SignalPlus Macro Research Report (20230925): High interest rates will last longer
The market continued the decline after the FOMC last Friday, with the SPX closing at a 3-month low, but U.S. bond yields fell due to some bargain hunting and relief after the market was oversold; Bank of Japan decision choice Maintaining an ultra-loose monetary policy, trying to downplay market speculation about imminent interest rate hikes, continuing to adhere to the key guidance of increasing stimulus without hesitation when necessary, and stating that Japan has not yet experienced a situation where inflation is accompanied by wage growth - that is, stable and Persistent Inflation ended last weeks series of central bank meetings with a rather clear dovish statement.
Recent correlations in stock and bond returns have meant that the diversification effect of a traditional 60/40 portfolio has been significantly diminished. Nearly 15 years of zero interest rate policy and quantitative easing have resulted in asset prices being driven primarily by the Feds liquidity stimulus, while recent inflation s return takes us back to a time (the 1980s-1990s) when price pressures posed a real and persistent threat to asset prices, similar to our current situation.
After the FOMC, the arguments of Fed officials basically continued Powells hawkish tendencies. Boston Fed Collins said that the option of further tightening policy is certainly not off the table, while Governor Bowman indicated that multiple interest rate hikes may be needed. San Francisco Fed Fed Daly said she was not ready to declare victory in the battle against inflation and that the Fed will not be satisfied until we get to where we need to be, which is that inflation is on its way back to price stability.
The SPX index fluctuated between gains and losses all day on Friday before closing slightly lower, ending a disappointing week in which interest-rate-sensitive sectors (real estate, financials and consumer staples) continued to struggle as interest rates began to rise. As a result, auto and credit card loan delinquency rates began to rise, dragging down consumer stocks in particular.
On the other hand, the United States and China plan to establish working groups to discuss economic and financial issues. This positive news has encouraged Chinese stocks listed in the United States to perform well. According to a statement issued by the U.S. Treasury Department last Friday, these working groups will provide ongoing structure. and provide channels for frank and substantive discussions on economic and financial policy issues and the exchange of information on macroeconomic and financial developments.
On the political front, the UAW strike continues, with union leaders saying they have secured key concessions from Ford to spare the company further pain amid strike action by rivals GM and Stellantis continues to worsen; at the same time, under strong opposition from the right wing of the Republican Party, U.S. congressmen are still trying to reach a budget agreement, and the U.S. government may shut down as soon as this weekend. Fierce disagreements on issues, including a plan to provide massive additional aid to Ukraine, have put pressure on House Speaker McCarthy, who is so divided within the Republican Party that they have been unable to even develop a specific set of demands. As we enter the end of the September quarter, last-minute drama may yet again unfold.
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