Kim Hyun-seok’s Wall Street Now interest rate seizure… Does the market challenge the Fed?

‘Pigeon’ Jerome Powell, chairman of the US Central Bank (Fed), had a’market appreciation’ effect for only one day.

The economic data that came out before the opening of the New York Stock Market on the 25th (local time) were all good. The preliminary economic growth rate for the fourth quarter (October-December) was 4.1% (annual rate), up from the breaking value of 4.0%. In January, orders for durable goods in the US increased 3.4% from the previous month, a sharper increase than expected (1.0%). It’s much higher than last December (1.2% increase).

The number of claims for unemployment benefits last week fell to 730,000, the lowest since the end of November last year. That’s 111,000 declines in one week. The number of claims from the previous week also decreased by 20,000, from 861,000 to 841,000. Wall Street analyzed that the number of claims declined due to the severe cold and power outages that struck the United States last week rather than the effect of economic improvement, but the power of the headline numbers was strong. In addition, Capital Economics recently predicted that the number of jobs could increase by 500,000 in February due to the recent reduction in corona infections and easing containment measures.

The 10-year U.S. Treasury bond interest rate, which has recently influenced the market, ended at 1.35% per annum at Powell’s comment on the regular market on the 24th, but gradually rose to 1.4% at 9 o’clock that night. The rise in interest rates sharpened as the economic indicators showed improvement in the economic indicators amid increasing expectations for economic resumption following the supply of vaccines, such as the opening of a middle school in New York City and students returning to school on this day. At 10:40 am, the 10-year yield soared to 1.495%, breaking the psychological resistance line of 1.5%.

The key index for the New York Stock Market, which started flat, fell. In the case of NASDAQ, it plummeted to 1.5% at 10:40 am. Still, the day before, the Dow rebounded sharply, recording an all-time high, so the fluctuations of investors were not so great. This is because the beneficiaries of a large number of’reflation trades’ such as energy and banking stocks, although still a small amount, have maintained the positive mark.

However, at 1 PM, news came to shake the market. In the US Treasury Department’s 7-year Treasury bidding, demand fell sharply and the issue rate soared. The interest rate rose from 1.151% per year just before issuance to 1.195% as a result of the bidding. The bid rate reached a record low of 2.045 times, which was significantly lower than the last January bid (2.305 times). This was because indirect demand plunged from 64.10% in January to 38.06% on the same day as demand for foreign investors plummeted.

In a situation where economic activity resumes and inflation is expected, more and more bond investors are “no longer accepting low interest rates.”

A Wall Street official said, “Amid the economic recovery and the rising possibility of inflation, the US administration is pushing ahead with enormous stimulus measures. It means that by the end of the year, an additional trillions of dollars of US Treasury bonds will be poured into the bond market. All of these factors are all factors of Powell’s repeated denial Despite this, it is encouraging the observation that this year the Fed could taper or even raise interest rates.”

The Joe Biden administration is said to be pushing for a $3 trillion in infrastructure deal following an additional $1.9 trillion in stimulus. Usually, the US fiscal deficit is about $1 trillion per year. If you add 5 trillion dollars of stimulus to this, someone has to digest the 6 trillion dollars of U.S. Treasury bonds.

The New York Melon Bank released a report that the 10-year Treasury bond yield could jump to 2.0% by April. On this day, a bet (5.8% probability) appeared in the Federal Fund Rate Futures market that the Federal Open Market Commission (FOMC) would raise the interest rate once as early as June this year. The five-year break-even rate (BER), reflecting the bond market’s forecast of inflation, jumped to 2.4%. It surpassed the level before the 2008 financial crisis.

When the news of the 7-year Treasury Bond bidding was announced, the 10-year Treasury bond rate instantly soared to 1.61% per year. It was a kind of’seizure’. The movement was also prominent in short- and medium-term bonds, where the Fed’s strong influence. The 5-year yield has risen to 0.827%. It is a whopping 22bp (1bp = 0.01% point) soaring from the previous day’s closing price of 0.602%.

Fear engulfed the market. Not only the bond market, but the New York stock market crashed like a hammer hit. Nasdaq fell to 500 points, or about 4%, pushing it back to 13,109 points (the previous day’s closing price of 13,597).

