Macro Analysis| What Makes the Market Volatile Recently?

We have mentioned that without further data guidances, the Fed may not give a accurate policy guidance, and market should volatile as "mean-revert" on the Fed's previous path. Therefore, we can see that after the US bond yields panicly broke through the 4% high point last week, they have fallen back somewhat.

Of course, the attitudes of some Fed officials are also essential. Last week, three important Fed officials (with voting rights) spoke.

Atlanta Fed President Bostic comment,

"The Fed will conditionally pause rate hikes in the mid-to-late summer of 2023, but if economic data continues to be stronger than expected, it will need to adjust its expectations for future rate trends."

Chicago Fed President Austan Goolsbee said in his inauguration speech,

"The Fed's excessive reliance on market reactions is dangerous and wrong."

On Saturday, San Francisco Fed President Mary Daly (who will have voting rights in 2024) said in a speech at Princeton University,

"The Fed obviously has more work to do. Further, sustained tightening policies may be necessary to get rid of the high inflation period."

These officials originally had certain policy tendencies, but it is evident that they are not entirely united in their pace of rate hikes. Although the mainstream expectation is still for a 25 basis point rate hike, a series of hot inflation data recently could intensify pressure to hike rates.

The market is still mostly betting that the FOMC meeting in March will not rashly "hike 50 basis points." The CME Fed Tool shows that the probability of a 50 basis point rate hike has been around 25%, and 75% is for a 25 basis point hike.

We believe that:

1. The Fed will also be concerned about monetary tightening policy going "too far." Currently, most of the good indicators, such as employment rates, are lagging indicators. With the continuous decline in US household savings, bank lending standards tightening, and the weakening of consumption growth momentum, as a central bank, it cannot fail to consider potential financial risks. Last week, a $531 million commercial real estate mortgage-backed security supported by Blackstone was reportedly in default, which is partly related to the spillover effects of rapid rate increases (due to US rate hikes and global inflation, the Eurozone also raised rates significantly).

   

2. The probability of the Fed significantly hiking rates has decreased, and it is more likely to tolerate higher inflation for a while. For example, allowing inflation to remain above the 2% level for a longer period. Currently, core inflation in the US, which reflects service sector inflation, is most important to policymakers, and the gradually increasing recession pressure has become an important condition for lowering such inflation.

What will be the reaction of the US stock market?

Since February, the US stock market has experienced varying degrees of decline, but there may be some rebound opportunities in March. This is partly due to last week's market rebound, which was fueled by information leaked by Federal Reserve officials (as the market is highly sensitive to policy-related signals and directionless), as well as bargain hunting and short covering.

However, from the perspective of fund flows, global stocks are still experiencing outflows, while bonds continue to flow in. US stocks experienced an outflow of $10.651 billion last week, up 24% from the previous week. By contrast, emerging markets continued to experience inflows, with $2.459 billion flowing in last week. Among them, Chinese assets have performed well since the beginning of the year, due to expectations of growth recovery.

The main reason for the continued outflow of US stocks is still the high valuation (with too much expectation of easing after tightening) and the decline in corporate earnings (with an overall decline in Q4 earnings reports).

Two key issues this week:

Fed Chairman Powell's semi-annual monetary policy testimony to the House Financial Services Committee;

US nonfarm payrolls, unemployment rate, and average hourly earnings of February