Can Kim Hyun-suk’s Wall Street Now Powell’s Poker Face Market Fool?

The financial markets in New York on the 15th (local time) were generally calm. The Dow and S&P 500 indexes on the New York stock market hit all-time highs during the week, but the gains were not significant.

Major indexes rose sharply last week (Dow 4.1%, S&P 500 2.6%, NASDAQ 3.1%), and above all, the Federal Open Market Committee (FOMC) of the US Central Bank (Fed) is ahead of the 16-17th. The Monetary Policy Statement and the new economic outlook to be released on the 17th at 2pm (3am on the 18th KST) are important enough to change the current financial market environment. On the morning of the 16th, retail sales and industrial production for February, which are key economic indicators, are also awaiting announcement.

Amid the continuation of the wait and see trend, the last-minute buys struck the Dow by 0.53%, the S&P 500 by 0.65%, and the Nasdaq by 1.05%.

The bond market also showed a stable trend. The 10-year U.S. Treasury bond yield, which rose to 1.642% a year on Friday, remained at around 1.61% on this day.

Since the beginning of last month, interest rates have been picking up, and the market has been waiting for further easing from the Fed. There were high expectations that the company would take an Operation Twist (OT) to reduce the proportion of short-term bonds and increase long-term bond purchases, and Yield Curve Control (YCC) to prevent further gains by setting an upper limit on Treasury bond rates.

However, with the FOMC in March, expectations are not high. A Wall Street official said, “It is very likely that the Fed will not do anything at this meeting.”

Regarding the surge in bond rates, Jerome Powell said last week that he “catchs the eye” and says “I don’t see a worrisome disorder or constant tightening of financial markets.” Many Fed members interpret that rising interest rates are a natural phenomenon due to improved economic outlook. It would be weird if the Fed with that perspective suddenly took action.

A Wall Street official predicted, “Looking at the European Central Bank’s (ECB) monetary policy meeting last week, the Fed is also likely to get rid of it with words.” The ECB announced that it would increase the pace of purchase in the second quarter while maintaining the scale of the Pandemic Emergency Purchase Program (PEPP), which is the source of financing for bond purchases. A Wall Street official explained, “It was not expected by the market at the time of the announcement, so it received a decent evaluation, but in terms of it, it is only a Samosaurus company,” and said, “The Fed will not be very different.”

Wall Street expects the Fed’s base rate hike to accelerate as the economy recovers. According to a Bloomberg study, Wall Street economists expect rate hikes to begin at the end of 2022.

However, as economic activity has not yet resumed in earnest, the Fed repeats its existing position in this FOMC regarding adjustment or taper of the base interest rate (maintaining the current monetary policy until’significant progress’ to achieve full employment and inflation targets). It is becoming clear to do.

There will be no IOER adjustment for banks, and the’Complementary Leverage Ratio’ (SLR) regulation introduced to increase banks’ government bond purchases amid the pandemic in April last year can be passed without any action. is.

SLR exempted banks with assets of over $250 billion from having to secure additional equity capital by buying government bonds, which will expire at the end of this month (March 31). Democrats have insisted on ending it as a preferential treatment for the bank. Once this measure is over, banks are more likely to sell Treasury bonds rather than increase equity capital. Some analysts say that volume could reach $700 billion. A Wall Street official predicted, “Since the SLR is not necessarily a matter to be decided by the FOMC, we can just pass it this time and watch it until the end of the month and announce an extension if the bond market becomes unstable.”

In the end, the economic outlook and the dot plot are to be watched. It is generally expected that the economic outlook such as this year’s economic growth rate and inflation forecast will be slightly improved.

In the case of the’dot chart’, which shows the prospects of future interest rates for the Fed members, there was also a view that predicted significant changes. As the Fed committee members have mentioned that the recent interest rate rise is a natural phenomenon due to the outlook for economic improvement, it was the view that such a prospect would be included in a dot plot. A Wall Street official said, “If the dot plot changes a lot, the observation that the Fed can really advance the rate hike will be strong, and bond rates will start to jump again,” he said. “In consideration of this, the Fed members are not likely to adjust the dot plot much.”

The 17 Fed commissioners predicted the base rate to be maintained through 2023 on a dot plot last December. The expected increase in 2022 was only 1 person, and the expected increase in 2023 was only 5 people.

The position of the Fed and Chairman Jerome Powell makes sense. The Joe Biden administration wants to vaccinate all adults by May 1st and declare an end to the coronavirus in a revived economy on Independence Day on July 4th. That’s why we are putting an additional $1.9 trillion in fiscal stimulus.

The pace of economic recovery will accelerate and prices will rise. Then the Fed may have to consider tightening rather than further easing. It may be from the second half of a few months later. In such a situation, it can be overwhelming to come up with something mitigating now. Monetary policy may be less consistent and credible, and the impact may be greater when tightening is initiated in the future. So, if the financial market is not fluctuating, I want to move on to the second half of the month with a few more months with’poker face’ while flying a dove with only my mouth. If the economy really improves, then market interest can shift from interest rates and Fed to economy and performance.

Will Chairman Powell’s’Poker Face’ work?

Traders in the bond market are under tremendous stress right now. With the economic recovery in the future, interest rates are expected to continue to rise. Interest rates and bond prices move in reverse, meaning traders will lose more. So I have to sell my bonds as much as I can, but the problem is the Fed. If any new easing measures are taken, interest rates may decline again (increased bond prices). Then it will turn out to be hastily sold the bonds for too low a price.

So, while waiting for the Fed to take further action, I was reconsidering the timing of the sale. At the end of last month, the 10-year interest rate jumped from 1.2 to 1.3% per annum to 1.6 to 1.7%, causing a huge loss. One Wall Street trader said, “There are a lot of traders who say that if the Fed presses interest rates once this time, it’s time to sell bonds.” He said, “I heard that there are pension funds that have been bought additionally because interest rates are expected to stabilize in the 1.3~1.4% range a year. They have suffered huge losses in the last 2-3 weeks, and I know they are looking for a stop loss point.” This means that there is a lot of waiting sales tax.

If he is correct, even if Chairman Powell’s’Poker Face’ succeeds in this FOMC, the bond market stability will not last long.

However, from April, Japanese financial companies, the largest foreign investors in US Treasury bonds, will return to the market. In addition, the Fed is unlikely to come out with OT and YCC if the bond market shakes further, but it is still alive.

Another Wall Street trader said, “It will be difficult for the Fed to allow interest rates above 1.75% per year as the economic recovery has not yet been in full swing.” “There is.”

Some view the market as’oversold’ for the rapid rise of the 10-year yield to the 1.6% range. It means that in the short term, there was a sudden sell-off and interest rates have risen too much compared to fundamentals.

Goldman Sachs is representative. In a podcast on the 9th, Mike Swell, head of Global Portfolio (Bonds) of Goldman Sachs Asset Management said, “Many opportunistic investors such as hedge funds are promoting interest rate hikes, such as short selling government bonds. But this trend will be short-term.” Said.

“There was no inflation in the US economy before the pandemic, and prices will rise due to the base effect last year, but that will only be in the short term,” he added. “If we expect 2022, growth will normalize and prices will normalize. And the Fed will still maintain a easing policy,” said Snell. “As a result, it will not be bad for the bond market and will be a good environment for risky assets. ”

Reporter Kim Hyun-seok [email protected]