US Yields Have Gone Too Far For The Fed,Correction Is Coming.
During the week from November 28 to December 4, the market sentiment calmed down, and the yield of 10-year US bonds once again faced the test of the FOMC meeting in December and fell into shock.
The S&P 500 index fluctuated slightly upward, with the sectors rising more and falling less. Only the IT, communication services and energy sectors fell, while other sectors closed up, among which the real estate, finance and industry sectors rose by more than 2%.
During the week from November 29th to December 5th, with the continuous digestion of dovish sentiment and the approach of the Fed's interest rate meeting, the market was worried about over-pricing US Treasury yields, and the risk appetite in the equity market declined. The MSCI market index fluctuated upward, rising more and falling less, and fluctuated mainly,
fundamental analysis
(1) The PMI of ISM manufacturing industry in the United States is shrinking, and the American economy is facing downward pressure.
According to the data released on December 1st, the ISM manufacturing PMI of the United States recorded 46.7 in November, with the previous value of 46.7 and the expected value of 47.6, which was the same as the previous value and continued to operate in the contraction range.
From the sub-index of ISM manufacturing industry, the output index, employment index, import index and new export index continue to shrink below threshold, while the new order index rises month-on-month but is in the contraction range, indicating that manufacturing production and demand are still weak, and manufacturing employment continues to run weakly, which may be further fed back to employment data; The customer inventory index rebounded, the price index rose slightly. The downstream demand of manufacturing industry is expected to improve, but the positive feedback persistence and upward transmission of demand are waiting for further verification. Generally speaking, the manufacturing PMI shows that the current US economy is facing downward pressure, which supports the Fed's suspension of rate hike.
The real GDP of the United States exceeded expectations in the third quarter.
According to the data released on November 29th, the revised annualized quarterly rate of real GDP in the third quarter of the United States recorded 5.2%, the previous value was 4.9%, and the expected value was 5%, which was higher than the expected value.
From the perspective of GDP sub-level, personal consumption expenditure, private investment and government consumption expenditure and investment have played a major pulling role, especially the weakening of consumption expenditure and fixed investment, and the negative growth of net exports.
The GDP exceeding expectations in the third quarter of the United States was mainly supported by consumption. With the decline of service PMI, consumption expectation declined, and the fear of economic recession increased. The short-term strength is difficult to reverse the expectation that the Federal Reserve will soon end the rate hike cycle, and the fear of future economic downturn warms up the expectation that the Federal Reserve will cut interest rates.
Durable goods consumption expenditure declined, and PCE slowed down in October in the United States.
According to the data released on November 30, the core PCE price index of the United States in October increased by 3.5% year-on-year, lower than the previous value of 3.7% and in line with market expectations of 3.5%; The 10-core PCE in the United States increased by 0.2% month-on-month, lower than the previous value of 0.3%.
According to the breakdown data, the year-on-year growth rate of personal consumption expenditure of durable goods declined, while the year-on-year growth rate of non-durable goods increased, and service consumption remained strong. The decline of durable goods consumption was the main reason for the slowdown of PCE in October.
Service industry and non-durable goods consumption pointed out that it remained strong to some extent, which supported PCE. Although the expectation of ending the increase and starting the interest rate cut continued to increase, inflation remained at a medium-high level, which lengthened the wait-and-see time of the Federal Reserve. It is more likely that the Federal Reserve will keep the interest rate unchanged and continue to observe in the short term.
In November, the employment and inflation data fell more than expected, the 10-year US bond yield went down, and the hawkish sentiment kept cooling down. The market expected the end of the Fed's rate hike cycle, but there were still obvious differences on when to start the interest rate cut in 2024 and how much.
Superimposed on the economic data such as PCE to be released in the United States this week, the market sentiment tends to be cautious, and the yield of US bonds fluctuates in the short term.
CFTC data analysis
According to data released by the US Commodity Futures Trading Commission (CFTC), as of the week of November 28, the net long positions of speculative positions in E-mini S&P 500 stock index futures and options decreased from 37,179 lots to 33,464 ； E-mini Nasdaq 100 index futures options net long positions decreased from 5,284 to 2,250
From the perspective of positions, the speculative positions of mini S&P 500 index futures decreased by 12,401 , and the speculative positions of small Dow futures and mini Nasdaq index futures increased by 1,705 and 3,612 respectively;
Figure 7: Changes in speculative positions of Dow Jones ($5) futures options
Market prospect
From a fundamental point of view, the inflation data and the decline of the job market confirmed the high point of the US Treasury yields.
With the rising economic downside concerns, the market generally expects the Federal Reserve to gradually approach the interest rate cut cycle, and the 10-year US bonds has opened a medium and long-term upward channel. However, there are still hawkish voices in the Federal Reserve since December. In view of the uncertainty when inflation will fall back to 2%, there is a high probability that the Federal Reserve may maintain a wait-and-see in the short and medium term.
From the market perspective, the position data shows that the long strength of speculative positions in the index futures on Wednesday was obviously weakened, and the speculative positions were reduced, indicating that some positions made profits and left the market. On the whole, the downward trend of interest rates is basically determined, and US stocks have rebound support.
However, considering the pressure of fundamental decline and the pressure of short-term US bond yields facing the test of the Federal Reserve's interest rate resolution, US stocks rebound or approach the pressure level, and the subsequent trend of US stocks needs further guidance from macro expectations, which may continue the pattern of high volatility in the short term.
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