Risk appetite has returned, can the new earnings season of US stocks add fire?

Risk appetite has returned, can the new earnings season of US stocks add fire?

Risk appetite in the U.S. market has picked up, and monetary funds have continued to outflow in the past two weeks.

After a short break, U.S. stocks started again last week, with the S&P 500 and the Nasdaq hitting 15-month highs.

With the further easing of inflationary pressures in the United States, the market’s expectations for the Fed’s interest rate hike have cooled, and risk appetite has returned. Bob Schwartz, a senior economist at Oxford Economics, said in an interview with China Business News that moderate inflation data has increased the possibility that the Fed will end its tightening cycle, that is, the rate hike in July may be the last. He believes that, taking into account factors such as housing inflation and the easing of supply chain bottlenecks, inflation is expected to ease further in the second half of the year.

After the Fed enters a period of silence, the earnings season will be in focus, and considering that short-term investor optimism is near record levels, positive corporate earnings reports are expected to continue to support market strength.

The Fed enters a period of silence

As one of the few heavyweight data before the Federal Reserve’s July meeting, two U.S. inflation reports attracted everyone’s attention last week, and the results also cheered the outside world. Specifically, the growth rate of the U.S. consumer price index (CPI) fell to 3% in June, a sharp drop of 1 percentage point from before, and the 12th consecutive month of decline. As a weathervane of upstream costs, the core producer price index (PPI) increased by 2.4% in June, hitting a new low in nearly three years.

Market policy expectations have changed, and the yields of medium and long-term U.S. bonds have fallen. The two-year U.S. bond linked to short-term interest rates has dropped from more than 4% last week to 3.74%, which is equivalent to one rate hike. The benchmark 10-year U.S. Treasury yield fell back below 3.80%, a three-week low. Federal funds rate futures show that while the rate hike in July is fully priced, the probability of raising interest rates again this year has dropped to 25%, a sharp drop of 10 percentage points from the previous week. It is generally expected that the Fed will reach the terminal interest rate level this month.

Yet divisions remained at the Fed, with officials speaking out ahead of the quiet period. CBN reporters found that many officials, including San Francisco Fed President Daly, insisted that two interest rate hikes may be needed within the year, while dovish members such as Atlanta Fed Bostic tended to believe that the Fed needs to be patient and observe the rate hike. impact on the economy. While there is broad agreement on the policy stance for July, the real differences may center on how to judge whether further rate hikes are needed.

In a report, agency Stifel said the latest price indicators suggested that previous policy moves were already having an effect on cooling inflation, especially on the producer side. With core inflation still at 2 times target, Stifel argues, there is clearly more work to be done before the committee is confident that price stability has been achieved.

Schwartz told China Business News that the decline in inflation will provide more support for consumers to maintain spending. The U.S. labor market is still very healthy, and while ensuring economic resilience, it may also mean that it is too early for the Fed to clearly end the interest rate hike cycle. However, in his view, lower inflation means higher real interest rates and continued policy tightening, which will have a greater impact on the economy in the second half of this year.

Schwartz continued to maintain his expectation of a mild recession in the U.S. economy at the end of the year. As the effects of monetary policy gradually emerge, the unemployment rate will slowly rise as the economy slows down, approaching 5% at the beginning of next year. That should put more downward pressure on inflation, he predicts, and the Fed, which has always been wary of cutting rates, may then start considering the option.

High hopes for new earnings season

Last week, the three major U.S. stock indexes rose by more than 2%, and the S&P 500 index stood at the key psychological level of 4,500 points. The “soft landing” optimism sweeping markets is driving the dollar lower and risk asset prices higher across the board.

( 149.77 , 0.90 , 0.60% )(43.56, -0.15, -0.34%)43.56 , -0.15 , -0.34% ) (188.21, 0.68, 0.36%)188.21 , 0.68 , 0.36% )

( 0.2804 , -0.02 , -5.49% )

Investors’ concerns about rising inflation and the Fed’s interest rate hike expectations have weakened, and risk appetite has returned. Investors bought into U.S. stock funds for the third straight week, with tech funds seeing $1.5 billion in net inflows, a four-week high, according to Refinitiv Lipper data. At the same time, the net outflow of U.S. money market funds reached 26.55 billion U.S. dollars, with a total of nearly 60 billion U.S. dollars in the past two weeks.

( 281.38 , 3.48 , 1.25% )(441.91, -8.47, -1.88%)441.91 , -8.47 , -1.88% )

Looking ahead to the market outlook next week, Charles Schwab said that as inflation concerns are put on hold, the positive effects will be gradually released in the short term, and bull market expectations seem to be the protagonists again. Compared with the end of the previous quarter, the outlook for the earnings season is constantly improving. If the economic resilience is confirmed, the positive corporate earnings reports are expected to continue to support the market. Therefore, we are moderately optimistic about the overall outlook for the coming week.