Source: Zhitong Finance
David Zervos, chief market strategist at Jefferies, said investors who were frightened by Wednesday's higher-than-expected inflation data need not worry because risk assets such as stocks can thrive regardless of whether the Fed cuts interest rates or not.
As the US CPI data for March once again exceeded expectations and raised market concerns that the Federal Reserve would postpone interest rate cuts, the three major US stock indexes all fell lower on Wednesday. The S&P 500 index and the Dow Jones index all fell more than 1%, and the NASDAQ index fell 0.84%. Meanwhile, the 10-year US Treasury yield climbed to a new high of nearly 4.5% during the year. Many investors worry that the reduction in the amount of interest rate cut by the Federal Reserve in 2024, or even not cutting interest rates, will have an impact on the hot stock market since the beginning of the year.
However, Jefferies chief market strategist David Zervos said investors who were frightened by Wednesday's higher-than-expected inflation data need not worry, because risk assets such as stocks can thrive regardless of whether the Fed cuts interest rates or not. He said that the US stock market may continue to rise on the basis of favorable economic news, and this favorable news will not overwhelm discussions about maintaining high interest rates for a longer period of time.
Strong US economic data and the Federal Reserve's signal that it is not in a hurry to relax monetary policy prompted investors to readjust their expectations about the timing and pace of the Fed's interest rate cuts. Following the release of the inflation data on Wednesday, the market currently expects the Federal Reserve to cut interest rates for the first time in September, and will only cut interest rates twice this year.
David Zervos said that in early 2024, the market's expectation that the Federal Reserve would cut interest rates six times this year was “foolish.” Although he believes that drastic interest rate cuts are just wishful thinking in the market, he also said that compared with traditional measures, there are still few policy restrictions. He pointed out that the Federal Reserve's balance sheet is a sign that “quantitative easing stimulus traces are still there.”
David Zervos said, “Due to long-standing high interest rates, the market has been predicting that the economy will face bad luck. But in the real economic story, the missing piece is a stimulating central bank balance sheet.” According to reports, the minutes of the March meeting of the US Federal Reserve released on Wednesday also showed that policymakers “generally tend” to slow down the pace of downsizing.
Furthermore, David Zervos said that the market seems to believe that the Federal Reserve will not lose control of inflation. He pointed out that the break-even interest rate for the five-year and five-year forward periods has hardly changed, and this is an indicator for measuring future inflationary pressure. He said, “Risk assets should stabilize and resume their upward trend here, because the favorable news on economic growth will outweigh the negative factors of the Federal Reserve in delaying interest rate cuts. The Federal Reserve needs to maintain slightly higher interest rates for a slightly longer period of time to fully stabilize long-term inflation expectations.”
David Zervos also praised Federal Reserve Chairman Powell's refusal to cut interest rates last year. He said, “Powell's hawkish wait-and-see position seems entirely correct today.” He also said that former Federal Reserve Chairman Volker “will be proud of this.”