One of the old adages of the US stock market is “Don’t fight the Fed.” This proverb came about because stocks, a representative risky asset, are sensitive to interest rates.
When interest rates rise, liquidity decreases and the stock market falls, and when interest rates fall, liquidity increases and stock prices rise.
However, the US stock market has recently rallied despite interest rate hikes. This is interpreted as investors ignoring the Fed’s warning and continuing to invest in the stock market, which is a risky asset.
In fact, recent macroeconomic indicators all at once raise the possibility of further rate hikes by the Fed. △ Retail sales are strong, △ The decline in the consumer price index (CPI) has slowed down, and △ New employment is soaring.
These are all macroeconomic indicators that increase the likelihood of further rate hikes by the Fed. Still, the US stock market is rallying.
◇ Retail Sales Highest in 20 Years
: Retail sales rose 3% to $697 billion in January after a second straight month of decline, the Commerce Department said on Monday. That’s well above Bloomberg’s estimate of 1.9%.
This is also the largest increase since March 2021. At the time, it was a time when stimulus books were pouring out due to the corona pandemic (trend). Excluding this period, it is the largest increase in 20 years.
This is an indicator that increases the likelihood of further rate hikes by the Fed. Nevertheless, the US stock market ended higher on the same day. The Dow rose 0.11%, the S&P 500 rose 0.28%, and the Nasdaq rose 0.92%.
◇ CPI decline also slowed down
: The previous day, the CPI also exceeded market expectations.
The U.S. Department of Labor announced yesterday that the CPI rose 0.5% month-on-month and 6.4% year-on-year. This is above Dow Jones’ expectations. Dow Jones expected a 0.4% MoM and 6.2% YoY.
Core CPI, excluding highly volatile energy and food prices, rose 0.4% MoM and 5.6% YoY. This also exceeded the Dow Jones’ expectations. The Dow Jones had expected a rise of 0.3% and 5.5%, respectively.
In short, inflation in the US is coming down, but the rate of decline is slowing. As a result, expectations are growing that the Fed will continue raising interest rates for a longer period of time. Nevertheless, the US stock market closed mixed on the day.
◇ New job market three times higher than expected
: The previously announced employment indicators also far exceeded the market’s expectations.
The U.S. Department of Labor announced on the 3rd that non-farm payrolls added 517,000 jobs last month. This is more than three times the market expectation of 188,000. This is also more than double the previous month’s 260,000.
As a result, the unemployment rate fell to 3.4%. Market expectations were 3.6%. The unemployment rate of 3.4% is the lowest in 53 years since May 1969.
Despite the Fed’s tightening policy, the labor market is still booming.
All of the above indicators are fueling concerns that the Fed will raise rates further. Nevertheless, the US stock market continued its rally at the beginning of the year.
◇ JP Morgan “Investors are mocking the Fed”
: JP Morgan, a famous investment bank in the United States, released a report on the same day and said, “Investors are mocking the Fed.”
JPMorgan’s chief investment officer Marco Kolanovic evaluated that “investors continue to play with fire, such as increasing their stock investment despite the Fed’s tightening.”
“There is a saying on Wall Street not to fight the Fed, but investors are ignoring it,” he said. “I think investors are mocking the Fed.”
Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.