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Build MT4 MT5 foreign exchange market, Huijin will take you to master it2022-09-07 11:13:33

On June 13 (Monday), local time, a "mouthpiece" broke the news, and it rained all night

Last Friday (June 10), the explosion of us CPI data in May coincided with the silence period of the Federal Reserve, which made Federal Reserve officials who were unable to make a monetary policy speech in public fall into a complete passive to some extent - there was no opportunity to directly affect the market's expectation of interest rate hike before the decision date through official statements, and market participants were almost unable to judge, How will the latest inflation data affect the Fed's decision in the early morning of this Thursday (June 16).

However, just last night, a report in the Wall Street Journal seemed to become a "breakthrough" in the communication between the Federal Reserve and the market.

The position of this report entitled "the Federal Reserve may consider raising interest rates by 75 basis points this week" is very clear. The first paragraph of the opening clearly pointed out that "a series of disturbing inflation reports in recent days are likely to lead Federal Reserve officials to consider an unexpected 75 basis points increase in interest rates at this week's meeting."

The article believes that although Federal Reserve officials said before the silence period that they were ready to raise interest rates by 50 basis points this week and raise interest rates by another 50 basis points at the July meeting. But they also said their outlook depended on whether the economic situation met their expectations. Two consumer surveys conducted by the Federal Reserve in recent days also showed that households' expectations of future inflation have increased. This data may make Fed officials uneasy.

This report also quoted a recent statement by US Federal Reserve Chairman Powell, "we need to see clear and convincing evidence that inflationary pressure is weakening and inflation is falling. If we do not see this, then we will have to consider taking more active actions."

As evidence, the report also mentioned the latest forecasts of several Wall Street forecasters, including investment banks Barclays and Jefferies, after the release of inflation data last Friday. They all expected the Federal Reserve to raise interest rates by 75 basis points this week.

In fact, the information provided in the original version of the Wall Street Journal report is generally only the above content. For many domestic investors, it may seem nothing at first glance - it can only be regarded as the words of the media, and the content quoted is basically the information already available in the market.

However, after the release of this report last night, Wall Street triggered a rare bloodbath, and the stock and bond markets both suffered "Black Monday"

"Black Monday" is rampant

Let's look at the stock market first. The three major U.S. stock indexes fell sharply on Monday (June 13). The Dow Jones Industrial Average fell about 880 points in a single day, and the NASDAQ fell 4.7%. The S & P 500 index confirmed to enter a bear market at the close, hitting a new low since 2022.

As of the close of the day, 495 of the 500 constituent stocks of the S & P 500 index closed lower. This decline made the US benchmark stock index fall by more than 20% from the record set in January this year.

Energy stocks were the only stocks that rose this year among the 11 stocks in the S & P 500 index, but they also fell 5.1% on Monday, larger than the decline of the broader market index. The second best performing utility stocks in 2022 also lagged behind the market, with a decline of 4.6%. As panic exploded, the CBOE volatility index (VIX), a measure of the degree of market panic, rose more than 25% to 34.82 points.

A measure of market breadth showed that as of Monday, less than 5% of the shares in the S & P 500 index closed above the 50 day moving average.

With the rapid rise of consumer prices, concerns about the U.S. economic recession continue to rise. So far this year, the U.S. stock market has been in a difficult situation. Goldman Sachs recently warned that if the recession came, the S & P 500 index would fall to 3150 points, which is expected to continue to fall by 19% from the current level.

Under the impact of the huge impact of the overnight US stock market crash, the global stock market was also quickly dragged down. On Monday, the MSCI global stock index fell more than 20% from the closing record level in November 2021, falling into a technical bear market area on the same day as the S & P 500 index.

In the bond market, the selling market of US Treasuries in the past two trading days can almost be described as "epic". The pressure on short-term yields caused the yield curve to hang upside down again after more than two months on Monday. The signal sent by the bond market is that the tightening policy of the Federal Reserve will lead to economic slowdown and may indicate that economic activity will decline.

After inflation shattered the expectation of peaking price inflation in May, the two-year US Treasury yield rose by 60 basis points to 3.4% in the past two trading days. The yield of 10-year US Treasury bonds also rose 28 basis points to 3.43% overnight, exceeding the historical peak since the end of 2018 and currently at the highest level since 2011.

