At the beginning of 2023, with the optimism that US core inflation would peak and fall in October 2022 and the judgment that US growth was gradually "soft landing", the market once expected the end of interest rate hikes in early 2023 and the beginning of interest rate cuts as early as during the year, and the 10-year US bond once fell to a low of 3.3%, which is a déjà vu with the current market expectation that interest rate cuts would start in March 2024, and that interest rate cuts would start in March 2024, which is the same as the current market expectation.
However, then the U.S. Treasury rates hit a new high of 5%, the U.S. growth from the beginning of the expected "soft landing" into the third quarter of the "re-acceleration", and the beginning of the expected very different.
Reflection and review in 2023, What factors have changed the original path?
1) Bank risk: the Fed's rapid and "symptomatic" response to the spread of liquidity risk in the pocket at the same time, but also re-injected a large amount of funds for the subsequent Nasdaq rally and the unexpected improvement in U.S. growth laid the groundwork. $SVB Financial Group(SIVBQ)$
2) Fiscal expansion and the debt ceiling issue: the expansion of fiscal deficits and the leverage ratio of the government sector to enhance the hedge at the beginning of the year tight credit direction. The direction of credit is also one of the reasons why the trend of U.S. growth and interest rates deviated considerably or even reversed from the prediction at the beginning of the year. $iShares 20+ Year Treasury Bond ETF(TLT)$
3) Interest rates and stock market contrarianism: the downward movement of U.S. bond rates activated real estate demand, and the wealth effect of rising U.S. stocks turned broad financial conditions loose, which will also affect fundamentals and the path of policy when the magnitude is sufficiently large to result in a self-fulfilling contrarianism. $iShares TIPS Bond ETF(TIP)$
4) Emerging industry trends: U.S. stocks are at record highs despite heavy challenges in 2023, inextricably linked to AI industry-driven headline company contributions. $Microsoft(MSFT)$ $C3.ai, Inc.(AI)$
Keys variables in 2024
Financial risks, fiscal policy, interest rate transitivity, supply chain and industry trends
1) Unexpected financial risk: financial risk itself is not overly worrisome, but a risky situation that leads to an over-expected Fed policy response could affect the growth and inflation path.
2) Fiscal policy variables: renewed fiscal expansion will push up interest rates and growth, delaying the expectation of interest rate cuts.
3) Interest rate trend contrarianism: if there is a rapid turn in financial conditions to loosening, the Fed's path of interest rate cuts could be delayed or slowed.
4) Supply Chain Risks: the supply chain crisis in the context of the results of the fall in inflation is not yet solid, may cause secondary inflation risk. 5) industry trends: technology leading valuation factored in more future earnings growth is expected, the performance can be realized for these leaders and even the U.S. stock have an important impact.
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