Weekly Market Update (November 06, 2022)
US stocks rebounded on Friday after 4 consecutive days of selloffs. The benchmark rate was raised by 75bps to the target range of 3.75% to 4%. Mega-caps tech giants lost billions of market value after the hawkish Fed policy announced this week, driving the capitalization-weighted S&P500 to the lowest compared to the equal-weighted S&P500. Markets are eyeing the coming inflation data next Thursday.
Reopening Rumor: An unverified screenshot about China's reopening plan was spread widely on WeChat. Chinese stocks jumped by over 8% in two days. It came back down after the rumor was denied by China's official sources and claimed that China is committed to its Zero-COVID policy. However, the rumor was about the plan of reopening in March but not now. We do not have to completely ignore this information while the official was only claiming Zero-COVID policy remains for now.
Extreme Inversion: The difference between 2Y and 10Y treasury yield is at 40years high. The 2Y yield is higher than the 10Y yield by 58bps, mainly driven by the higher-than-expected aggressiveness of the Fed’s hiking path. The market is pricing at a 5% fed fund rate next year.
NFP: Nonfarm payroll increased by 261k, higher than the expectation. The surge is mainly driven by technical services, healthcare, leisure and hospitality. Fed officials described the labor market as overheated and the wage gains are well above the target inflation level. The result of the job report aligns with the direction of the Fed’s policy.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Morgan Stanley: A bear market that is created by tightening tends to be longer. A peak in rate hike is not enough for stock to stabilize. Stock investors will need to see rate cuts to change their minds as they focus on valuations and earnings forecasts.
Standard Chartered: While comparing the performance of the S&P500 and Nasaq100, the earnings adjustment and rate hikes expectation are favorable to the S&P500 over the Nasdaq100. Sectors like energy and healthcare are recommended, which have performed well in Q3 earnings.
Morgan Stanley: Historical data shows an average of 5 months between the last rate hike and the first rate cut. Assuming the terminal rate will reach its peak in April 2023, the first rate cut is likely to happen in September next year.
Standard Chartered: For the coming months, treasury bond yield is expected to be skewed upwards as the expectation of early Fed pivot has disappeared with a higher terminal rate pricing. 10Y treasury yield is expected to stay above 4% for now.
Standard Chartered: The hope of Fed pivot is gone. The policy rate is at a 14-year high of 4%, with a hawkish signal that the Fed’s projection of the fed fund rate will be 4.75%. Market has priced in 5.25% by May next year.
Citibank: Inflation, Fed policy, recession risks and the subsequent earnings impact will be the main drivers in the coming year. "Slower Pace, Higher Destination" is the new narrative.
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