After the release of November CPI data in the United States on Wednesday, investors seem to have finally "confirmed" that the Federal Reserve's interest rate cut next week is a certainty
The pricing of overnight short-term interest rates (STIR) shows that the probability of the Federal Reserve cutting interest rates by 25 basis points this month has exceeded 95% on Wednesday. The trend across asset classes in the financial market on Wednesday also seemed quite encouraging. Apart from the decline in US Treasury bonds, investors are buying everything else - US stocks rising, gold rising, US dollar rising, crude oil rising, cryptocurrency rising
Among them, perhaps the most excited are the holders of US technology stocks - the Nasdaq broke through 20000 points for the first time on Wednesday, as the artificial intelligence (AI) boom and expectations of lower interest rates stimulated a sharp rise in technology stocks, helping the Nasdaq continue this year full of exclamation marks.
The Nasdaq Composite Index closed at 20034.89 points on Wednesday, up 1.8%. Driven by tech giants such as Apple, Nvidia, Google parent company Alphabet, and electric car manufacturer Tesla, the Nasdaq index has risen more than 33% this year.
(The road from 10000 points to 20000 points)
Although the valuation of the NASDAQ has climbed in this round of bull market, it is still far from the level of the Internet foam more than 20 years ago. According to LSEG Datastream data, the current P/E ratio of the index is about 36 times, the highest in three years. Although this number is higher than its long-term average of 27 times, it is still far below the price to earnings ratio of about 70 times reached in March 2000, and investors should feel reassured when comparing these two periods.
Jessica Rabe, co-founder of DataTrek Research, stated in a report on Wednesday that "the recent uptrend of the Nasdaq is still insignificant compared to the experience of the late 1990s/early 2000s. The uptrend is more gradual and does not seem unsustainable
Regarding the overnight surge, Peter Cardillo, Chief Market Economist at Spartan Capital Securities, stated that the Nasdaq has risen sharply due to the prospect of the Federal Reserve cutting interest rates next week, and there should still be room for further growth.
The stock market seems to be relieved because this is another stable inflation report, "said Wasif Latif, Chief Investment Officer of Sarmaya Partners." There's nothing unexpected. The stock market seems to have been prepared for numbers higher than expected
In addition to the Nasdaq easily breaking through the 20000 point mark, Bitcoin prices regained the $100000 mark again on Wednesday. The profit taking and selling pressure of cryptocurrency holders after initially overcoming this barrier seems to be coming to an end.
Note: Bitcoin Trend Chart
In addition, commodity prices such as gold and crude oil have also surged overnight. Spot gold prices rose 0.9% on Wednesday to $2717.29 per ounce. David Meger, Head of Metal Trading at High Ridge Futures, stated:& amp; quot; The premise for gold to rise is that CPI data is moderate and inflation rates remain stable, which will almost certainly lead the Federal Reserve to cut interest rates at the next FOMC meeting& amp; quot;
Note: Gold spot trend chart
Oil prices closed higher than $1 on Wednesday after the European Union agreed to impose a new round of sanctions on Russian oil exports, which could tighten global crude oil supply. Among them, the settlement price of Brent crude oil futures rose by $1.33, or 1.84%, to $73.52 per barrel. US WTI crude oil futures rose $1.70, or 2.48%, to $70.29.
Without a doubt, with the release of non farm payroll and CPI data, it is almost certain that the Federal Reserve will cut interest rates next week, and the rise in the prices of risk assets and commodities mentioned above is also reasonable. However, what is interesting or worth pondering overnight is actually the synchronous increase in US bond yields and the US dollar index with the aforementioned assets.
The US dollar index rose by about 0.32% in late trading overnight, closing at 106.7 points. The yields of US Treasury bonds of various maturities have also generally risen (meaning that US Treasury bond prices are under pressure) - among them, the yield of 2-year Treasury bonds rose 0.9 basis points to 4.162%, the yield of 5-year Treasury bonds rose 3.8 basis points to 4.14%, the yield of 10-year Treasury bonds rose 4.7 basis points to 4.276%, and the yield of 30-year Treasury bonds rose 6.3 basis points to 4.483%.
Generally speaking, when expectations of interest rate cuts rise, the US dollar index and US Treasury yields should decline. However, although overnight US dollar and US bond yields did come under pressure during trading, they ultimately recorded an upward trend, which seems to indicate that the focus of the foreign exchange and bond markets for overnight trading is "slightly different" from other assets
From the data performance, the November CPI released by the US Department of Labor yesterday fully met expectations, which indeed strengthened traders' expectations that the Federal Reserve will cut interest rates by 25 basis points next week. However, considering that the data itself has increased from previous values, it has to some extent compressed the space for the Federal Reserve to cut interest rates next year.
The data released by the US Department of Labor on Wednesday showed that the nominal CPI in November increased by 0.3% month on month and 2.7% year-on-year, both of which were 0.1 percentage points higher than the pre October value. This is also the first time since March that nominal CPI has accelerated year-on-year growth for two consecutive months; Excluding volatile food and energy, the core CPI increased by 0.3% month on month, marking the fourth consecutive month of 0.3% growth, and remained unchanged from the previous value with a year-on-year increase of 3.3%.
The increase in the expectation of the Federal Reserve's December interest rate cut and the decrease in the magnitude of next year's interest rate cut can be clearly seen in the comparison in the following chart:
Note: The red line represents the trend of the expected decrease in the federal funds rate in 2025, while the green line represents the trend in 2024
Anne Wealth Management Chief Economist Brian Jacobsen stated that with the release of employment and inflation reports, there is nothing left to prevent the Federal Reserve from cutting interest rates by 25 basis points next week. A positive sign in the data is that housing inflation continues to slow down, but service and housing inflation remain above the level that the Federal Reserve wants to see. Therefore, he expects the Federal Reserve to send some cautious signals and cut interest rates next week, while indicating that they are not locked in cutting rates at every meeting - they will have to continue monitoring the data and ultimately need to see more downward momentum in inflation.
In addition, in terms of news affecting the bond market, the US government announced on Wednesday that the November budget deficit was as high as $367 billion, a year-on-year increase of 17%, which also put pressure on US bond prices. People's concerns about the long-term debt prospects of the United States have put pressure on the trend of US bonds.