Has Kim Hyun-seok’s fear of interest rates on Wall Street Now eased? NASDAQ 3’s all-time rebound

Last weekend (27th) the House of Representatives passed an extra-large $1.9 trillion stimulus law. Democrats will start debating in the Senate starting this week. Excluding the Minimum Wage Act, we plan to vote on support laws as soon as possible. Passing the Senate brings stimulus measures estimated to be at least $1.5 trillion by the end of the month.

Here, on the 27th, the US Food and Drug Administration (FDA) approved the emergency use of Johnson & Johnson’s (J&J) coronavirus vaccine. It is the third vaccine approved in the United States.

In the United States, more than 2 million people are vaccinated a day. The high-risk group (58% over the age of 65 and 69% over the age of 75) completed nearly two-thirds of the vaccinations. In this situation, it is possible to store at room temperature and a new vaccine that only needs to be hit once appears. The US federal government plans to supply 3.9 million doses this week, 20 million doses within this month, and 100 million doses in the first half of the year.

With news that Apple has reopened all 27 Apple stores in the United States for the first time since March last year, vaccine and stimulus news are raising expectations for an economic recovery.

The actual game is getting better. The February Manufacturing Purchasing Managers Index (PMI) of the Supply Management Association (ISM), released this morning, confirmed this. In February, the PMI rose to 60.8 from 58.7 the previous month.

If the PMI is over 50, it means an expansion of the economy. This is far beyond this, exceeding the Wall Street estimate of 58.9. ISM’s Chairman Timothy Fiore said, “The manufacturing industry continued to recover in February. The figures for February show that the US’s real gross domestic product (GDP) is growing at an annual rate of 5% this year.” PMI will be higher with the resumption of the game. The Atlanta Federal Bank’s GDP Now currently predicts a growth rate of 10% for the first quarter.

These good news came out, but bond yields were quiet. If it was last week, higher inflationary anxiety could have led to soaring returns.

In response, the New York stock market rally. It rose to the 1% level at the beginning of the market, and as time went on, it increased. The Dow rose 1.95%, the S&P 500 rose 2.38%, and the Nasdaq soared 3.01%. It almost made up for the decline last week (Dow -1.8%, S&P 500 -2.45%, Nasdaq 4.92%). The increase in the S&P 500 index on this day was the largest in the nine months since June last year. Economically sensitive stocks have also risen, while tech stocks that have recently been adjusted have risen further. Tesla surged 6.36%, Apple surged 5.39%, Zoom 9.65%, Fuel Cell Energy 10.33%, and Nio 8.69%.

In fact, inflationary anxiety was also detected in the manufacturing PMI in February. Among the detailed indices, the price index rose to 86.0 from 82.1 last month. This is the highest since 2008. Many respondents complained of rising raw material prices due to supply chain disruption and difficulties in manpower management due to corona.

However, this is in line with the Fed’s expectations. Retaliatory consumption, supply chain disruption, etc. can lead to inflation in the short term. Supply chain disruption is expected to normalize over time as economic activity resumes.

Long-term inflation caused by rising wages is still viewed as less likely. Bloomberg reports that interviewing five pension funds in Australia with $2.3 trillion funding showed they weren’t too concerned about the risk of inflation. “The market is wrong. The deflation force is greater. Interest rates will remain near zero,” said Sam Scalia of Australia’s Host Plus Party Pension Fund.

In fact, the January Personal Consumption Expenditure (PCE) price index released last week showed a 1.5% increase from the previous year. Many Wall Street financial companies, such as Black Rock, expect prices that have remained low since the global financial crisis.

A Wall Street official explained, “I think there were some technical factors behind the sudden surge in interest rates last week.”

The reason why the 10-year US Treasury bond yield suddenly soared to 1.61% last week was due to a decline in foreign demand during the 7-year bond bidding by the Ministry of Finance on the 25th. A Wall Street official said, “Investors such as Japanese insurance companies’ pension funds have settled a lot in March. Recently, as the possibility of a decline in bond prices has increased, they have been focusing on selling since last month.” At the end of the fiscal year, for window dressing, they sold bonds that had increased a lot from February to secure profits and are not buying new ones. As of the end of December last year, Japan is the world’s largest investor with US Treasury bonds worth $1.25 trillion.

Here, an analysis shows that as interest rates suddenly soared, pension funds with mortgage bonds (MBS) sold long-dated Treasury bonds due to the possibility of an increase in duration across the portfolio. This is the so-called convexity hedging demand. This is because, as mortgage rates rise and consumers’ demand for refinancing declines, mortgage durations can be longer than expected. In addition, it is known that the sudden movement of interest rates and the selling of CTA funds following the trend have also been added.

