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Market interest rates, which have risen rapidly due to the Democratic Party’s “blue wave,” are seeking stability. The same goes for the New York Stock Exchange. On the 13th (U.S. local time), the major index fluctuated slightly in the consolidation zone, but the Dow closed 0.03%, while the S&P 500 rose 0.23% and the Nasdaq rose 0.43%.
On this day, the 10-year US Treasury Bond yield (interest rate) fell to the 1.08% level per year. There are three reasons why interest rates have stabilized.
① Moderate CPI
The December Consumer Price Index (CPI) met market expectations. It continued to rise slowly. CPI rose 0.4% from the previous month and 1.4% from the previous year, and the source CPI, excluding food and energy, rose 0.1% from the previous month and 1.6% from the previous year. The core CPI growth rate was lower than the 0.2% in November.
There were some concerns that unexpectedly high numbers might come out, but they weren’t. Excluding the high oil prices, there were few noticeable increases in prices. Immediately after the CPI was announced, the 10-year US Treasury bond traded at 1.13% and immediately began to decline.
② Strong demand to buy bonds in the low 1%
In addition to the 10-year transaction the previous day, a large-scale US$24 billion 30-year Treasury bond bid conducted by the Ministry of Finance on the same day ended successfully at 1.82% per year. The bid rate also reached 2.34 times. At this level of interest, it has shown that the demand for US Treasury bonds is significant. That’s because there is a lot of money in the market.
③ Fed’s pigeons
The US central bank (Fed) officials continued to comment on’pigeon’. Fed Vice Chairman Richard Kleeda said that day, “until we get inflation at 2% for a year, we try to tie our hands. We’re not raising interest rates until then.” I have said that I will not.” The period of enduring the 2% interest rate was previously referred to as a’significant period’, but was specifically nailed to’one year’.
In addition, St. Louis Federal Bank Governor James Bourd said, “We will not preemptively respond to inflation with tapering (gradual reduction in the amount of bonds we are buying on a monthly basis in order to qualify).” “The current rate of purchase of bonds will remain’for quite some time’.”
But it doesn’t end there. There is more to watch.
First, at 12:30 pm on the 14th (2:30 am on the 15th Korean time), Chairman Jerome Powell will discuss. On Wall Street, Chairman Powell is hoping to clear up some of the market’s concerns about the timing of taper. A Wall Street official said, “If Chairman Powell makes clear that there is no taper in the second half of this year, interest rates could fall further.”
There is also interest in the additional fiscal stimulus proposals announced by Joe Biden on the 14th. Candidate Biden referred to it several times as “trillions of dollars.” However, the market sees scale below that. In the case of Goldman Sachs, a total of $750 billion is expected, including $300 billion for payment of $1,400 per check ($600 plus $2,000).
If the trillions of dollars of stimulus bills, including controversial student aid relief plans, are released, a confrontation between Democrats and Republicans in the process of passing Congress is inevitable. From the very beginning of the regime, cooperation between the two parties can go beyond water. Even if a stimulus package can be passed by a simple majority, this could negatively affect the passing of infrastructure deals in the future.
And although it will be a few months later, it is the price that will come to life in earnest from April to May. Because oil prices plunged last year, everyone is expecting prices to soar this spring. Capital Economics (CE) said on the day, “Due to the base effect of the temporary inflation of the early corona pandemic last year, both headline prices and source prices will exceed 2% this spring. Inflation may even reach 3%.” Said.
The problem would be if these levels of inflation continue. Capital Economics did not rule out such a situation. “In the early stages of this economic cycle, stocks are exceptionally low,” he said. “If retaliatory consumption increases rapidly due to successful vaccine distribution, prices can remain 2% or more in the second half of the year after the spring base effect disappears. .
In any case, the US financial markets, including stocks and bonds, have digested the’blue wave’ and are now generally calm again. Wall Street investor David Hunter said, “As inflation rises, the 10-year Treasury bond rate will reach 1.5% a year at some point, but in the short run it could go down to 0.95% with some retreat from the recent surge.” This means interest rates may have hit a peak in the short term.
From the 15th, the fourth quarter earnings season will begin in earnest. As always, financial stocks are at the forefront. JP Morgan, Wells Fargo, and Citigroup are showing their results before the opening of the stock market on the 15th.
However, the interest of investors declines. This is because this earning season is not expected to give special guidance. The fourth quarter performance itself will not be good. This is because the corona re-proliferation has led to blockades everywhere.
According to the fact set, earnings per share (EPS) of S&P 500 companies in the fourth quarter are expected to decline by 8.8% compared to the same period last year. If correct, it will be the third worst quarter after the third quarter of 2009, at the time of the global financial crisis.
Initially, Wall Street was paying attention to’How much companies will improve their 2020 earnings forecasts’, but the observation that there are not many companies to come up with specific forecasts is gaining momentum as there is still a blockade amid the spread of the virus.
This situation is clearly revealed in the Fed’s Beige Book (Business Trend Report) released on that day. The Fed said in the Beige Book that “in most regions, economic activity has’modestly’ expanded.” It is a regression from what was described in December as “the economy has expanded to a’modest or moderate’ level.”
For the time being, there is a possibility that there will be an exploration war in the market to find additional momentum. However, there is a calm and fierce hand change in the market. The so-called’reflation trade’ is active. It refers to a move to buy economically sensitive and value stocks that benefit from economic recovery and inflation.
On this day, technology stocks and growth stocks, which had fallen the previous day, rebounded again, and value stocks showed a stagnation. The reflation trade has stalled.
A Wall Street official said, “If you look closely, technology stocks such as Apple have gone up and down, and since September of last year, technology stocks have been almost in place, but value stocks such as JP Morgan have risen and stopped, and continue to rise.”
In fact, many of the stocks that hit a record high on the day are heavy stocks, that is, large value stocks. General Motors (after relisting in 2010), Caterpillar, Johnson Controls, Emerson Electric, Capital One, Dow and SVB Financial are such stocks.
Expectations for Wall Street’s value stocks are also growing. On this day, JP Morgan upgraded its investment rating for Exxon Mobil to’overweight’ for the first time in 7 years. The target price was also raised from $50 to $56. This is because consistent dividends will be possible as future performance improves due to cost reduction and rising oil prices.
Regarding ExxonMobil, Morgan Stanley also presented an opinion of’expanding’ on the previous day, and Goldman Sachs and Wells Fargo made a positive analysis last month. ExxonMobil’s stock price has already jumped 17% this year, hitting a 7-month high.
In addition, Deutsche Bank presented a’buy’ opinion to 3M and Nomura to GM, and Jeffreys raised the investment rating for Visa and Mastercard to’Buy’. It is worth a reference for trading stocks.
Reporter Kim Hyun-seok [email protected]