If Kim Hyun-seok’s Wall Street Now Powell doesn’t do something, the stock market will continue to fluctuate.

As interest rates tumbled again, the New York stock market plunged again.

On the 3rd (local time), the Dow fell 0.39%, the S&P 500 fell 1.31%, and the technology stock-oriented NASDAQ composite index fell 2.7%. The Dow turned negative at 3:50 p.m., with 10 minutes left for the market close, while the Nasdaq fell below the 13,000 line, considered to be the resistance line, ending at 1,2997.75.

After the close of the market the day before, US President Joe Biden announced that his rival Merck would also produce a one-time vaccine developed by J&J, and that he would secure a vaccine for all American adults by the end of May. The initial goal was at the end of July, but it was two months ahead.

This raised hope that the economy would normalize sooner. The 10-year U.S. Treasury bond yield, which remained at the low 1.4% per year, rose again to the mid-1.4%. And when the economic indicators were released this morning, they soared to 1.498% a year and were ready to break through 1.5% again.

In fact, the economic indicators released this morning were not good. In the ADP National Employment Report, private sector employment in February increased by only 117,000 people. It fell short of the market estimate of 225,000 people.

The Service Industry Purchasing Managers Index (PMI) for February, released by the American Supply Managers Association (ISM), fell to 55.3 on 58.7 the previous month.

However, on Wall Street, both indices were interpreted as the effects of the cold wave in March and the blackout in the southern region, leaving no significant meaning. Also, the February service PMI announced by IHS Markit on that day was 59.8, up from 58.3 in the previous month.

What investors paid attention to was the price index among the ISM service industry PMIs. The price soared 7.6 percentage points from the previous year to 71.8. “Prices are rising at a faster rate,” the ISM said. In the ISM manufacturing PMI, which was released two days ago, the price index among the detailed indices surged from 82.1 to 86.0 in the previous month. Inflation concerns are bound to grow.

In addition, the Federal Bank of Atlanta’s GDP Now forecasts a growth rate of 10% in the first quarter due to personal income increased by 10% in January and the ISM manufacturing PMI soaring to 60.

This raises the possibility that interest rates will continue to rise. A Wall Street official said, “The interest rate, which soared last week, has retreated to the 1.4% level, but I think it can go up to the mid-1.7% at any time.”

First of all, events that can stimulate interest rates are waiting in line.

On the 5th, the non-agricultural employment index will be released for February. The market estimates that there are about 200,000 jobs. However, due to the impact of the cold wave last month and the blackout in the southern region, the estimates for each financial company are very different. If the market comes up with surprising numbers, interest rates can react rapidly.

The U.S. Treasury Department is placing an unprecedented $400 billion worth of extra-large government bonds this month. Three-year bonds, 10-year bonds, and 30-year bonds are scheduled for the coming 9-11.

On the 25th of last month, the bid for 7-year government bonds was a mess. As the bid rate fell to 2.045 times, the issuance rate soared. As a result, the market interest rate soared, and the 10-year yield soared to 1.61%.

This is because there was little foreign investor participation, and the situation is still the same. This is because Japan and China, the first and second largest investors in US Treasury bonds, have few reasons to participate in the bidding. In the case of Japan, financial companies such as insurance companies, which are demanders of government bonds, settled a lot in March, but it is known that they have been focusing on selling since last month as the possibility of a decline in bond prices has increased recently. At the end of the fiscal year, for window dressing, they are not buying new profits by selling bonds that have risen a lot. As of the end of December last year, Japan is the world’s largest investor with US Treasury bonds worth $1.25 trillion.

In the case of China, which has US Treasury bonds worth $1.7 trillion, there is little reason to actively buy US Treasury bonds. The New York Times reported that in his speech last week, President Xi Jinping said, “Currently, the biggest cause of confusion in the world is the United States. The United States poses the greatest threat to China’s development and security.”

In fact, it will. Although the Biden administration has entered the country, various measures taken by former President Trump, including tariffs, have been maintained and are now trying to raise human rights issues in the Xinjiang Uyghur region. US Secretary of State Tony Blincoln reiterated his hardline argument against China today, saying, “Although North Korea and Russia are serious challenges, China is the biggest geopolitical test.”

In this situation, is there anything that China can help the US economy by buying US Treasury bonds to stabilize interest rates? What’s more, rising interest rates means that U.S. Treasury prices will fall in the future. It’s hard to find a reason to buy more assets that are going to go down. What’s more, if the Fed prints more dollars to stabilize interest rates, the dollar could fluctuate, creating more favorable conditions for the internationalization of the renminbi.

This year, the size of the US Treasury Bond issuance is expected to reach at least 4 trillion dollars, and as much as 5 to 6 trillion dollars. This is more than last year’s 3.6 trillion won (estimated), when government bonds were printed out in response to a sudden pandemic. This is because the Biden government’s extra-large stimulus measures and infrastructure deals are being promoted.

However, the US Central Bank (Fed) currently buys only $120 billion per month. In terms of annual terms, they are all 1.4 trillion dollars. Another third of these are mortgage securities. “The bigger the stimulus, the more Treasury bonds will be issued, the bigger the stimulus, the more it will be,” said Matthew Miskin, chief investment strategist at John Hancock Investment Management.