Because of this, the so-called’taper tantrum’ occurred. A Wall Street official said, “I look forward to improving the supply and demand situation from April when Japanese investors return.”

That said, you shouldn’t think that the market will continue to be as consistently stable as it is today. Interest rates are certain to continue rising with the resumption of the economy. Level and speed will be a problem. A Wall Street official predicted that “the interest rate will continue to rise in the future, but as we have already experienced 1.6% a year, we can comfortably rise to the 1.7% level.” It means that you have been vaccinated against a rate hike.

Goldman Sachs said in a report on the 28th, “Investors ask if the level of interest rates poses a threat to the valuation of stocks.” Strategist David Costin said, “If the current New York Stock Market’s stock price-to-earnings ratio (P/E) of 22x remains constant, the 10-year yield should reach 2.1% per year, so the difference in return from the stock price is the historical median of 250bp (1bp = 0.01% points). ),” he explained. In other words, it is expected that the stock market will be safe until interest rates reach 2.1%.

UBS also said that when interest rates rose for’good reasons’ such as an economic improvement, the stock market continued to rise. In the past 25 years, there have been ten periods in which 10-year U.S. bond yields have risen more than 100bp. In all of these cases, the global stock market either provided a positive rate of return or maintained a minimum consolidation right.

Of course, if you look closely, it doesn’t mean that it has continued to rise steadily. In the month after the global financial crisis, when 10-year yields rose by more than 50 bps, the stock market recorded negative or very little returns.

The biggest event this week is the remarks of officials from the U.S. Central Bank (Fed). A few people stand on the podium every day. This is because public speaking is banned next week ahead of the 15-16 March Federal Open Markets Commission (FOMC).

On that day, Federal Bank Governor John Williams, Director Rael Braid, and Federal Bank Governor Thomas Barkin Richmond made speeches. Their words remain the same. “Given the positive economic outlook, the rise in interest rates is not surprising. Interest rates are still low compared to before the pandemic,” Barkin said. “Rising interest rates will not constrain the economy.”

The 4th coming is the highlight. Chairman Jerome Powell attends an event hosted by the Wall Street Journal.

A Wall Street official said, “I don’t expect anything new to be said.” He said last month that the Fed would tolerate some rate hikes to counter risky asset rally. And the Fed is doing that.

Chairman Powell has been making comments since last month (△Rising interest rates are due to improved economic outlook △Inflation risk is low and controllable △The economic outlook is improving, but short-term risks remain △Easy monetary policy is the Fed’s It will be maintained until there is substantial progress in the target △If tapering occurs, I will inform the market with sufficient time in advance, etc.), and this means that it will be the case again.

Powell is actually in a dilemma. New appreciation comments could also fuel inflation concerns, triggering higher interest rates. If you talk hawkishly, it will cause anxiety about tightening and explodes the rise in interest rates. Even if words are successful in stabilizing the market enough, more speculative actions such as Bitcoin GameStop may intensify.

A Wall Street official said, “What the mayor wants is action rather than what the Fed says.” Until the Fed pulls out cards that will stabilize long-term interest rates, such as expanding long-term bond purchases or controlling yield curves (YCC), investors will be demanding higher interest rates (increased bond prices) whenever government bonds come out.

Last week, the Reserve Bank of Australia ended up being pushed to the market, doubling its long-term Treasury purchases. In doing so, the 10-year yield, which soared to 1.97% last week, dropped to 1.6%. In the end, bond investors won.

It is difficult to predict that the Fed will surrender to the bond market as easily as Australia. Yields may continue to rise until specific actions such as increasing long-term Treasury purchases or implementing Yield Curve Control (YCC) support the word. In other words, as the tug of war between the Fed and bond investors continues, volatility may occur for the time being.

It is possible that the Fed will fine-tune its policies to appease the market. CNBC said the Fed revived an’operation twist’ (selling short-term government bonds and buying long-term bonds instead, flattening the slope of the yield curve) at FOMC in March, or raised interest on excess reserves (IOER) from now 0.1%. It is reported that a plan to increase it to 0.15% can be adopted. Operation Twist doesn’t put in more liquidity, but it’s a way to lower long-term interest rates. Increasing IOER can prevent inflationary anxiety by holding excess reserves within the Fed as money released as additional stimulus measures. The March FOMC is also the FOMC that publishes the economic outlook and point chart.

On Friday (5th), employment indicators for February are also available. Even if employment improves faster than market expectations, interest rates may rise again.

Reporter Kim Hyun-seok [email protected]