US stocks fell sharply, the yen and US bonds rose, and Trump's trade reversed. In addition, some Federal Reserve officials said it was too early to judge whether the Fed should cut interest rates at its meeting next month.

Written by: He Hao

Source: Wall Street Journal

U.S. stocks plunged on Friday, with the tech-heavy Nasdaq 100 index giving up most of its gains since the U.S. election results came out. The Nasdaq 100 has significantly underperformed the broader U.S. stock market, with large tech stocks performing particularly poorly, having wiped out all gains since the U.S. election.

 

On Friday, U.S. retail sales, New York Fed manufacturing, import price index and other economic data exceeded expectations, which was an important trigger for the sharp drop in U.S. stocks that day:

U.S. retail sales remained solid at the beginning of the fourth quarter, with retail sales increasing by 0.4% month-on-month in October, in line with expectations of 0.3% and a sharp upward revision to 0.8% in September.


The New York Fed Manufacturing Index for the United States in November was 31.2, in line with expectations of 0 and -11.9 in October.


The U.S. import price index rose 0.3% month-on-month in October, compared with expectations of a 0.1% decline and a previous 0.4% decline. The import price index rose 0.8% year-on-year in October, compared with expectations of a 0.3% increase.

Analysts pointed out that the latest US retail sales data may indicate a solid holiday shopping season. In addition, the New York Fed manufacturing index far exceeded expectations and October data. Combined with the higher-than-expected CPI and PPI inflation data earlier this week, the Federal Reserve is expected to remain cautious in further cutting interest rates.

Markets generally reacted hawkishly to Friday's economic data, with U.S. stock futures and Treasuries sold off in pre-market trading, while the dollar index rose. The probability of a 25 basis point rate cut by the Federal Reserve in December fell to about 55%, compared with 60% before the data was released.

After the U.S. market opened, U.S. stocks extended their losses and were sold off aggressively, while U.S. Treasury bonds reversed their trend. As risk aversion increased, U.S. bonds were bought, and the yen, which had been falling recently, rose 1.5%. Major assets reflected a clear reversal of Trump's trade.

Senior Federal Reserve officials also poured cold water on the market.

On Thursday afternoon, U.S. time, Fed Chairman Powell said that the U.S. economy is strong and the Fed does not need to rush to cut interest rates. Labor market indicators have returned to more normal levels consistent with the Fed's full employment goal. Inflation will continue to fall toward the target of 2%, although there will be bumps from time to time. The interest rate path is not preset and depends on the data and economic outlook. If the data tells us to slow down the rate cuts, it is wise to slow down. Congress generally believes that the independence of the Federal Reserve is very important. It is too early to draw conclusions about the Trump administration's policies. The Federal Reserve will act cautiously before it is more certain about its policies.

Collins, president of the Boston Fed and a voter next year, said in an interview Thursday evening that another rate cut in December is certainly possible, but it is not a done deal. We will see more data between now and the December meeting, and we must continue to weigh what is reasonable.

The Fed’s next meeting will be held on December 17 and 18. Fed officials will see November inflation and employment data before the meeting.

Collins supported the Fed's two rate cuts earlier this year. As for the next step, she said, "We will find a place where we can move forward in a slower and more cautious way."

Collins was not all hawkish, however. She also said she did not see any evidence that inflation was picking up due to new dynamics in the U.S. economy, which is consistent with the view expressed by Powell. Both believed that the recent stickiness of inflation was a response or catch-up effect of the sharp price increases in the past few years, such as the increase in the cost of auto insurance reflecting the increase in auto prices in the past, but auto prices have since fallen.

Collins believes it is appropriate to continue to lower interest rates to the so-called neutral stance. In the absence of new evidence of price pressures, it does not make sense to maintain restrictive policies, and current policies remain restrictive. The old dynamics may gradually resolve unevenly over time.

Nick Timiraos, a well-known financial journalist known as the "New Fed News Agency", wrote that U.S. stocks fell on Friday, and the strong retail sales report released earlier may support the view that the U.S. economy is strong or does not need support in the form of interest rate cuts. In addition, a Fed official (Collins, the president of the Boston Fed mentioned above) said it is too early to judge whether the Fed should cut interest rates at next month's meeting.

Timiraos said the latest developments highlight uncertainty investors are anticipating over whether the Federal Reserve will be able to continue cutting interest rates as aggressively as expected, in part because the U.S. economy continues to perform well.

Timiraos cited a letter from Jefferies analyst Thomas Simons to clients after the release of Friday's economic data: "Various comments from Fed officials suggest that they are increasingly concerned that the cooling of inflation is encountering obstacles. But we believe that there is not enough evidence to confirm these assumptions before the next meeting."