To The Moon

Last night, three major events were settled, and the global financial market ushered in a carnival.

Let's take a look at the market trend first:

-The US stock market rose across the board, the Dow Jones index rose 2.17% (entering a technical bull market), the S&P 500 index rose 3.02%, and the Nasdaq index rose 4.41% (most of the gains occurred at the end of global trading hours, Beijing time this morning);

-Oil, copper and gold prices rose simultaneously;

-The US dollar resumed its decline;

-The yield of US bonds fell across the board, and the yield of 10-year government bonds fell by 6 basis points to 3.6847%. The difference between the yields of 2-year and 10-year government bonds rose by about 4.4 basis points to-69. 35 basis points.

What can you roughly perceive from the market trend?

1. ADP data shows that the number of employees in American enterprises has dropped to the lowest level in the past two years, and the salary growth has slowed down, indicating that the labor market has slowed down more significantly than before (which is a welcome development for the Federal Reserve).

2. The GDP of the United States exceeded expectations in the third quarter (market expectation: 2.8%; Real value: 2.9%), continue to provide reasons for the Fed to raise interest rates.

However, after the release of these two data, the market volatility was not large, and people waited for the speech of Federal Reserve Chairman Powell five hours later.

3. Powell's speech was not a major accident.

Key points:

1. The timing of slowing down the rate of interest rate increase may appear at the December meeting at the earliest (implication: confirm that the rate increase in December is 50 basis points), and slowing down the rate increase is a good way to balance the method (implication: slow down the observation and avoid excessive rate increase);

2. In view of our progress in tightening policies, it is more important to think about how much interest rates will rise and how long they need to remain at restrictive levels to curb inflation than the timing of slowing down interest rate hikes (implication: emphasize attention to the "end interest rate", and where interest rates peak depends on the progress in anti-inflation);

3. The top of interest rate may be higher than the forecast of officials in September (the median forecast at that time was that the interest rate would reach 4.6% next year);

4. At present, there is not enough strong evidence to prove that inflation will slow down soon (implication: it is not enough to get a good CPI report at present). More evidence is needed to prove that inflation is indeed falling. In fact, the future development path of inflation is still highly uncertain. Despite the tightening of policies and the slowdown of economic growth in the past year, no obvious progress has been made in the slowdown of inflation (implication: the inflation situation is still grim). The Federal Reserve expects the personal consumption expenditure price index (PCE) to increase by 6% year-on-year in October and the core PCE to increase by 5% (the data will be released on Thursday);

5. The war against inflation is far from over, and interest rates will continue to rise and remain at restrictive levels for some time (implication: even after stopping raising interest rates, high interest rates will remain for some time);

6. The decline of labor force participation rate in the United States relative to the pre-epidemic level is mainly due to the excessive number of retirees, and this trend will not be reversed in the short term. The gap in labor force participation rate is partly due to the sequelae left by some workers infected with the epidemic.

7. The Federal Reserve has been "quite radical" in raising interest rates, and will not raise interest rates further and lead to economic collapse. I think we're in a position where the right thing to do is to move as fast as we did before and now slow down and get to where we think we need to get to. Incidentally, there is a high degree of uncertainty surrounding this issue (the implication is that there is still no certainty as to when the interest rate hike will end).

8. Interest rate cuts are not something we want to do soon, which is why we should slow down and try to find a suitable way to determine what this interest rate level is (in response to the current interest rate cut hype).

It can be said that Powell took out the overall ideas of the Federal Reserve and communicated with the market, without revealing any major signals, but the market interpreted it as "hawkish deficiency".

Although he warned of further interest rate hikes in the future, the yield of policy-sensitive 2-year US bonds once fell by 7 basis points to 4.41% in intraday trading. The dollar also fell and U.S. stocks rose. The market liked what Powell said this time. They had expected Powell to have some unexpected "hawkish words", but he didn't make himself more hawkish.

Bond traders lowered their forecasts for the top of interest rates. Swap contract prices show that the interest rate of this tightening cycle will eventually peak at around 4.97%, possibly in mid-2023.

The possibility of raising interest rates in December and February declined moderately, and the possibility of raising interest rates by 50 basis points in December was basically locked. Now, the possibility of raising interest rates by 50 basis points in February is only 45%.

There is still a question to be solved: Is the market overly optimistic?

First, the market ignored Powell's phrase that "the final interest rate may be higher, and the higher restrictive policy needs to be maintained for a longer time". Many analysts on Wall Street believe that Powell's speech is actually more hawkish than many Fed officials;

Second, the market trend may not only feedback Powell's speech, but also add the month-end factor (fund managers adjust their positions). Yesterday was the last day of November. For example, at the close of spot treasury bonds at 3 pm EST, there were a series of block transactions related to month-end factors, including 13,752 lots of 5-year treasury bond futures buying, which also led to Powell's speech. The rally was basically maintained;

Third, with the S&P soaring in late trading, VIX is currently down 5.98%.

Whether this is the reaction Powell is looking for or not, we look for the answer from the trend of the next two trading days this week.

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