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US stock earnings season is getting better! How will the Fed market be interpreted?

US stock earnings season is getting better! How will the Fed market be interpreted?

As the new earnings season is gradually getting on track, the market has begun to show a trend of differentiation.

The rebound in cyclical sectors such as banking and energy helped the Dow to achieve its best performance in nearly six years, while technology stocks, which performed well in the first half of the year, fell into the quagmire of poor performance and led the market down.

In the coming week, U.S. stocks will face the test of the Federal Reserve’s interest rate meeting. At the same time, the performance of star technology stocks with artificial intelligence aura will make it difficult for the market to calm down. With the panic index VIX hovering at the low level of the year, a new round of volatility risks is gathering.

  Suspense over Fed decision

As an important indicator of U.S. household consumption spending, retail sales rose by 0.2% month-on-month last month, slightly below market expectations, which may impact the economic momentum at the end of the quarter. At the same time, the labor market continued to be tense, and the number of initial jobless claims fell to a near two-month low.

This week the focus will turn to the Fed. Last month, the FOMC pressed the “pause” button on interest rate hikes. As the first meeting in the second half of this year, under the background of further easing of price pressures, whether the end of this round of tightening cycle is coming has become a major focus of this meeting.

Fed funds rate futures show that a 25 basis point rate hike in July has been fully priced in, and compared with the Fed’s June dot plot, which expects two rate hikes this year, investors believe that the tightening cycle starting in March 2022 will peak this week. Bob Schwartz, a senior economist at Oxford Economics, said in an interview with China Business News that the Fed has communicated well with the outside world to restart interest rate hikes, so the focus will be on the policy statement and Powell’s views and statements on the next move.

For the Fed, the much higher-than-expected core inflation means it is too early to declare victory, and the committee may reiterate its view that the fight against inflation is not over yet. At that time, Powell may continue to “pour cold water” on the issue of interest rate cuts, emphasizing his determination to achieve the inflation target. The activity of the labor market will become an important reference for the Federal Reserve to assess policy decisions, and strong job demand may not be able to help inflation fall back to 2% in the short term.

In the past week, medium and long-term U.S. bond yields rose slightly, and the two-year U.S. bond, which reflects the outlook for short-term interest rates, rose to a two-week high of 4.84%. Many funds seem to be guarding against the Fed’s hawkish stance. United Credit released a report saying that most Fed officials believe that further tightening is needed, but it is unclear whether there will be a second rate hike. The Fed may open the door for potential actions, but at the same time emphasized that interest rate decisions will ultimately depend on upcoming data.

Schwartz told Yicai that he prefers the Fed to reach the terminal interest rate of the current cycle in July and then keep it unchanged during the year. But he believes the committee will continue to take a tough stance to prevent loosening financial conditions from making previous efforts to suppress prices in vain.

Schwartz said that in the second half of the year, as the lagging effect of monetary policy emerges, the economic slowdown and weakening demand will further suppress inflation.

  Market Volatility Could Make a Comeback

Last week, the divergence trend of the U.S. stock market was obvious. The turmoil in the regional banking industry in the first quarter did not have a substantial impact on the operations of large U.S. banks. The market’s optimism about the economic outlook also boosted the performance of cyclical sectors such as energy and raw materials. The Dow set a record for its longest winning streak since August 2017. In contrast, the volatility of technology stocks intensified in the second half of the week, and short-term dives occurred many times during the day. As the group with the best performance this year, companies such as Netflix( 427.5 , -9.92 , -2.27% ) , Tesla( 260.02 , -2.88 , -1.10% ) and IBM( 138.94 , 0.56 , 0.40% ) have suffered a blow to the confidence of some investors. Among them, the New York Stock Exchange FANG+TM index fell 4.6% on the 20th, a record for the year biggest drop.

Regarding the evolution of the market, Art Hogan, chief market strategist at B Riley Wealth, said that compared with strong sectors such as technology, communication services and consumer discretionary goods, he began to see some funds looking for opportunities in the relatively underperforming energy, financial and healthcare sectors, which will definitely have a huge impact on the Dow. “This trend is more indicative of the catch-up trade in the second half of the year, as investors began to look for sectors and asset classes where valuations were favorable,” he said.

Fund flows showed that investors were becoming more cautious ahead of the announcement of the Fed decision. Refinitiv Lipper statistics found that as of the week of July 19, net sales of US stock funds reached 3.04 billion US dollars, which was the first outflow of funds in nearly four weeks. At the same time, money market funds outflowed for the second consecutive week, with a scale of about 3.47 billion US dollars.

 ( 343.77 , -3.10 , -0.89% )

( 14032.8052 , -30.50 , -0.22% )

When looking forward to the market outlook this week, Charles Schwab said that as the positive impact of financial stocks dissipated, the upward momentum of US stocks has weakened, but it has not disappeared. Investors will look for opportunities in the earnings season, especially star technology stocks. “The Fed decision is also critical, and the outlook for the path of interest rates will affect changes in risk appetite. In this complex situation, we are neutral on the overall outlook for the week ahead.” Charles Schwab wrote.

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