Since April, the U.S. stock market has faced continuous adjustment pressures.

After the release of the latest U.S. employment and inflation data, market expectations for a shift in Federal Reserve policy have continued to cool. At the same time, geopolitical tensions are imminent, and multiple factors have become the fuse for turmoil, with U.S. stock funds continuing to flee. In the coming week, uncertainty remains the main factor troubling the market. In addition to the earnings season and the stance of the Federal Reserve, the direction of the Middle East situation may become the key to whether the market can stabilize quickly.

The Federal Reserve hints at patience

After the non-farm report exceeded expectations, the strong inflation report almost dashed hopes for the Federal Reserve to shift to an easy policy in the first half of the year. In the just-ended March, the overall U.S. Consumer Price Index (CPI) rose by 3.5%, the largest increase since September last year, with energy and rent continuing to be the leading factors. At the same time, the rise in import prices has also added a new threat to the upward pressure on prices. In the absence of evidence of a sharp economic slowdown, the Federal Open Market Committee (FOMC) may choose to continue waiting.

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Bob Schwartz, a senior economist at Oxford Economics, said in an interview with reporters that as prices have been higher than expected for three consecutive months, the market has begun to re-evaluate the possibility of the Federal Reserve cutting interest rates three times this year. "Even after stripping out more volatile factors, the trend in prices is still not optimistic," he said. He analyzed that "especially the super core service prices closely watched by the Federal Reserve have accelerated, largely influenced by labor costs, which is a huge obstacle for inflation to overcome on the path to achieving the Federal Reserve's 2% target."

At the same time, U.S. Treasury yields continue to rise, with the 2-year U.S. Treasury, closely related to interest rate expectations, rising by more than 15 basis points to 4.88% in a week, approaching the 5% psychological threshold at one point. The benchmark 10-year U.S. Treasury is close to 4.50%, setting a new high in nearly five months.

Federal funds rate futures show that investors have pushed back the time window for the first interest rate cut to September. Several Wall Street institutions, including Goldman Sachs, Deutsche Bank, Nomura Securities, and PIMCO, have recently reduced the space for the Federal Reserve to cut interest rates this year from 3 times to 1-2 times.

From the minutes of the Federal Reserve's March meeting, the recent rebound in prices has already aroused vigilance within the committee. If the recent inflation declines and dissipates, they are prepared to keep interest rates at the current level for a longer time than expected. Recent speeches by Federal Reserve officials have also strengthened this expectation. The attitude of John Williams, the "third person" of the Federal Reserve and the chairman of the New York Federal Reserve, is worth paying attention to. This important advisor to Federal Reserve Chairman Powell believes that there is no need to change monetary policy in the "short term". He said that the Federal Reserve has made considerable progress in reducing inflation, and the uncertain outlook means that the Federal Reserve must pay attention to the upcoming data to formulate interest rate policies. "We need to maintain data dependence. In assessing the appropriate way to achieve the best monetary policy goals, I will continue to pay attention to data, economic prospects, and risks."

Schwartz told reporters that the Federal Reserve's data-dependent slogan may force it to maintain high interest rates for a longer period, and the possibility of the first interest rate cut in September is rising. "However, for now, the Federal Reserve's view that inflation is sustainably returning to the 2% target has not changed substantially."

Schwartz expects that due to some seasonal factors, this year's inflation may have a lot in common with last year, with a strong rise at the beginning of the year and a slowdown in the second half of the year. He believes that core personal consumption expenditure (PCE) is the most important for the Federal Reserve. Compared with the 0.4% increase in core CPI, the PCE in March may be relatively moderate, as there are signs that wage growth is expected to slow down, which is crucial for the development trajectory of super core inflation.Uncertainty Disrupts the Market

Hit by bearish pressures such as expectations of Federal Reserve rate cuts and geopolitical factors, hopes for a "soft landing" and a steady downward trend in interest rates have been shaken. Major stock indices have undergone adjustments across the board, with the divergence in technology stocks intensifying, indicating a cooling of market risk appetite.

Investors have also sensed danger signals from the earnings season. As an important economic barometer, the outlook of large financial institutions' earnings reports appears quite cautious. JPMorgan Chase CEO Jamie Dimon warned that persistent inflationary pressures are exerting stress on the economy. BlackRock Group CEO Larry Fink also believes that it will be difficult for U.S. inflation to fall back to 2%, and he expects the Federal Reserve to cut rates at most twice this year, but even so, it will be hard to curb inflation.

U.S. equity funds have experienced outflows for the second consecutive week. According to data provided by the London Stock Exchange Group (LSEG) to reporters, net outflows from U.S. stock funds reached $2.73 billion. Among them, large-cap stock funds saw sales of $5.28 billion, the highest since January 10th of this year. At the same time, money market funds saw net sales of $34.98 billion, marking the third week of outflows in four weeks.

It is worth mentioning that hedge funds' bearish sentiment towards risky assets has escalated. Transaction data compiled by Goldman Sachs shows that the hedge fund industry has net sold global equities for the second consecutive week, with the largest selling pressure on North American and European stocks, both setting new highs for the year.

Alexandra Wilson-Elizondo, Co-Chief Investment Officer of Multi-Asset Solutions at Goldman Sachs Asset Management, advises investors to gradually exit technology stocks. Although the U.S. economy is expected to have a soft landing, there are many risks that could change this trajectory. "We prefer to take profits from technology stocks and shift to other sectors, as the risk-reward situation in the technology sector is biased towards the downside."

Charles Schwab wrote in its market outlook that, influenced by factors such as higher-than-expected CPI data, a significant rise in U.S. Treasury yields, and a mixed start to the earnings season, U.S. stocks experienced increased volatility last week. There are more signs indicating that the market may take the risks indicated by inflation more seriously.

The institution believes that investors now seem a bit shaken, as the S&P 500 Index has reached an important short-term support level—the 50-day moving average—for the first time since November last year, and the Volatility Index (VIX) also shows signs of acceleration, breaking through the integer threshold of 19 last week. In the coming week, as more corporate earnings are released, and economic indicators such as retail sales and industrial output may put pressure on monetary policy if they exceed expectations, investors should prepare for more potential volatility.