Perhaps many domestic investors do not know much about the volatility of the US bond market. In fact, in regular trading days, the one-day rise and fall of short-term US bond yields within 5-10 basis points is already a large fluctuation. And such a situation as yesterday, where the single day fluctuation reached more than 30 basis points, has not been seen since the Lehman crisis.

At present, the yield curve of U.S. Treasury bonds with a term of more than one year has been higher than the 3% threshold, and the yield curve of U.S. Treasury bonds with a one-year long term has been completely inverted.

Driven by soaring US bond yields, the US dollar index also strengthened overnight in the foreign exchange market. The Bloomberg dollar index rose for the fourth consecutive day - eight of the past 10 days rose, and has now reached the highest level since April 2020.

The more well-known ICE Dollar Index (DXY) also further broke through the high point of this round of rise, surpassing the 105 mark and hitting the highest level since 2002. Many insiders said that in the current crazy expectation of the Federal Reserve's radical interest rate hike, the dollar has almost become the only reliable safe haven asset.

"The mouthpiece of the Federal Reserve" reappears

After reviewing the amazing turbulence in the global market last night, many domestic investors may not understand why a report in the wall street journal can produce such great market power? Is this seemingly ordinary report really that important?

The answer is yes.

As the Fed has done more and more in communication in recent years, and even "people-friendly" - for example, a press conference is now held after each meeting, some media, which are usually regarded as the "mouthpiece" of the Fed, have become increasingly less important in the past few years.

However, this time, when the explosion of U.S. inflation coincided with the silence period of the Federal Reserve, and the Federal Reserve fell into the situation of "mute eating Coptis has pain to say", many industry insiders are turning the focus back to the media that used to have close relations with the Federal Reserve.

The Wall Street Journal is undoubtedly one of the representatives.

According to the signature, this report entitled "the Federal Reserve may consider raising interest rates by 75 basis points this week" was written by nicktimiraos, the chief economist of the Wall Street Journal, who is usually responsible for the coverage of the Federal Reserve and U.S. economic policy. You know, during the Bernanke era (when the Fed's communication mechanism was not as sound as it is now), jonhilsenrath, who was well-known in the circle at that time, was the chief economic reporter of the newspaper. He once had the reputation of "fed news agency" - through which the Fed often sent important signals to the market.

Today, although nicktimiraos does not have the reputation of jonhilsenrath in the past, it is still difficult to guarantee that the Wall Street Journal will not get some insider information from the Federal Reserve, or the latter will seek the newspaper to help guide market expectations. The newspaper's every move in forecasting is even more important than the forecasts of many major Wall Street investment banks.

Zerohedge, a financial blog, commented that the intention of nicktimiraos' article published by the Wall Street Journal at this time is very simple, that is, it regards a 75 basis point interest rate increase as a very realistic possibility. As for whether the Federal Reserve really wants to send a "panic" signal and crush its forward-looking guidance strategy, or is it just to make this week's 50 basis point interest rate hike look like a benevolent dove fulcrum? There will be an answer soon.

This is clearly reflected in the changes in the interest rate swap market. Immediately after the release of the Wall Street Journal report, market participants began to prepare for the Fed's 75 basis point interest rate hike. Traders are currently betting that the Fed will raise interest rates by nearly 200 basis points (75 basis points twice and 50 basis points once) in the next three meetings.

According to the Federal Reserve observation tool of Zhishang Institute, after the report of the Wall Street Journal was released overnight, the market's prediction of the probability of the Federal Reserve raising interest rates by 75 basis points this week has risen to more than 80%. On Friday (June 19), even with the "plus" of inflation, this prediction was once only 23%, compared with 3% a week ago.

Some radical institutions dare not rule out the possibility of raising interest rates by 100 basis points even now. Stevenennglander, global head of G10 foreign exchange research at Standard Chartered Bank, said, "the Federal Reserve is trying to erase the impression that they are acting too slowly. Six months ago, 50 basis points was a big number, but now 75 basis points seems to be a very medium scale, so the Federal Reserve may say, 'look, if we want to show our determination, then add 100 basis points'."

Englander said that the Federal Reserve is trying to improve its credibility in inflation. If it is forced to prove that it is now the "Volcker moment", the Federal Reserve may implement a larger interest rate hike.

Volcker, the former Federal Reserve Chairman Paul Volcker, has been suppressing inflation through a series of historic interest rate hikes since 1979. As for whether Powell will become the "Volcker of the new era" this week, let's wait and see in the early morning of Thursday (June 16).