In the end, the Dow plunged 1.75%, the S&P 500 plunged 2.45%, and the tech-focused NASDAQ plunged 3.52%. The NASDAQ had the largest daily decline since the end of October last year. As you can see from the index, technology stocks fell sharply amid all stocks falling. By industry, technology stocks plunged 3.53% and financial stocks, which were considered to be beneficiaries of rising interest rates, fell 1.81%. Large technology owners △Apple 3.48% △Amazon 3.24% △Alphabet 3.26% all fell by more than 3%, △Tesla 8.06% △ NVIDIA also plunged 8.22%. High-value technology stocks such as △Nio 9.74% △Fuel Cell Energy 10.74% △Plug Power 13.6% have collapsed.

The 10-year interest rate ended in the 1.5% range, but there is still anxiety. A Wall Street official said, “As the resistance line collapses, you can always return to the level once broken (1.6% per year).”

1.5% per year was a very important resistance level. This is because the dividend yield of the S&P 500 is about this. If bond yields exceed this, the reasons for investing in stocks dilute to a great extent.

It is analyzed that the 10-year yield on that day soared to 1.6% momentarily is attributed to quant funds such as CTA. CTA funds invest according to trends, crossing many commodities such as stock bonds, foreign exchange, etc. On this day, when the yield of bonds suddenly exceeded the resistance line of 1.5% (the price of bonds plunged), it is estimated that the holdings of bonds were sold at a time by the algorithm.

Wall Street’s interest rate will steadily rise, but I think it is difficult to keep rising at such a rapid pace. Rick Ryder, Chief Investment Officer of Blackrock, told CNBC, “High inflation expectations are the cause of the rise in interest rates and we expect inflation. But the economy now has the structural conditions for excessive inflation as in the past. No. We forecast inflation to be between the mid-2% and 2% range, which is not that high.” “If interest rates go up and real interest rates rise, there’s a reaction. This move happened very quickly, but real interest rates are still negative,” he added. “I’ve been in an extremely easing financial environment, because the real interest rate was negative. There is some uncertainty, there is market volatility, and I’m going to re-adjust, but I’m not very worried about stocks.”

The Wall Street Journal (WSJ) said, “Currently, the inflation expectation based on 5-year Treasury Bonds and TIPS is high at 2.4%, but it is lower at 2.15% for 10-year bonds and 2.1% for 30-year bonds.” “It can also be seen as agreeing to the Fed’s opinion that inflation will stop in the short term.”

A Wall Street official said, “Considering the rapid rise in interest rates, the stock market has not fallen very much. The S&P 500 is still only 3% below its all-time high.”

The Fed also implemented zero interest rates and quantitative easing during the 2008 global financial crisis. At the time, concerns over inflation were great, but prices continued to stabilize. But why are some of the markets worrying about inflation? This is fundamentally because the nature of this crisis and the government’s response method are different from the past.

JPMorgan analyzes that it is different from the time of the financial crisis in three ways.

① Supply vs. demand-led recession

The financial crisis was a demand-driven recession. Demand disappeared as the economy overheated and collapsed due to an excess of housing and financial markets. As a result, employment and growth also collapsed. However, this recession caused by the corona is characterized by a decline in supply due to the economic blockade, although demand is still strong. Once economic activity resumes with the supply of vaccines, the supply will be revived as the repressed demand bursts.

② Product VS Service

When the financial crisis broke out, consumers did not buy expensive items such as houses and cars. But they still used the service. This time it is the opposite. Consumers’ home purchases continued, and car purchases quickly survived. By moving consumption online, commodity consumption increased by 7% compared to the previous year. On the other hand, service spending is still down 5% due to the economic blockade. In the United States, services account for more than twice as much as goods in total consumption. In particular, employment depends on the service. If the economy rises, demand for services will surge, and employment and the economy will recover much faster than the financial crisis.

③ Financial and monetary policy support

In both crises, the Fed almost immediately dropped its interest rate to zero. However, during the financial crisis, the financial market crunch continued for a while. This time, the financial markets were immediately normalized, and access to credit was easy. This quantitative easing (QE4) is due to its larger scale than the sum of all three quantitative easing that the Fed implemented during the financial crisis.

The same goes for federal government support. Following the $2.4 trillion-dollar CARES Act in April of last year, an additional $900 billion in stimulus was implemented at the end of last year, and will soon introduce another $1.9 trillion worth of fiscal stimulus. Add this to a total of $5.2 trillion. This amounts to 25% of nominal gross domestic product (GDP) in 2020. The fiscal stimulus package issued by the U.S. administration in 2009 was only 5.8% of nominal GDP at $831 billion. This time, monetary and fiscal policy support is faster and much more.

Reporter Kim Hyun-seok [email protected]