Overnight, the US stocks and bonds experienced a "rise before fall", what happened?

On Wednesday, Federal Reserve Chairman Powell stated at the FOMC press conference that, despite inflation pressures, he explicitly indicated that the next interest rate action is unlikely to be a rate hike.

The dovish statement led to a short-term surge in the U.S. stock market, the largest rebound since the policy meeting in December last year, with all three major U.S. stock indexes rising by over 1%. Meanwhile, yields on U.S. treasuries of different maturities plummeted by over 10 basis points.

However, Powell did not explicitly state that there will be a rate cut this year, and emphasized that the Fed may need more time to gain enough confidence in the downward trajectory of inflation before considering easing policy.

The stock market, after a moment of realization, suddenly reversed course, with the S&P falling by 0.34%, the Nasdaq falling by 0.33%, and only the Dow rising by 0.23%.

The decline in U.S. treasury yields narrowed, with the policy-sensitive two-year yield falling to below 5% to 4.96%, a decrease of 7 basis points intraday.

Market Breathes a Sigh of Relief at No Rate Hike

Powell's remarks about no rate hike in the future caused a significant market rally mainly because this year the market's optimistic sentiment towards the Fed's rate trajectory has completely reversed.

At the beginning of the year, the general consensus in the market was that the Fed would cut rates multiple times, and inflation would steadily decline, with few expecting rate hikes at that time.

However, the recent strong resilience of the U.S. economy, strong job market, and signs of rising inflation have made investors worried that the Fed may shift to a hawkish stance, especially among bond investors. The market has revised down its expectations for rate cuts this year to slightly above one, a significant convergence from the initial expectation of six cuts in January.

The stock and bond sell-off in April reflected the significant pressure that the market had accumulated before the rate decision this week: U.S. yields rose back above 5% in April, and the S&P 500 index saw its largest monthly decline since October last year. Friday will see the release of April nonfarm payroll data, with strong job growth widely expected; more inflation indicators will be released in the coming weeks.

Powell Only Temporarily Soothed the Market

Although Powell acknowledged the lack of progress in achieving the inflation target through rate hikes this year, his clear statement that the next action will not be a rate hike has at least temporarily calmed the market. However, whether the stock market can sustain its rebound remains to be seen.

Strategists like Stuart Kaiser from Citigroup wrote in a report:

The Fed seems intent on not letting the market deviate too far from its core expectations: the economy continues to grow steadily, inflation remains stubbornly persistent, and rate cuts will come at the right time this year, resulting in traders experiencing a rollercoaster day.

While Powell believes that the Fed is unlikely to resume rate hikes, the current rate policy is restrictive and will eventually have sufficient restraining effects, but he also added that the specific action path depends on the data Castle Securities' global interest rate trading director Michael Depas pointed out:

"Powell clearly stated that the barriers to raising interest rates are very high. They ultimately believe that the level of interest rates is restrictive, which is undeniable. The question now is whether the restrictions are sufficient and how long it will take for them to permeate the economy."