Market 09/11: Expectations of FED Pause to extend rally streak

Market Overview

The market opened the new week's trading session with fairly stable sentiment after 2 rally days last week. Tech stocks and especially the mega cap block continued to attract most of the money flow in an environment of significantly reduced liquidity in the morning. Tesla, Amazon and Meta were the 3 stocks carrying SPX close to 4500 after 3 early pull-backs with Tesla surging +9.5% just in the morning after announcing doubled market share in China, helping Morgan Stanley raise price target from $250 to $400.

Market volatility decreased quite clearly along with liquidity, indicating that most investors decided to sit out today's trading session. Looking further, most call positions from the AI Mania block in June/July have almost disappeared, creating a “lull” for the AI-tech block at both ends, keeping VIX generally low.

Overall market sentiment continues to be maintained at an optimistic level as most investors continue to believe that FED will act as the market desires, keeping current interest rates at next week's meeting. Most headlines suggest that FED needs a pause to assess the situation before further action to avoid raising rates too high and risking an economic crisis.

Key headlines of the day:

US expectations for soft-landing future
Consumers show signs of fatigue after resisting recession longer than expected
EU cuts growth outlook due to concerns over German economic crisis
China: Credit demand increases. Estimated 50% youth unemployment, dreaming of “tang ping” lifestyle

US expectations for soft-landing future

Treasury Secretary expects soft-landing future for the economy. Stable declining inflation data and many job seekers are expected to curb inflation without harming the labor market.

Additionally, Yellen is also optimistic about stable financial budget, although the deficit due to rising interest costs. In the first 10 months of the fiscal year, total interest payments amounted to 726 billion USD.

Consumers show signs of fatigue after resisting recession longer than expected

According to a Bloomberg survey, more than half of respondents believe personal consumption will decline in 2024, as borrowing costs rise and savings are at risk of depletion.

Up to now, the economy seems to still be growing thanks to strong household spending, however this consumer strength is not truly sustainable.

People are struggling with high interest rates, delinquency rates on credit cards are steadily increasing.

Not to mention next year, 7.6 trillion USD in government debt will mature, adding more pressure on interest rates.

The burden from credit tightening is the biggest obstacle for consumers.

Student support loans will soon become a burden as people will have to pay about 9 billion USD per month to service debt, which could affect people's spending and consumption capacity.

EU cuts growth outlook due to concerns over German economic crisis

In contrast to the positive soft-landing expectations from the US economy, most other countries in Europe and Asia are still struggling with significant export declines. According to EU update, G20 group output is expected to increase 0.8% in 2023 (lower than 1.1% forecast) on Monday (9/11). Next year's outlook down to 1.3%.

Inflation will continue to rise and is unlikely to reach the 2% target. Forecast for this year is 5.6%, slightly lower than expected. In 2024, inflation will rise to 2.9%.

Most of this impact comes from Germany, predicted to contract 0.4% economic activity this year - lower than 0.6% expected in May. 2024 growth expectations also down from 1.4% to 1.1%.

China: Credit demand increases. Estimated 50% youth unemployment, dreaming of “tang ping” lifestyle

China's credit demand has improved, indicating that the economy and financial markets may be stabilizing after a period of strong recession.

CNY recovers, up about 1%, strongest session since March, before a slight retreat after China warns of speculation.

However, deflationary pressure has not completely disappeared as CPI is still far from the government's official target of around 3% for the year.

Consumer confidence data has also declined sharply in 2022-2023, signaling recession warnings.

On the other hand, youth unemployment rate in China continues to rise, official figure at 21% and real estimate at 50%. This phenomenon is causing much controversy as young people praise the “tang ping” lifestyle - living aimlessly without effort to serve capitalism. Some sources say China plans to deduct social credit points to deter this in society.

Key events of the week:

Apple launches iPhone on Tuesday.
August CPI - Wednesday.
August PPI - Thursday.
Retail Sales - Thursday.
Consumer Sentiment - Friday.
NY Fed Manufacturing - Friday.

Some other news:

Hostess Brands stock surges +17% after being acquired by J.M. Smucker for more than 5.6 billion USD.

Country Garden nears RMB bond extension date on Thursday, deciding whether to face large payment.

Vietnam Airlines to buy 50 Boeing 737 Max aircraft worth nearly 8 billion USD after President Biden's visit.
Meta stock up 1.5% after news of developing AI system comparable to OpenAI's most advanced model.