Traders are more “eagles” than the Federal Reserve! Damo Reminder: It is more beneficial not to cut interest rates

Golden10 Data ·  Apr 3 09:16

Source: Golden Ten Data
Author: Xiao Yanyan

Expectations of interest rate cuts were thwarted, and US stocks suddenly plummeted. Damo said there is no need to worry about the Fed cutting interest rates or not cutting interest rates.

After experiencing the strongest first quarter since 2019, the US stock market began to decline after entering April, as a wave of strong economic data revived concerns that the Federal Reserve would not be in a hurry to relax its policies.

On Tuesday, due to better-than-expected US job vacancies and factory goods order data, traders predicted that the 2024 interest rate cut would be lower than the Fed's own forecast, and 10-year US Treasury yields would rise to the highest level since November last year. This finally put pressure on the US stock market. The three major stock indexes collectively closed down overnight. The S&P 500 index recorded its worst day in nearly a month. The Dow fell nearly 400 points, and the VIX index rose.

Calls for a pullback in US stocks began pouring in. Fawad Razaqzada of City Index and said, “Stock market bulls may find it difficult to justify buying stocks at such a high level as US bond yields rise. The rise in crude oil prices poses an additional risk to the inflation outlook. Additionally, a number of employment reports will be released this week. Deals may fluctuate.” BlackRock's Gargi Chaudhuri said: “Our basic assumption is that the Federal Reserve will achieve a soft landing in the second half of this year and begin cutting interest rates. The downside risk of economic growth has been reduced, so the risk of the Fed cutting interest rates only twice now seems higher than the risk of cutting interest rates four times.”

However, investors who sell stocks because the Federal Reserve may cut interest rate cuts may have misunderstandings. Andrew Slimmon (Andrew Slimmon) of Morgan Stanley Investment Management said that the reduction in interest rate cuts by the Federal Reserve bodes well for the US economy and even the US stock market.

“I think the Fed's continued patience actually confirms that the economy is strong,” Slimon said in an interview with Bloomberg TV on Tuesday. “It's better for the stock market.”

Sliemon's words are worth listening to. The S&P 500 surged 24% last year, proving that his optimism was correct. In contrast, his colleague at Morgan Stanley, Mike Wilson (Mike Wilson), the company's chief sell-side strategist, predicted the collapse of US stocks several times, but this prediction has been “punched in the face” until now.

In fact, investors are now more hawkish than Federal Reserve officials. They expect to cut interest rates by about 65 basis points this year, while the median forecast announced by the Federal Reserve after the March meeting was 75 basis points. Investors have been more dovish than Federal Reserve officials for most of this year, but now their positions have completely changed.

Traders have readjusted their expectations for interest rate cuts this year, lowering the rate cut expectations from 6 times in early 2024 to around 3 times, but the S&P 500 index still rose more than 10% in the first quarter. Sliemon said that the need to cut interest rates is usually a reason for optimism.

US stocks continued to rise despite lower expectations of the Federal Reserve's interest rate cut in the first quarter

In his view, if the Federal Reserve does not cut interest rates this year, it will mean that profit expectations for S&P 500 stocks in 2025 may be between 275 US dollars and 280 US dollars. Given that the market will expect these predictions, this will “confirm the upward space for the stock market.” “I think if the economy weakens, they will be forced to cut interest rates,” he added, adding that this will put pressure on profit estimates for the coming year.

This optimism faces the risk that rising oil prices may put pressure on the stock market in the short term. Sliemon expects the recent surge in commodity prices to be temporary. But if the Federal Reserve does not cut interest rates because oil prices remain high, then it is not a sign that the economy is strengthening. “That's an inflation issue, a concern,” he said.


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