At the beginning of this week, all Wall Streeters were eagerly awaiting Nvidia's earnings report, known as “the most important stock on the planet,” which could bring new guidance to US stock trends. However, as this week came to an end, people suddenly discovered that the real “protagonist” of the US market this week was not Nvidia's “Leather Coat and Knife Guest Show”...

Nvidia's performance cannot be described as poor — the company's revenue, profit, and Q2 guidance completely surpassed market expectations, and its stock price surged 9.3% in a single day on Thursday, continuing to reach a record high, yet none of this saved the US stock market from two consecutive days of sharp declines on Wednesday and Thursday.

A shocking set of comparisons is that although Nvidia's market capitalization surged by 230 billion US dollars on Thursday, the total market value of US stocks still plummeted by about 500 billion US dollars on that day.

By the overnight close, the S&P 500 index was down 0.7%. The Nasdaq Composite Index fell 0.4%. The Dow Jones Industrial Average Price Index fell by about 600 points, or 1.5%, the biggest one-day percentage drop since the Silicon Valley Bank crisis in March 2023. This is the second day in a row that the three major indices have declined. Of the top seven US stocks, only Nvidia rose on Thursday...

So, what exactly makes “the most important stock on Earth” not save US stocks?

Wall Street is once again pointing the finger at the hot US economic data like a “thunderbolt from the blue” and the “broken heart” of the US Federal Reserve's interest rate cut expectations in the market...

US data “thunderbolt from the blue”

As mentioned in our report yesterday, the minutes of the latest meeting released by the Federal Reserve this Wednesday “made a big mistake” — although Federal Reserve Chairman Powell vowed at the press conference after the meeting, it is unlikely that the Fed's next move will be to raise interest rates. However, the newly revealed details of the meeting minutes revealed that Powell's “dovish” statement at the time probably largely covered up the voices of hawkish officials.

This hawkish report shows that “many” Federal Reserve officials questioned whether the restrictive nature of the policy was enough to reduce the inflation rate to the target level, and many officials mentioned their intention to further tighten the policy if necessary.

After the release of the Federal Reserve minutes, the market's expectations that the Fed would cut interest rates twice during the year quickly cooled down. And all of this is getting worse with the release of a brand-new series of hot US data this Thursday...

The US financial market on Thursday actually proved once again the lethality of the current “good data” on Wall Street: in a context where inflation is still sticky, US business activity is accelerating. This reinforces people's expectations that the Federal Reserve will keep interest rates high for a long time, leading to a decline in the stock market and bond market.

According to data released by S&P Global on the same day, the S&P Global US Composite PMI Index rose more than 3 points to 54.4 in May, the highest level since April 2022. Among them, the manufacturing PMI hit a two-month high and broke through the 50-mark, while the service sector PMI hit a 12-month high.

A PMI reading above 50 indicates an expansion of industry activity. And Thursday's data also surpassed the expectations of all the economists surveyed. The rise in this PMI indicator indicates that overall US economic activity is still accelerating significantly after entering the middle of the second quarter. This reversed the downward trend in some previous economic indicators. Recent data showed that retail sales were sluggish in April and manufacturing output declined. At one point, it indicated that the overheating of the US economy had eased at the beginning of this quarter.

Judging from the disaggregated data, the most worrying thing about this set of overnight PMI indicators is probably that the downward trend in US prices will continue to be repeated — factory input prices are rising the fastest since November 2022, and the prices paid and received by service providers are also increasing. In the comprehensive PMI data, the index for measuring the price of inputs rose to the second highest level since September last year.

Chris Williamson, chief corporate economist at S&P Global Markets Finance Intelligence, said in a statement, “What's interesting is that the main driver of inflation now comes from manufacturing rather than services, which means that according to pre-pandemic standards, cost and sales price inflation rates have risen in both industries. This indicates that the last mile of achieving the Federal Reserve's 2% target still seems far away.”

Williamson also pointed out that the US composite PMI index hit the highest value in 25 months, which clearly “will cause the Federal Reserve to worry.”

In addition to PMI, the latest weekly job market indicators released on Thursday also performed well. According to the data, the number of jobless claims in the US fell by 8,000 to 215,000 at the beginning of the week of May 18, the biggest continuous decline since September last year. The market is expected to be 220,000.

Wall Street's “heart is broken”

For most of the year, the market's expectations about how much the Federal Reserve will cut interest rates this year have actually been cooling down. The rare turning point comes in recent weeks — some economic indicators reflecting the start of the second quarter showed signs of decline, and inflation data also showed a welcome decline.

However, at a time when people are expecting the Federal Reserve's interest rate cut in September to “something good is near,” this week's US Federal Reserve minutes and the latest PMI data made a joke for traders. This also made the market's expectations of the Fed's interest rate cut quite a bit better, and once again “shattered”...

The latest pricing in the interest rate market shows that after several hot sets of US economic data were released on Thursday, traders currently expect the Federal Reserve to cut interest rates by only 35 basis points this year. This figure is further lower than 40 basis points on the previous trading day. In terms of frequency, this indicates that the market's benchmark estimate has gone from cutting interest rates twice to cutting interest rates once again.

At the same time, traders also directly postponed their estimate of when the Federal Reserve will cut interest rates for the first time from November to December.

In the bond market, US bond yields of various matures also soared overnight due to the impact of the Federal Reserve's interest rate cut expectations. As of the end of the New York session, 2-year US Treasury yields rose 7.2 basis points to 4.952%, 5-year US Treasury yields rose 6.8 basis points to 4.537%, 10-year US Treasury yields rose 5.5 basis points to 4.483%, and 30-year US Treasury yields rose 4.4 basis points to 4.585%.

Ellis Phifer, managing director of fixed income capital markets at Raymond James, said, “The S&P PMI indicator had never really had much impact on the market before, but suddenly (Thursday) it caused a stir. The only thing I can think of is that the manufacturing industry is recovering more strongly than expected by the market.”

Phifer added, “My guess is that the market has always lacked dynamism, and people have had little reaction to the number of initial jobless claims. But when you combine better-than-expected unemployment reports and PMI, the quiet market will make waves.”

In the foreign exchange market, the ICE US dollar index, which tracks the exchange rate of the US dollar against a basket of six major currencies including the euro, also rose above the 105 mark on Thursday, continuing to reach a one-week high. Marc Chandler, chief market strategist at Bannockburn Global Forex LLC, said, “Foreign exchange market trends show that the market is still responding to strong US economic data in an expected manner. I think there is still some room for the dollar to rise.”

It is worth mentioning that on Thursday, Federal Reserve officials once again released “hawks” to the outside world. This year, Chairman Bostic of the Atlanta Federal Reserve said overnight that monetary policy is not as effective in slowing economic growth as in previous cycles, so it is even more necessary to maintain high interest rates for a long time to curb inflation. Although Bostic believes that the Federal Reserve will start cutting interest rates before the end of this year, it is impossible to cut interest rates before the fourth quarter.

The next FOMC meeting will be held June 11-12.

Regarding the current market situation and the key indicators that will be faced next, Vail Hartman, an American interest rate strategist at Mandike Bank Capital Markets, said, “Overall, we are in consolidation mode, waiting for key information to be released. The next important data is next week's core personal consumption expenditure (PCE) price index, but I think that considering the earlier consumer price index (CPI) and other inflation data, the market has made a pretty good judgment on the new PCE. The next important indicator after PCE will be the May non-farm payrolls report to be released on June 7.”

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