Despite Kim Hyun-seok’s Wall Street Now NASDAQ surge, high-value technology stocks plummeted… Why

After the Easter holidays, the New York Stock Market revived as a bull market. On the 5th (local time), the Dow rose 1.13%, the S&P 500 rose 1.44%, and the Nasdaq index rose 1.67%. The Dow and S&P 500 indexes each hit an all-time high, and the Nasdaq is close to its all-time high by about 3%.

The March employment report released by the Ministry of Labor on the 2nd was amazing. In March, the number of non-agricultural jobs increased by 916,000, far exceeding the expected (64 million to 670,000 increase). The unemployment rate was 6.0%, down 0.2 percentage points from the previous month. In February, the number of new jobs was also raised to 379,000, an increase of 89,000 from the previous announcement. In fact, there are more than 1 million new jobs. It was an indicator that confirmed that the US economy is recovering faster than expected.

The Supply Management Association (ISM) March Service Industry Purchasing Managers Index (PMI), which was released this morning, confirmed this rapid recovery. It was counted at 63.7, which greatly exceeded both the market forecast (59.2) and the delivery (55.3) figures. The ISM manufacturing PMI for March, which was released earlier this month, also reached 64.7, a record high since December 1983.

Here, with an average of 3 million vaccinations per day in the past week, more than 100 million Americans have been vaccinated at least once. Accordingly, as the economy continued to open up, Warner Bros.’s’Godzilla vs. Kong’ box office revenue, which was released at more than 3,000 theaters over the weekend, was calculated to be 48.5 million dollars. Although the seating capacity was limited to an average of 25-50%, it exceeded $47.8 million in Godzilla: King of Monsters, which was released in May 2019.

In addition, in response to the surge in passenger passengers, Southwest Airlines notified 209 pilots who had been temporarily laid off to reinstate their jobs, and Delta decided to put customers in the middle seats that had been vacated. It was revealed that the Norwegian Gian Cruise sent a plan to depart the flight by vaccinating all crew members and passengers in July to the US Centers for Disease Control and Prevention (CDC).

The economy is normalizing. No wonder the US stock market responded with a strong bullish trend.

What was not as expected was the reaction of the New York bond market. Treasury bond yields surged over the past two months from February to March, threatening the high valuation of the US stock market. When the number of new hires exceeded 1 million in March, it was predicted that the 10-year U.S. Treasury bond yield, which remained in the early 1.7% range, would surge again.

However, when the employment index came out in March, the government bond market was quiet. The 10-year interest rate rose by 4bp (1bp=0.01% point) from 1.68% to 1.72% at the moment, but it ended at 1.707% this day. Compared to the 1.776% increase on the 30th of last month, it was very stable.

These interest rate movements have eased stock investors’ anxiety. The surge in the stock market on this day is analyzed thanks to the combination of two things:’economic recovery’ +’interest rate stabilization’.

In fact, the two-year and five-year US Treasury bonds showed greater movement than 10-year bonds. In the case of the 2-year product, it increased significantly from 0.168% to 0.200%, but it returned to the 0.165% level again on this day. In the case of the 5-year product, it jumped from 0.906% to 0.988%, but the day ended at 0.933%.

A Wall Street official explained, “The fact that the two-year and five-year yields, which are more affected by the US central bank (Fed)’s standard interest rate, have risen further means that the government bond market has begun to reflect the possibility of a rise in the base rate.

Until now, the Fed has strongly suggested that it will raise its base rate in 2024, three years later, but there has been increasing bets in the market that the first rate hike will be made in 2022. There were many such bets on the swap rate market or the Federal Fund rate futures market.

But in the much larger U.S. Treasury market, that prediction wasn’t reflected in the price. The proof is that the two-year interest rate remains at the 0-0.25% level set by the Fed. A Wall Street official explained, “After the announcement of employment in March, if the 5-year interest rate has risen more than the two-year interest rate, it is unlikely that the base rate will increase within two years, but it is very likely that it will be raised within five years. The fact that the 5-year yield is around 0.9% can be interpreted as the Fed predicts that the base rate will increase three times by 0.25 percentage points by 2025.

So why did the U.S. Treasury bond yield quiet after the March employment index confirmed the rapid recovery of the U.S. economy?

Four reasons are pointed out.

① It was expected to some extent

The Wall Street Consensus, compiled by the Wall Street Journal (WSJ), was an increase of 675,000 new jobs, but some Wall Street financial companies have already predicted higher levels. Three or four places are expected to release more than 1 million, Goldman Sachs estimated 775,000 and Morgan Stanley expected 700,000. A Wall Street official explained, “March was a time when there was no weather factors such as a cold wave in February, and the vaccination rate accelerated,” he said. “There was little downside, and the upside (more likely to come out) was much greater.”