Additional fiscal stimulus, estimated to be at least $1.5 trillion, is expected to pass through the Senate on the 12th. As the pandemic unemployment benefits expire on the 14th, the Democratic Party’s goal is to pass them before that. On that day, President Biden agreed to reduce the amount of cash grants per capita of $1,400 per person to $75,000 or less from $80,000 or less per year, and the amount is expected to decrease from $1.9 trillion, but Wall Street initially expected 1 Much more than a trillion dollars. When this money starts to come out, the sale of bonds may reappear.

The next week, 15-16, the Fed’s March Federal Open Markets Committee (FOMC) will be held. This FOMC is a meeting in which a dotplot indicating the economic outlook and interest rate forecast is released. (FOMC is held once every six weeks, and the economic outlook and dot plot are released every 12 weeks.)

The Fed’s authority is rocking the recent five-year interest rate, which is affected by the base rate. As the five-year interest rate rose, the inflation expectation, which is the difference between the interest rates of the five-year and five-year inflation-linked government bonds, exceeded 2.5% per annum.

The market wants the Fed to act. In some of Wall Street, there is already a rumor that’the 3rd Operation Twist (OT) will be decided at FOMC in March’. OT, which was taken in the 1960s and after the global financial crisis, in 2011-2012, is a measure to lower long-term interest rates by adjusting the proportion of bonds to be purchased without increasing the amount of quantitative easing. In other words, QE mainly buys short-term bonds. If you do OT, you sell some short-term bonds and use that money to increase purchases of long-term bonds of 10 years or more.

Currently, money is overflowing in the short-term money market in the United States with various stimulus measures and increased household savings rates. The interest rate in the Money Market Fund (MMF) market with an operating value of well over $4 trillion is almost negative. Selling short-term bonds can find demand for money like this. And it can lower long-term interest rates.

Bank of America interest rate strategist Mark Caberna, from the Federal Bank of New York, made this talk last week. He said, “The rising interest rate for the healthy reason of the economic recovery could rise for bad reasons, such as the lack of demand for government bonds.” He warned that a rise for’bad reasons’ could adversely affect risky assets such as stocks even if the absolute level of interest rates is low. He urged the Fed to take action before reaching such a critical point.

Market expectations rose when Fed director Rael Brainerd said on the move in Treasury bonds last week, “Some movements and speeds have attracted attention. If we see a disorderly situation threatening the Fed’s targets or a steady rise in returns,” market expectations have risen. . It was a little different from what Fed officials have said as if tolerating the rise in interest rates was a natural phenomenon due to improved economic outlook.

In the Beige Book released by the Fed on that day, concerns about inflation were raised. “As a rule, production costs have risen moderately,” he said, while “steel and wood prices have risen markedly.” This beige book is used as the basis for the March FOMC.

Chairman Powell speaks at the Wall Street Journal event on the 4th at noon. The Mayor expects Powell to give hints here on what to do in the FOMC in March.

A Wall Street official said, “If the stock market has not yet fallen by 5% from its all-time high, and interest rates are around 1.5%, it is still absolutely low.” I said.

In fact, although the New York stock market fell on that day, it was due to a lot of tech stocks such as Tesla (-4.84%), Apple (-2.45%) and Amazon (-2.89%), which had a strong index influence. Goldman Sachs (+1.05%) and JP Morgan (+1.93%) ), a number of financial stocks hit all-time highs. In addition to finance, energy and industrial sector indexes also rose. Not all stocks are falling, but as interest rates rise and the’reflation trade’ is gaining strength, the stocks are struggling.

A Wall Street official said, “Even amid a reflation trade, the index could fall.” This is because the share of technology stocks in the market is so large. The energy sector, which has soared nearly 30% this year, only accounts for 2.5% of the S&P 500 index. It was once less than Tesla’s market cap.

In any case, the market is raising expectations for the Fed’s actions, not words. In an interview with Reuters, John Hancock’s Miskin strategist, “The Fed boards signaled that they weren’t worried about interest rates. In response, the bond market said,’If you don’t feel pain, we’ll figure out what you’ll feel pain.’ I’m talking.” “Last week’s rate seizure could be just the first case,” said Fidelity’s head of global macroeconomics Sammon Ahmed. YCC is a system in which an upper limit of a certain interest rate is set and an unlimited number of bonds are bought when the rate is exceeded.

Higher market interest rates can slow the recovery of the US economy. This is because 10-year bonds are benchmark rates for all loans and mortgages. If interest rates go up while the light is enormously stretched, businesses and households can be overwhelmed by the burden of interest.

Already, investors threw stocks against Chairman Powell who said’will continue tightening’ at the end of 2018. In the month of December of that year, when the New York stock market plummeted 20%, Chairman Powell threw a towel. In early January 2019, the American Economic Association made a turn to stop raising interest rates.

A Wall Street official said, “It’s not enough for the Fed to take action during the first half of March,” he said. US economic indicators will continue to improve due to increased vaccine supply and economic resumption. In addition, prices can go up to 3-4% (which may be temporary, according to the Fed). Whenever that happens, the market interest rate will test the Fed’s patience. How far is Chairman Powell’s patience?

Reporter Kim Hyun-seok [email protected]