[September 23 US Market Summary] US stocks fall due to “too strong economy” | Decoding 5% range long-term interest rates, over 7% mortgage rates, and Fed governor's rate hike …
The major three US stock indices all fell in last night’s market.
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NY Dow 51,511.59 (▼352.10 / -0.68%)
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NASDAQ 26,936.04 (▼308.24 / -1.13%)
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S&P 500 7,706.03 (▼58.61 / -0.76%)
The notable point is the decline in the Nasdaq. Up until the previous day, the Nasdaq had risen for four consecutive days, hitting record highs day after day, and for the past few days, a “mixed market” had continued where “the Dow is weak due to high interest rates, but AI and semiconductors are supporting high-tech.” Last night, that support was removed, leading to a broad-based decline.
The trigger was that the “economy was too good.” A significant upside surprise in PMI, rising mortgage rates, and the Fed governor’s remarks on rate hikes. These three are actually connected by a single thread.
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The essence of the three pieces of news
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Why stocks were sold
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Spillover to Japanese stocks
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Future checkpoints and three scenarios
will be organized.
Summary
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PMI at a 5-year high confirmed that the “US economy is re-accelerating rather than slowing down”
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Strong economy = inflation will not subside = Fed will raise rates further; this association caused long-term interest rates to surge
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Rising interest rates hit high-valuation tech stocks, causing the Nasdaq to fall the most
News 1: PMI shows a “surprise-level” upside
| Indicator | Result | Forecast |
|—|—|—|
| Manufacturing PMI | 57.0 | 53.7 |
| Services PMI | 58.7 | 55.8 |
| Composite PMI | 58.4 | 55.3 |
All exceeded forecasts by around 3 points, and manufacturing is at a 5-year high.
The point is the gap from prior expectations. Before the announcement, the market expected PMI for both manufacturing and services to be lower than the previous month, and was pricing in a “deterioration in business sentiment.” Because a “re-acceleration” occurred instead, it was a situation where position adjustments were likely to happen all at once.
50 is the dividing line for the economy in the PMI, and a level in the 57-58 range indicates a fairly strong expansion phase. While the risk of recession has receded significantly, it also serves as evidence for the Fed that “tightening is not yet having enough effect.”
News 2: Mortgage interest rate at 7.12%
The 30-year fixed mortgage rate announced by the MBA was 7.12%, up 15bp from the previous week. This shows that the rise in long-term interest rates is directly spilling over into the real economy.
In fact, in the bond market that same morning, the yield on the 10-year US Treasury note temporarily hit 5.05%, the highest level since 2007. When the 10-year note exceeds 5%, it becomes easier for mortgage rates to “normalize” in the 7% range.
There are two ways to look at this.
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Evidence that tightening is working: Cooling housing demand = a factor for future inflation control
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However, the economy as a whole is still hot: As far as the PMI is concerned, only some sectors sensitive to interest rates are cooling down
In other words, this is the most difficult situation for the Fed to judge: “Housing has begun to cool, but the economy as a whole is still overheating.”
Incidentally, the previous day, it was revealed that Berkshire Hathaway had purchased Lennar shares, and housing stocks such as Lennar, D.R. Horton, and KB Home were being bought. Immediately after attracting attention as a “Buffett stock,” they are facing a headwind in the form of rising loan interest rates. Caution is required regarding short-term price volatility.
News 3: Fed Governor Barr says “further rate hikes are necessary”
This is the most important point.
Governor Michael Barr has been in a position responsible for financial regulation, and he has not necessarily been seen by the market as a representative hawk. With Governor Barr clearly mentioning additional rate hikes, it has become easier to perceive that “the consensus within the Fed is shifting in a hawkish direction.”
Rate hike comments from someone known as a hawk are dismissed as “the usual,” but comments from someone seen as a centrist tend to have a greater impact on the market as a signal of a shift in the “Fed’s center of gravity.”
Why were stocks sold?: “Good news is bad news”
Connecting the three pieces of news leads to the following story:
Strong economy (PMI) → Concerns about prolonged inflation → Expectations of additional Fed rate hikes (Governor Barr) → Long-term interest rates over 5% → Mortgage rates over 7% and a sense of overvaluation in stocks
What hit particularly hard were long-term interest rates. Since stock prices are roughly evaluated as “future earnings ÷ interest rates,” when interest rates rise, the theoretical stock price of stocks bought for future growth expectations falls.
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Nasdaq (-1.13%): High-PER tech stocks driven by growth expectations were hit the hardest
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S&P 500 (-0.76%): An intermediate decline due to the high ratio of tech stocks
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NY Dow (-0.68%): Relatively value-oriented, so the decline was smaller
The order of the decline rate for each index is, in this instance, exactly the “order of interest rate sensitivity.”
Until now, the structure of “high-tech stocks will rise if there are AI expectations, even with high interest rates” has persisted, but I believe the 10-year Treasury yield at the 5% level is a level that tests that premise.
Spillover to Japanese stocks
Following tonight’s US market, I anticipate that Japanese stocks will see a development where “sectors are divided between light and shadow” as follows.
Likely to face headwinds
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Semiconductors/High-tech (Tokyo Electron, Advantest, etc.): Highly susceptible to the direct impact of the Nasdaq decline and high US interest rates
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Growth stocks in general: Valuations tend to fall during periods of rising interest rates
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Real Estate/REITs: Global interest rate hikes are a burden in terms of valuation
Relatively likely to be supported
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Export stocks: A tailwind for earnings if the yen weakens due to the widening interest rate gap between Japan and the US
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Bank stocks: Global interest rate hikes are likely to lead to expectations of improved interest margins
On the other hand, if the yen weakens at a rapid pace, vigilance against currency intervention by the authorities will also increase. One should not consider a weak yen as a one-sided tailwind; caution is required regarding the level and speed of the dollar-yen rate.
Future checkpoints
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The battle over the 5% US 10-year Treasury yield: Will it settle in the 5% range, or will it be pushed back? The most important turning point
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US 2-year Treasury yield and Fed Funds futures: How many additional rate hikes will the market price in?
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PCE deflator (end of month): The inflation indicator most emphasized by the Fed
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Employment statistics (early October): Confirmation of wage aspects where a strong economy leads to inflation
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Next FOMC: Whether there will be a rate hike, and the tone of the dot plot and statement
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Remarks by other Fed officials: Whether a tone similar to Governor Barr’s will spread
Stance as an investor
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Recognize that “a strong economy does not equal rising stock prices,” but rather that interest rates are currently in control of stock prices.
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Concentration in high P/E stocks should be reconsidered. Prioritize selecting stocks with earnings backing.
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If you are considering buying the dip, it is not too late even after confirming that interest rates have peaked.
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Even if the baseline for the exchange rate is toward a weaker yen, be prepared for a sudden appreciation of the yen due to intervention risks.
Summary
Last night’s decline occurred not because the economy is bad, but because the economy is too good. While this type of decline is less likely to become as serious as one caused by a recession, it is characterized by the fact that the recovery is likely to be sluggish until interest rates settle down.
For the time being, I believe that watching the US 10-year Treasury yield and inflation indicators rather than stock prices is the shortest path to grasping the market’s direction.
*This article is for informational purposes only and does not recommend buying or selling any specific stocks. Please make investment decisions at your own risk.