Will Powell take action to save the market? This indicator is crucial
Goldman Sachs pointed out that if the credit spread further widens to 500 basis points, Powell is likely to intervene and change the policy stance as he did in 2018. Currently, the high-yield bond spread has reached 454 basis points, just one step away from the dangerous threshold of 500 basis points
The recent plunge in the US stock market has left investors in shock, but the real trigger for Powell's intervention may not lie in the stock market, but in the bond market.
According to Goldman Sachs analyst Lindsay Matcham, if credit spreads continue to widen, coupled with the bond market pricing in a recession, it will prompt the Federal Reserve to take action. Typically, an expanding credit spread indicates that corporate financing may face difficulties, leading to a softening job market. If the high-yield bond spread continues to widen to 500 basis points, Powell is likely to intervene and change his policy stance, similar to what he did in 2018.
Powell's stance was relatively hawkish last Friday, but this was mainly due to the fact that the recent plunge in the US stock market was event-driven, the non-farm payroll data was still strong, and given that tariffs may push inflation higher in the future, he does not want to use policy "bullets" too early. However, the current high-yield bond spread has reached 454 basis points, just a step away from the dangerous threshold of 500 basis points.
The Bond Market Has Not Signaled a Recession
Goldman Sachs analysts believe that compared to the sharp fluctuations in the stock market, the bond market's response has been relatively limited. Yields have decreased, and the yield curve has steepened in a bull market, but the overall changes have been relatively mild.
Goldman Sachs points out that the current bond market expects the federal funds rate to drop to 3% in a year, which aligns perfectly with the neutral rate set by the Federal Reserve, indicating that it is far from recessionary pricing.
The market currently expects five rate cuts in the next year, while Goldman Sachs analysts believe that true recessionary rate cuts typically reach 8-10 times.
The probability of a rate cut at the May Federal Reserve meeting is only 51%, indicating that the bond market needs further adjustment to prompt Powell to change his policy stance, which could potentially trigger a rebound in the stock market