Have Japan, US and China stock markets touched the bottom?

 Written by:  Mutsumi Kagawa (Chief Global Strategist, Economic Research Institute of Rakuten Securities)



1. Have Nasdaq and Hong Kong stocks reached the bottom?

Stocks rebounded in the final week of May globally. In 5 days until May 27, the Philadelphia Semiconductor Sector Index rose +8.1%, the S&P 500 Growth Index rose +7.3%, the Nasdaq 100 Index rose +7.1% and the US market average (S&P 500 Index) rose more than +6.6%. It is necessary to keep an eye on future price movements in order to gauge whether it is an autonomous rebound (bear market rally) for the downtrend, or signs of recovery for growth stocks mainly the high-tech stocks. On the other hand, China and Hong Kong stocks, which have underperformed the domestic stocks (Nikkei average) since last year, are showing signs of picking up at the moment. The lockdown of Shanghai, which was a concern will be lifted. The May manufacturing and non-manufacturing PMIs (Purchasing Managers’ Index) announced by the National Bureau of Statistics of China on May 31 exceeded the market's forecast. Chart 1 shows changes in the Nikkei Average, Nasdaq Composite Index and Hang Seng Index. The correlations (co-movements) among stock indexes in Japan, US and China are relatively high. The recovery of Nasdaq and Hang Seng Index will improve external environment and risk appetite, which most probably will support the Nikkei average back to the 27,000 yen level. In this article, I would like to forecast whether the US market Nasdaq may continue to pick up based on the forecasted inflation rate and the policy interest rate outlook estimated by the market.


<Chart 1> The rebounds of Nasdaq and Hong Kong stocks help the Nikkei average picking up 

(Source) Created by Economic Research Institute of Rakuten Securities, Inc. from Bloomberg (May 2021 – Jun 1, 2022)


2. Policy interest rate outlook is stabilizing with the rebound of Nasdaq

Earlier this year, rising interest rates due to the accelerating inflation in the US have affected the stock markets, especially Nasdaq. At present, the focus of attention is on the wage increase rate in the May employment statistics to be announced on Jun 3, the CPI (Consumer Price Index) growth announced on the May 10, the PPI (Producer Price Index) growth announced on May 14, 14 and the FOMC (Federal Open Market Committee) on May 14–15. However, we should note that the forecasted inflation rate in the bond market is clearly peaking out. Chart 2 shows the changes in the 2-year, 5-year and 10-year forecasted breakeven inflation rates (BEI) estimated in the US bond market. The forecasted inflation rate is calculated by the yield difference between fixed-rate bonds and inflation-indexed bonds with the same maturity, and it indicates the forecasted inflation rate for each period by market participants. In particular, we can see that the 10-year forecasted inflation rate, which has attracted the most attention in the market, has stabilized since May.


<Chart 2> The forecasted inflation in the US bond market has eased


(Source) Created by Economic Research Institute of Rakuten Securities, Inc. from Bloomberg (May 2021 – Jun 1, 2022)


Following the peak out of the forecasted inflation rate, the interest rate outlook is also changing. The long-term interest rate (10-year bond yield) hit 3.2% on May 9, has declined since then and is currently around 2.9% (June 1). Then, we can see the change in the outlook for the policy interest rate. Chart 3 showing changes of the “policy interest rate forecast at the end of 2022” and the “policy interest rate forecast at the end of 2023” calculated from the trends of the FF interest rate futures traded in Chicago. Policy interest rate forecast fell in May as inflation outlook has gradually eased, and the markets began to reflect views such as (1) the FRB’s tightening of monetary policy will ease in the second half of the year, (2) the pace of rate hikes will slow down after the second half of the year and (3) the rate hike in 2023 will remain modest. A pause in the pace of rising interest rates is likely to help the growth stocks thus Nasdaq to rise.


<Chart 3> Futures market policy rate outlook is somewhat stable


(Source) Created by Economic Research Institute of Rakuten Securities, Inc. from Bloomberg (May 2021 – Jun 1, 2022)


3. Will global economic growth continue?

The reason why FRB rushes to normalize monetary policy is to control inflationary pressure in the near future. However, some market participants are wary of the risk that global (except Japan) monetary tightening could lead to an “overkill” (a situation that sacrifices an economic downturn). Chart 4 shows the latest outlook (market forecast average) regarding real GDP growth rate by country (region) by private economists. Although the global real growth rate slowed since 2021, it is expected to achieve +3.3% in 2022 and 2023. The real growth rate of US in 2022 is +2.6% and the economy is expected to expand at a pace faster than the potential growth rate. The driving force for economic recovery is also expanding from the manufacturing industry to the non-manufacturing industry, particularly the service industry such as tourism and food & beverage that are recovering from the Covid-19 pandemic. The FRB’s move to incorporate normalization of monetary policy into the market is rational, when considering factors such as surges in demand, supply constraints and rising wages that have been protracted longer than expected by monetary authorities. On the other hand, revenge spending due to the emergence of pent-up demand (deferred demand) is not permanent. The price increase pressure which was due to the increased demand and supply constraints (except for some commodity prices), is expected to ease toward the second half of the year. As shown in Chart 4, the real growth rates of US, China, Europe (EU) and Japan are expected to remain strong. Of course, the risks of a prolonged Ukrainian crisis and its consequences and the future waves of the Covid-19 are unpredictable. However, it seems likely that the global growth of the economy, centered on US, will move toward a “soft landing”. The global stocks are expected to regain the pace in the second half of the year and fully “recovered” by the end of the year. I think continue “buying on decline” and “bargain hunting” are the good investment strategies.


<Chart 4> Expecting the global growth will make a soft landing


*Real GDP growth rates in 2022 and 2023 are market forecast average
(Source) Created by Economic Research Institute of Rakuten Securities, Inc. from Bloomberg (Jun 1, 2022)