November 28 news from the Financial Associated Press (edited by Xiaoxiang)With the arrival of the holiday season at the end of the year, Wall Street, in the festive atmosphere of the past few weeks, seems to have finally temporarily dissipated the haze that shrouded most of the year. Both the stock and bond markets have rebounded sharply this month, and some fund managers have also begun to resume Place speculative bets on the hope that a friendlier (or at least less hostile) Fed will come back to them.
Market data show that it has risen nearly 4% so far this month and is expected to rise for the second consecutive month. Even the European stock indexes, which have always been troubled in the middle of the year, have risen for the sixth consecutive week; The index is on track for its biggest monthly drop since 2009, having fallen nearly 5% so far this month.
In the bond market, since peaking earlier this month, 10-year, 5-year and 2-year U.S. bond yields have fallen by 54bp, 54bp and 30bp to 3.68%, 3.85% and 4.42% respectively. There are signs that the U.S. Treasury market appears to be gearing up for a possible recession next year, even as the Federal Reserve remains busy signaling continued interest rate hikes — with traders predicting lower long-term interest rates.
It is worth mentioning that in the recent trend of U.S. debt, a signal that is easily overlooked by investors but is actually quite critical is: even if the market expects the Fed to raise interest rates by about 1 percentage point in the next six months, the 10-year U.S. bond yields have now begun to fall below the current range of the federal funds target rate of 3.75%-4%.
Inflection point signal of interest rate hike cycle?
This scene first appeared in mid-November (around the 16th). At that time, it was only a few days before the US CPI data came out in October. This inflation report showed that both the overall CPI and core CPI data in October fell more than expected, and core inflation peaked. The “dawn” of the U.S. bond yields fell rapidly.
And almost since then, the sharp decline in long-term yields has led to a continuous widening of the yield curve inversion to the largest in four decades.
Gregory Faranello, director of U.S. interest rate trading and strategy at AmeriVet Securities, said that the Fed’s policy is developing dynamically, and Fed officials still signal that they will raise interest rates, but the market’s trading tends to think that the Fed’s tightening cycle is coming to an end.
As we mentioned last week, there has also been some action in the options market, with some investors taking steps to hedge against the risk of the Fed cutting interest rates to 2% (half the current rate) by the end of next year.
The current swap contract market pricing shows that the market expects the benchmark interest rate to rise to a peak of around 5% by the middle of next year, and to cut interest rates by more than 50 basis points from the peak by early 2024. But some are betting on a bigger shift toward tightening, with some investors predicting rates could drop to 3% or even 2% by late 2023 or early 2024, according to trades tied to secured overnight financing rate (SOFR) futures. %.
According to statistics from Zhao Wei’s team at Sinolink Securities, looking back at history, after 1982, the Federal Reserve shifted its intermediary target from the quantitative target M2 growth rate to the price target money market interest rate.In the subsequent 6 rounds of interest rate hike cycles, the 10-year U.S. bond yield was more than 1-2 quarters ahead of the policy rate and peaked.In 2006, which was relatively special, the interest rate hike came to an abrupt end when real estate risks loomed, and the 10-year U.S. bond rate peaked simultaneously with the policy rate. The current round of U.S. macro indicators of “strengthening the outside and doing the work” may point to the Fed’s interest rate hike operation or stop in the first half of next year.
Some large institutional investors, including PIMCO, have also been actively buying U.S. Treasury bonds recently.
Jeffery Gundlach, known as the “new debt king”, recently said that the rise in U.S. bond yields may have come to an end. Flattening of long-dated yields – the 10-year and 30-year yields being comparable – is usually a signal that a rally in bond yields is coming to an end.
Focus on Powell speech and non-agricultural data
The U.S. economy—especially the labor market—has shown considerable resilience so far in the face of continued interest rate hikes by the Federal Reserve.Therefore, whether the emergence of the above-mentioned inflection point signals of interest rate hikes and the trend of falling long-term bond yields can continue, the performance of US data will undoubtedly be the key, andThe monthly non-farm payrolls report released by the US Department of Labor this Friday will obviously be closely watched by investors.
The size of the current long position in the Treasury market and the depth of the yield curve inversion means that there could be further volatility in Treasuries with the release of a series of top-line economic data, including not only the non-farm payrolls report but also the ISM manufacturing Index, Personal Consumption Expenditures Price Index (PCE), Number of Job Openings, etc.
They will also listen carefully to the last speeches by Fed Chairman Jerome Powell and his colleagues before the silent period begins.While the minutes of the most recent meeting suggested they may soon ease the pace of tightening, officials remained firm in reaffirming the need for policy rates to be higher than current levels.
According to the schedule, Federal Reserve Chairman Powell will deliver a speech on the economy and the job market at 2:30 a.m. Beijing time on Thursday, a time before Fed officials need to stop talking publicly to prepare for the mid-December policy meeting. The silence period” will last only two days.
Simon Harvey, senior currency analyst at Monex Europe, said, “Powell’s first comments after the November 2 meeting will be critical. If he does not choose to prevent the near-term easing of financial conditions, the dollar’s short-term support may slip.”
From the perspective of volatility indicators, although the recent US stock market fear index VIX has fallen with the rebound of US stocks, the volatility indicator of the bond market, the Bank of America MOVE Index, remains high. For bond market investors, with the approach of the Federal Reserve’s decision in mid-December, it is obvious that the last shift is still needed before the holiday season at the end of the year…