Is April just passed the turning point of the market this year?

More and more signs indicate that the risk of "stagflation" in the United States is looming large, frightening the market completely, and April may become a turning point for the market this year.

The economic data released on the last day of April in the United States was really bad:

The Employment Cost Index (ECI) for the first quarter unexpectedly recorded the largest year-on-year increase in a year; the Case-Shiller House Price Index for February saw a year-on-year increase rise to the highest level since November 2022;

The Chicago PMI plunged significantly in April, but business costs rose significantly; the Conference Board Consumer Confidence Index fell to the lowest level in over a year in April; the Dallas Fed's Service Income Index plummeted in April.

Overnight, both US stocks and bonds fell, international crude oil continued to decline, and gold and Bitcoin also continued their downward trend.

Looking back at the entire month of April, the US macroeconomy was simply a disaster: The Citigroup Economic Surprise Index plummeted from above 40 at the beginning of April to 7.6.

In the midst of inflation making a comeback, US stocks and bonds both reversed course, ending the strong momentum of the past six months.

In April, both the S&P 500 and Nasdaq fell by over 4%, while the Dow fell by 5%, marking the largest monthly decline since September 2022.

US bond yields continued to rise, with the 10-year and 2-year US bond yields rising by 48 basis points and 42 basis points respectively in April, with the latter already surpassing the key psychological level of 5%.

Stock prices of the "Big Seven" in the US fell in April, marking the first decline since October last year.

In April, Chinese concept stocks significantly outperformed US tech stocks, with the MSCI China Internet Index rising by 9.5% in April, while the Goldman Sachs TMT Megacap Tech Index fell by 2%.

After reaching a high point in the middle of the month, gold, copper, and oil all saw a full retreat at the end of the month, with Bitcoin falling by over $10,000 in April, a decline of 16% At the same time, the US dollar is making a strong comeback. The US dollar index has been rising for the fourth consecutive month, with a significant increase in the middle of the month.

Behind the ominous signs in the US financial markets, the threat of stagflation has become so severe that it cannot be ignored. Considering that economic growth is lower than expected and inflation is significantly higher than expected, Wall Street is worried that a stagflation crisis comparable to the 1970s is about to hit the United States.

A Repeat of the Stagflation of the 1970s? Will Powell Turn Hawkish in the April Rate Decision?

Jamie Dimon, CEO of JPMorgan Chase, warned last week:

Yes, I think this situation (1970s-style stagflation) could happen again. It looks like our situation now is more like the 70s, the situation in 1972 looks quite optimistic, but the situation in 1973 took a sharp turn for the worse.

A more noteworthy event in April is the tightening of financial conditions. Although the financial conditions have only slightly tightened, compared to the extremely loose market expectations before, this tightening trend is what the Federal Reserve wants to see.

The Federal Reserve's May rate decision will be announced early Thursday morning Beijing time. The current consensus on Wall Street is that the rate will remain unchanged this month, with the Fed's view on recent inflation trends becoming the key focus of this decision.

Barclays expects that Powell will have to acknowledge disappointing inflation data at the press conference on that day, and may retract previous statements about policy constraints.

Barclays' analyst team led by Ajay Rajadhyaksha stated in a report released this week that since this meeting will not provide a new dot plot and economic forecasts, Powell's remarks are likely to lean hawkish. However, Powell is still expected to lower market expectations for future rate hikes.

Will April be a Turning Point?

For investors, the key question is how long the sell-off in US stocks and bonds will continue?

According to Morgan Stanley's quantitative analysis, if US stocks continue to decline, systematic funds are expected to be forced to sell a large amount of stock positions due to their extremely large long positions, leading to further declines in the stock market Morgan Stanley's recent survey also shows that the vast majority of respondents expect a significant increase in the VIX volatility index for the remainder of this year, indicating that investors are concerned that the future market will be more volatile and risky.

At the same time, Barclays maintains a negative view on bonds and risk assets, believing that both fixed income assets and risk assets currently tend to be downward in risk.

Risk assets rebounded last week, but we believe this rebound may not be sustainable. Despite the temporary boost from strong earnings of giant tech stocks last week, the overall market volatility remains intense.

Even after significant selling pressure, fixed income assets (such as bonds) still face downward risks. Market expectations for economic slowdown may be overly pessimistic, and most of the selling pressure is due to rising interest rate expectations rather than an increase in risk premiums. Quantitative tightening will not provide the same boost to the bond market as it did at the end of 2023; auction sizes may remain unchanged in 2024.

The prices of risk assets are still too high, and hedging tools as part of long-term bond investment portfolios are not attractive.

Barclays emphasizes the importance of cash, believing that in the current highly volatile market environment, holding cash is a relatively safe choice.