Kim Hyun-suk’s Wall Street Now Powell’s haircut is only 12 hours… Brain fiscals surrounding soaring interest rates

It has been 12 hours since Fed Chairman Jerome Powell finished a press conference at the Federal Open Markets Commission (FOMC) in March. The 10-year U.S. Treasury bond yield, which was at 1.65% a year, started to wriggle again at 3 am on the 18th (local time) EST. At that time, interest rates began to skyrocket in the Asian bond market.

At 7:30 a.m., it went over the 1.75% annually, which was considered a resistance line, to 1.757% and then retreated slightly. It is 10bp, about 0.1% point increase compared to the battlefield. This is the highest since January 24th last year (1.762%). The 30-year yield, which is an ultra-long term, was also great. It broke above the 2.50%, which was once analyzed as a strong resistance, and broke the record high since August 2019.

The previous day, Chairman Powell calmed concerns about austerity by saying, “I will keep the easing policy until we see real progress, not the progress of the prospects,” but some of the market said that inflation worries have grown even more. CNBC’s Mike Santoli, a stock critic, said, “It’s very common for the market to rethink the Fed’s decision a day later.”

The Fed announced the day before that it would maintain monetary policy while predicting economic growth of 6.5% and inflation at 2.4% in 2020. This is the first time since 1984 that the huge US economy has grown by around 6%. Of course, there is a base effect of negative growth due to the pandemic last year, but some are expected to grow by more than 8%.

Those who have been watching the Fed for decades are experiencing great confusion about the Fed’s call to maintain easing policies in this context. Wasn’t it the Fed that raised interest rates preemptively even with signs of inflation?

A Wall Street official explained, “If the economy recovers at a rapid pace, and if the zero interest rate is maintained, the rein in prices can be relieved. If that happens, the Fed will also be pushed by inflation and only tighten quickly.” BCA Research commented, “I don’t know how the Fed can stop interest rates from rising amid such strong fundamentals.”

As interest rates jumped sharply, Nasdaq’s tech stocks were weakened all at once. The NASDAQ started trading at the -1.5% level. Apple and Tesla traded at a drop of 2-3%.

On the other hand, economically sensitive stocks such as bank stocks, which are beneficiaries of rising interest rates, are showing strong strength, and the Dow index started with an increase of about 0.5%. Bank stocks such as JP Morgan and Goldman Sachs recorded all-time highs on the day.

In the afternoon, the low-priced buying tax flowed back into the bond market, keeping the 10-year yield at 1.71%. But in the stock market, the sell-off has accelerated over time. After the suspension of AstraZeneca vaccination in Europe, the corona spread again intensified, and on that day, France imposed restrictions on movement for four weeks in eight states in the Ile de France region, including Paris. International oil prices, which had declined due to US inventory growth, plunged to 7%, pulling energy stocks down by more than 4%, and the Dow index fell to the negative range.

In the end, the Dow also fell 0.46% and the S&P 500 closed at 1.48% lower. In particular, the NASDAQ plunged 3.02%. Apple fell 3.39%, Amazon fell 3.44%, and Tesla fell 6.93%. The so-called high-value technology stocks such as Zoom 6.04%, Square 9.00%, Fuel Cell Energy 9.08%, and Nio 6.99% saw a significant decline.

All investors look only at interest rates these days. What happened inside the bond market on this day? And what will be the interest rates in the future? I asked a few bond traders who buy and sell U.S. Treasury bonds. They convey the’brain fiscal’ they convey without any addition or subtraction. I think we can guess the current market situation and the sentiment of traders.

△ “On the night of the 16th, the day before the announcement of the results of the FOMC, some investment banks came up with an expectation that’the median dot plot will change to an increase in 2023.’ Goldman Sachs is the representative. So on the morning of the 17th, interest rates rose to 1.68% in advance. Looking at the dotplot released at 2pm, there was no change in the median value, which is the reason the interest rate fell shortly after that. As a result, the aspect of the market must have changed.”

△ “At the FOMC in June, the median value in the dot plot will surely advance to a 2023 increase. If only two more people change their opinions, the median value will increase.”

△ “The most talkative is whether the SLR (Complementary Leverage Ratio) will be extended. There are concerns that banks will sell government bonds held by banks if the SLR, which eases reserves for government bond purchases by banks, is not extended. Chairman Powell said about this. “I won’t answer now. There will be a separate announcement soon.” But there are many sayings that if they had decided to extend this measure, they would have just announced it. It means that it was not announced because it was not extended. In particular, the institution of reverse redemption conditional bonds (reverse RP) on that day. It is argued that the daily transaction limit has been increased from $30 billion to $80 billion, which is instead of an SLR extension.” Credit Swiss strategist Zoltan Fozar said, “The extension of the reverse RP limit suggests that the Fed is on the path to ending SLR measures. “Of course, the official interpretation is that the SLR was delayed because it was the decision of the Fed board, not the FOMC.”

△ “There is a view that it is difficult to extend the SLR even for political reasons. Chairman Powell’s term of office ends in February of next year. To take office, he must go through a Senate hearing. Democrats, including Chairman Sherrod Brown, are insisting on the abolition of the SLR, which could hinder Powell’s tenure.” Jelena McWilliams, chairman of the Federal Deposit Insurance Corporation (FDIC), already appointed by the Democratic Party, said earlier this month, “SLR extension extension. “I don’t see the need,” he said. It is also heard that Rael Brainerd, who is aiming for the next Fed chairman, will be opposed by the Fed board.”

