 2024, but if economic data continues to be strong, this seems unlikely. One potential dilemma for the bull market: If economic data continues to beat expectations in the coming months, will that ignite the embers of inflation data and change the trajectory of Fed policy? So the challenge remains the direction of U.S. bond yields. In the coming week, the earnings season will continue to be the focus. If U.S. debt continues to rise, market sentiment may trigger a tipping point and turn, which will be a risk that hinders the market.