② The content is not very good

If you look closely at the March employment report, the number of jobs is still 8.4 million less than in February last year. In particular, the number of hiring in sectors such as retail and lodging and food services that have been hit hardest is far less than pre-Corona epidemic levels.
In addition, the labor market participation rate was 61.5%, which is still similar to 61.4% of the previous month, and in the case of hourly wages, it fell by 4 cents (0.1%) to $29.96 per hour. Although 910,000 jobs were created, it is still less than when the number of 1.58 million to 4.84 million increased when the economy recovered from June to August of last year.

In the case of Mizuho, ​​excluding the seasonal adjustment (which was messed up after the pandemic), it was also estimated that the actual number of job growth in March was similar to the market estimate.

③ Inflow of Chinese buying tax on US Treasury bonds?

Some analysts say that this rapid economic recovery is already reflected in 10-year interest rates. The reason the rate of return has risen so far is that it is due to anticipation of this economic recovery.

A Wall Street official said, “There is a rumor that the 10-year U.S. Treasury bond has been inflow from not only Japan but also China from April.” China continues to manage its liquidity. At this level, the foreign liquidity that is rushing into the Chinese market, or the dollar, is being used to buy U.S. Treasury bonds. It means that the US is preparing for tightening in the second half or next year, such as tapering. When the United States began tightening, the dollar that had been released around the world was rapidly recovered, and countries that used the dollar at a low price were often in trouble.

In fact, some believe that Bill Hwang’s Akegos Capital crisis emerged from the Fed’s tightening movements. Before the outbreak of the Arcegos crisis, the Fed notified US-based investment banks (IBs) such as Goldman Sachs that it would “check the leverage ratio,” and accordingly, Goldman Sachs and others will give more time to Akegos Capital, which had a large leverage ratio It means that they quickly forcibly dispose of their holdings. Foreign IBs, such as Credit Switzerland and Nomura, did not know this and said that they’opened their eyes’.

A Wall Street official explained, “It is occasionally happening for the Fed to check the leverage ratio, but there are some sayings that this is a pre-stop work to tighten in the second half of the year.” In other words, it is trying to check the liquidity that has been released too much in advance in order to avoid the financial market which was prospering due to high leverage, etc. from being affected by tapering.

④ Neutral infrastructure deal

Interest rates on 10-year Treasury bonds have risen steadily this year, reflecting the economic recovery. One variable was the content of the Joe Biden administration’s infrastructure deal. However, according to the announcement on the 1st, about 8 years, 4 trillion dollars will be spent, but through the tax increase, 4 trillion dollars will be raised over 15 years. A Wall Street official said, “The bond market sees the announcement of the infrastructure deal as neutral to interest rates.” There is a time difference, but because the amount of money to be spent and the amount of tax increase came out the same, and because the scale has not yet been confirmed, it is judged that there is not a big impact yet.

The 2nd and 5-year Treasury bond yields rose after the employment index came out in March on the 2nd, and then closed again on the same day. This is because some Wall Street IBs, such as Barclays, said that the Fed is unlikely to accelerate the rate hike in response to this indicator. As explained above, employment has yet to recover less, labor market participation is low, and hourly wages are not recovering. Taking this into account, Barclays recommended buying it, saying, “The 5-year interest rate has risen too much.” It was analyzed that the 5-year yield will decline by 20bp from the current 0.95% level. In addition, the TD Ameritrade also predicted that the 5-year interest rate would drop to 0.80%.

A Wall Street official said, “There are opinions that bond rates have risen too much, but given the consumer price index (CPI) to be released next week and the employment index to be released at the beginning of each month, interest rates will continue to rise,” he said. Pantheon Macroenomics chief economist Shepardson, Iran, said, “In the second quarter, there will be much larger numbers of employment. New jobs will increase by 1 million in April and 2 million in May and June.” I did.

The WSJ noted that “the survey on which the March employment report was based was conducted before Americans received stimulus checks, when the number of people vaccinated was tens of millions less than they are now.” It means that the numbers coming out in the future could come out better. “Some forecasters are seeing interest rates to surpass 2% this year for the first time since summer 2019,” WSJ noted.

However, even if interest rates rise, if companies’ earnings improvement is faster, the stock market may enter an earnings market, leading to a rally. Financial stocks such as JP Morgan from the 14th of next week announced their earnings for the first quarter, Factset said on the 1st, “Wall analysts’ 1Q 1Q’bottom-up’ EPS estimates have increased by 6.0% over the past 3 months.” “This is the largest increase since the second quarter of 2002, since we started calculating our quarterly bottom-up EPS estimates.”

Some of the signs of a performance market were also revealed on this day. Although Nasdaq surged by 1.67%, if you look at the side of the stocks that have risen, they are large tech stocks that are supported by most performances such as Apple.

△Apple 2.36% △Facebook 3.43% △Amazon 2.08% △Microsoft 2.77% △Tesla 4.43%, which announced that it sold more than 180,000 units in the first quarter △Zoom -0.70% △Peloton -2.68% △ Nio -0.88% △ Fuel Cell Energy -5.47% △ Plug Power -5.16% △ Roku -1.09% △ Shopify -0.82%.

Reporter Kim Hyun-seok [email protected]