Over 40 billion US dollars returned to the money market fund! When will the cold wave in the US stock market end in August? Investors | Factors | Cold Wave

Since August, the upward trend of the US stock market has temporarily come to a halt, and bearish factors such as a downgrade of the US credit rating continue to suppress market risk appetite.

At the same time, energy prices and other factors are bringing uncertainty to inflation. Factors such as the cold auction of US treasury bond bonds have kept the yield of medium and long-term US bonds higher, further depressing the trend of growth stocks, and investors fled from US stocks to monetary funds. Market analysis suggests that as the financial reporting season approaches its end, macro factors and the trend of US bond yields may become important indicators of whether short-term US stocks can stabilize.

Market bet that the Federal Reserve will remain stagnant

Last week, the United States released its first inflation report after the July interest rate meeting. Last month, the CPI increased by 3.2% year-on-year, slightly higher than the previous 3.0%, better than market expectations. The core CPI growth rate fell to 4.7%, reaching a nearly two-year low. In the sub indicators, rental inflation continues to slow down, and prices of goods and used cars have fallen, but there is still upward pressure on prices of multiple categories of services.

Meanwhile, another survey by the American Enterprise Federation showed that the proportion of small businesses with inflation as the most important issue dropped to its lowest level since November 2021, and the demand for companies to transmit cost pressures through price hikes continued to decline.

Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that as rent increases begin to hit resistance, the anti inflation trend is still ongoing. "Moderate prices hold hope that the economy can achieve a stable landing without a significant increase in unemployment. However, recent increases in energy and food prices may push up CPI in the coming months, of course, only temporarily.".

The federal funds rate futures show that the probability of the Federal Reserve remaining stagnant in September has further increased to 90%, almost a certainty. At the same time, investors also tend to believe that the Federal Open Market Committee has ended this round of interest rate hikes, and the possibility of further rate hikes in the future remains below 30%.

For the future price path, Citigroup believes that there is very little possibility of further interest rate hikes by the Federal Reserve, and given that expectations for a soft landing have risen, it is not surprising that inflation is weak. Ashworth, Chief North American Economist at Capital Economics, said that if housing costs are excluded, the Federal Reserve seems to have reached its inflation target.

However, there are still significant differences within the Federal Reserve regarding the next steps of the plan. Last week, both New York Fed Chairman Williams and Philadelphia Fed Chairman Huck expressed in comments that they may see interest rate hikes come to an end. However, Federal Reserve directors Bowman and Waller reiterated that further interest rate hikes may be needed in the future; San Francisco Fed Chairman Daley also believes that the Fed needs to do more. Regardless of whether further action is taken, almost all members of the Federal Reserve agree that high interest rates may persist for a period of time.

Schwartz told First Financial that although the Federal Reserve acknowledges progress on inflation, it will not announce victory ahead of schedule. "The resilient job market is driving strong wage growth, which the Federal Reserve believes will become a hidden factor in inflation. The good news is that there are signs that the labor market is cooling down, and the lagging effect of tightening policies will cause an increase in unemployment rates by the end of the year, reducing the pressure on wage increases.".

Schwartz predicts that the Federal Reserve will take a tough stance in the short term as it hopes to prevent a easing of financial market conditions. "The Federal Reserve may skip rate hikes in September and November, observe the trend of inflation, and the rate hike option will continue to be retained. In contrast, rate cuts are still far away as the Federal Reserve wants to maintain higher interest rates for a longer period of time to ensure further suppression of inflation.".

The stock index faces key direction choices

Over the past week, the performance of the US stock market has diverged, with the Dow stabilizing and rebounding driven by cyclical sectors such as energy. However, the upward trend in US dollar and bond yields has put pressure on growth stocks, while weak consolidation in star technology stocks such as Apple and Nvidia has dragged down the Nasdaq's unparalleled performance so far this year.

Since August, the market has been hit by a series of negative events, including Fitch's downgrade of the US credit rating and Moody's downgrade of several small and medium-sized banks, which have raised concerns about the economic outlook, suppressed risk appetite, and signs of profit taking in funds. The flow of funds shows that there has been another significant outflow of funds from US stock funds in the past week. According to Refinitiv Lipper's statistics, investors have sold approximately $14.96 billion in US stocks, reaching a new high since the week of June 21st. At the same time, driven by risk aversion, US money market funds and government bond funds attracted buying of $40.88 billion and $4.48 billion respectively.

JPMorgan Chase called for continued reduction in holdings of US stocks, stating that investors have overlooked the risks that could still lead to an economic recession. Xiaomo Chief Analyst Kolanovich said that Wall Street is still too optimistic about the US economy, and even seems to include continuously expanding prices, as weak inflation data makes traders hope that the Federal Reserve may soon end its interest rate hikes. "We disagree with the market's expectation that a soft landing is the most likely outcome. The likelihood of an economic recession this year or next is 65%, while the likelihood of a soft landing is 35%," he said.

Many market participants are paying attention to the trend of US bond yields. Ryan, portfolio manager and head of multi asset solutions at Madison Investments, stated that energy prices have continued to rebound in the near future and will have an impact. "We are currently working hard to bring inflation rates below 3%, which is difficult given the strong labor market, growing consumer spending, and improving oil conditions.".

Jiaxin Wealth Management wrote in market reviews that the weakness of the US stock market in the past two weeks may be related to seasonal factors and short-term technical indicators. At the same time, as the second quarter financial reporting season approaches its end, the market lacks additional bull market catalysts.

Jiaxin Wealth Management believes that the trend of the US stock market in the next week will also be influenced by the technical aspects and the trend of US bond yields. The Nasdaq and S&P 500 index are seeking support near the 50 day moving average. If the 10-year US Treasury yield falls, the market will experience a short-term rebound. On the contrary, a further increase in US Treasury yields may trigger a new round of selling. Therefore, the potential breakthrough direction of the market in the future will depend on the direction of US Treasury yields.