How much should Kim Hyun-suk’s Wall Street Now interest rate rise?

The dawn before the opening of the New York Stock Market on the 17th (local time) was as quiet as’The Night Before the Storm’. The 10-year Treasury bond yield, which soared more than 10bp (1bp=0.01% point) the day before, showed a quiet movement in the late 1.2% range, and major index futures such as Dow remained in the consolidation range.

But it started to fluctuate when the retail sales indicators and producer price index (PPI) were released for January at 8:30 am.

Retail sales in January increased by 5.3% from December, the’year-end shopping season’. It was much higher than the market forecast (1.2% increase). Electronics sales increased 14.7%, and furniture sales increased 12.0%. As the $900 billion stimulus package was passed at the end of last year, an analysis found that distributing $600 per person led to consumption.

It would have been better if it was normal. However, as soon as the interest rate skyrocketed, there were immediate concerns that’strong consumption could boost inflation.’ What’s more, the Joe Biden administration is pushing for an additional $1,400 per capita in additional stimulus measures worth $1.9 trillion.

The PPI for January, which was also released, rose 1.3% from the previous month, far exceeding the expected (0.4% increase). This is the highest number since the tally began in December 2009. This was attributed to the reflection of the aftermath of rising oil prices. Western Texas Crude Oil (WTI) was in excess of $61 a barrel even at that time due to the impact of the Arctic cold wave sweeping the United States.

It’s not just oil prices that have risen. The core PPI, excluding volatile energy (such as oil prices) and food prices, also rose 1.2%.

Immediately after the release of these indicators, 10-year interest rates soared to 1.332% per annum in an instant. As interest rates rose again, index futures plunged. At 9:30 a.m., all major indexes on the New York Stock Market opened lower. The NASDAQ index, which has a large share of technology stocks, declined by about 1%.

The Wall Street Journal (WSJ) reported that’Saudi Arabia is preparing to reverse the voluntary cuts of 1 million barrels in February and March announced in January’, while oil prices declined and interest rates have returned to stability. The decline has been reduced.

Major indexes rebounded after the minutes of the Federal Open Markets Committee (FOMC) in January of the US Central Bank (Fed) released at 2pm.

The word’far from’ appeared several times in the minutes.

“The commissioners agreed that economic conditions are far from long-term targets and the policy stance needs to remain relaxed until the targets are achieved. These inflationary pressures have triggered monetary policy tightening, although some believe inflation will begin to rise. I didn’t see it going long enough to do it. I figured it would take some time for the economy to make significant progress’farther’ from its targets.”

A Wall Street official interpreted it as “the key message is not to worry about money taper on the road to economic recovery.”

However, concerns from investors who witnessed the explosive movement of interest rates the day before continued. If interest rates continue to rise, it could threaten the high valuation of the current stock. Especially if you climb at such a high speed.

Eventually, the S&P 500 fell 0.03% and the Nasdaq closed 0.58%. Technology stocks such as Peloton (-4.56%), Zoom (-3.39%), Etsy (-2.59%), Nvidia (-2.77%), Apple (-1.76%), and Netflix (-1.07%) fell, and the Nasdaq declined. This was great.

On the other hand, the Dow rose 0.29%. The day before, Warren Buffett’s Buckshire Hathaway saw a surge of 5.24% for Verizon and 3.0% for Chevron.

Perhaps because interest rates have stirred up the market atmosphere, adjustments are emerging again.

“Investors are stalling as bond rates limit growth stocks and fuel inflation fears. There is a growing likelihood of a 10% market decline,” Citi warned. Bank of America mentioned bitcoin, which exceeded $52,000 on the day, and said that if’unknown risks’ collide with the high valuation of stocks, a 5-10% correction is expected in the first quarter.

Wall Street expects interest rates to affect stocks. However, opinions differ on the level that will have a serious negative impact on the stock market. The majority opinion is that if it exceeds the 1.5% per year level on a 10-year basis, it is negative.

Nomura is representative. Nomura warned, “If the 10-year yield stays between 1.3 and 1.4%, US stocks will only undergo a slight downward revision, but above 1.5% could lead to a sharp downward revision. The S&P 500 could fall more than 8%.” Jeffreys also predicted that a 10-year interest rate could threaten overvalued stocks if it reaches 1.5%, the same level as the dividend yield of the S&P 500. Jeffreys diagnosed, “These moments may come sooner or later, and interest rates will rise to 2% at the end of the year.”

JP Morgan is slightly different. In the future, it is expected that the interest rate will be negative for stocks only when the interest rate rises by an additional 1-2 percentage points and reaches 2% per year. The rising interest rate based on’good reasons’ such as economic recovery and growth is also positive for stocks. It is different from when it rises due to’bad reasons’ such as lack of government bond demand.

Mislav Matezka, strategist JP Morgan put this together in four sentences.

① Bond yields are likely to rise at the current level, and such a move should be well accepted by the stock market.

② Bond yields are expected to rise further, reflecting the possibility of overheating due to the continued fiscal policy as well as the economic normalization to begin in 2Q. There is a significant difference between current bond yields, inflation expectations, and the US Supply Managers Index (PMI) (the leading indicator). (Should narrow down as interest rates rise)

③ If the central bank’s liquidity supply is sufficient and the growth background is positive, the correlation between stocks and bonds (when bond rates rise after 2000, stocks also rise) are not expected to collapse while the 10-year yield is less than 2% per year. The stock price-to-earnings ratio (P/E) did not fall during the cycle of increasing corporate profits.

④ In order to lose the attractiveness of stocks, bond yields must rise by 100-200bps from now.

Anyway, tremendous liquidity is released by the unprecedented monetary and fiscal policy in the US. When economic activity resumes in earnest, inflation will rise and interest rates will rise. Its level and speed will be of paramount importance. Merrill’s Chief Investment Officer Chris Haige (CIO) has best illustrated this situation. Let’s hear his explanation.

“Inflation can be divided into two categories: asset inflation and price inflation. Asset inflation occurs when the central bank releases liquidity through easing monetary policy. It is the same case now that everything from stocks to bitcoins rises. Price inflation is This can happen when demand is increasing and economic activity is active (when it grows), when money turns faster and inflation rises, and fiscal stimulus implemented in conjunction with easing monetary policy increases the likelihood of such price inflation.

When economic activity increases, consumption increases and corporate profits increase. This leads to higher wage pressures and companies raise prices for goods and services. Then the central bank will raise interest rates to prevent overheating. When inflation soars and interest rates rise, consumption declines and corporate profits decline. At this stage, the stock market cannot maintain a high valuation.

There is asset inflation right now, but it’s far from when price inflation occurs. If economic activity resumes soon with the supply of vaccines, consumption will increase and corporate profits will increase. Still looking good at stocks. Price inflation is something to keep in mind in 2022.”

Reporter Kim Hyun-seok [email protected]