△ “Even if the SLR is abolished, the market may not be affected. It is unlikely that banks who have extended the SLR will be holding government bonds whose prices continue to drop.”

△ “Not extending the SLR may mean that the Fed will allow long-term interest rates to rise. If there is disorder in the financial market or interest rates rise without tightening financial conditions, as Chairman Powell said, 10 years will be 2% or more. “I think it is acceptable. In fact, isn’t the Fed’s prediction that prices will rise by 2.4% this year?”

△ “If the growth rate reaches 6.5% this year and the unemployment rate drops to 4%, it is a number that should increase the interest rate right away from the past. But if the Fed watches, the possibility of inflation rising as the economy overheats.”

△ “From Powell’s point of view, if the money market is okay, it would be better to raise the interest rate. Basically, if the economy improves, it is natural for interest rates to rise. And if interest rates rise, you can go while controlling the bubble that appears in the stock market. Liability for the bubble. At a press conference the day before, Chairman Powell said,’By some standards, we can say that the valuation of some assets is historically high.’
(In this regard, Michael Darda, a strategist of MKM Partners, said, “Beware of high valuations. Here, about 40% of NASDAQ 100 companies with double-digit share price sales ratio (PSR), acquisition purpose companies (SPAC), gamestop, etc. (meme) stocks, cryptocurrency, etc. are included.”)

△ “In the market, the 10-year yield is close to 1.75% per year, so it is said that now 1.85% is the resistance line. There are also predictions that the rate will reach 2% per year in the second quarter. If interest rates rise slowly, Chairman Powell will let it go. Financial market conditions are steadily decent.

Wells Fargo released a report the day before, predicting that US Treasury yields would rise to 1.75% within a few weeks and reach 2% at the end of the year. Powell said he didn’t say a word at the press conference that would lower long-term interest rates. Moreover, the supply of government bonds keeps pouring out.”

△ “Some say that considering that the interest rate rose 120bp in a month during the taper tentrum in 2013, this time it has risen by 60bp so far, so there is a long time left.”

△ “Hedge funds are exciting. The Fed announced yesterday that the short-term interest rate would be tied up for at least 2-3 years. So, for two years or less, the interest rate fell yesterday as well. Buying such short-term and selling long-term. In other words, ‘ The’Curve steepener’ is the hottest deal right now.
In a situation where the yield curve is steeper as it is now, short-term interest rates go down and eat, while long-term interest rates go up and eat. Even if interest rates fall, you can eat them. Short selling of long-term bonds suffers losses when interest rates fall, but buying short-term bonds leads to hedging. That’s why I heard that hedge funds are eagerly selling organs.”

△ “Real money (long-term investors) such as pension funds are uneasy. Suddenly, it wasn’t even April, so I didn’t know that the interest rate would jump like this. Even those who predicted aggressively saw about 2% at the end of this year. Looking at the stock market, there is no opportunity to sell stocks held every day. This is a case of dropping. As this situation continues, I feel like I want to reduce my position significantly if the interest rate falls a little.”

△ “It seems that Japan was blamed for the sudden surge in interest rates yesterday. In the afternoon, the Japan Economic Daily (Nikkei) reported that “the Bank of Japan will expand the allowable range of fluctuations in 10-year Treasury bond rates from ±0.20% to ±0.25%. As it became known, the interest rate suddenly jumped from 1.66% to 1.73% on the 10-year US Treasury bond. This means that some rate hikes are allowed. The Bank of Japan announces the results of the Monetary Policy Meeting on the 19th.”

△ “If there is hope, however, it is expected that Japanese investors will return to the US Treasury market with money in April. So, I want to watch the situation a little bit.
Also, the Fed, led by Alan Greenspan, used to tame bond traders by suddenly announcing sensational measures when they felt the Fed was losing market control. Since there is such a precedent, it is also cautious to sell. Because of these factors, the 10-year yield will be slightly resisted at 1.75% and 1.85%.”

Listening to traders, there is a lot of anxiety in the bond market. Net Intelligence said today, “The 10-year yield of 1.75% is not a decent technical resistance line. It won’t stay long at this line. We see 1.82%, 1.875%, or 1.95% as resistance. Then, when 2%, when Will it reach the level. If it is at this level, it may be next week.” It means that prediction is difficult.

In addition, government bond tenders are waiting in line until the 22nd and 25th next week. On the 22nd, there will be a bidding for a 1-year or less short term, followed by a two-year (60 billion dollars) on the 23rd, a 5-year (61 billion dollars) on the 24th, and a 7-year (62 billion dollars) that triggered an interest rate surge at the end of February on the 25th. .

What will happen to the stock market if interest rates continue to rise? Goldman Sachs claims the New York Stock Market will be fine until the 10-year interest rate reaches 2.1%. However, Bank of America (BofA) reveals that the 1.75% line of 10-year products is the’Tipping point’. Historically, at that level, investors have begun to move money from stocks to bonds.

In addition, according to the March Global Fund Manager Survey (FMS) released by BofA on the 16th, 43% of respondents answered the question,’What level of 10-year interest rates do you think will trigger an adjustment of more than 10% in stocks?’ I answered %. In addition, 19% of investors expected 2.25%, and 16% answered 1.75%.

A Wall Street official explained, “Rather than expecting the stock market to rise overall, it is time to pick and buy stocks that will perform better if the economy improves.” When Bloomberg surveyed Wall Street strategists last month to target the S&P 500 at the end of this year, it was still 4099 as in January. On this day, the S&P 500 closed at 3915.46 points. If they are correct, the upside is only 4.68%.

Reporter Kim Hyun-seok [email protected]