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Lower Probability of Significant Rate Cuts Expected
Massive Shift in Expectations for Federal Reserve Rate Cut!
On the early morning of October 10th, the Federal Reserve released the minutes of the September interest rate meeting. The content revealed significant internal disagreements within the Federal Reserve over the decision to cut rates by 50 basis points in September.
Although the Federal Reserve's rate cut in September has already been implemented, marking the first 50 basis point cut in four years, policymakers' attitudes towards the September rate cut are noticeably different.
In addition, recent strong economic data from the United States has come as a big surprise, significantly reducing market expectations for further rate cuts by the Federal Reserve. Speculations are arising about whether the A-share market will be affected.
The Federal Reserve Reveals Significant Disagreements on Substantial Rate Cuts
According to the minutes of the interest rate meeting released by the Federal Reserve, the reasons for the Federal Reserve officials' decision to cut rates by 50 basis points in September, as well as their latest assessment of the future path of monetary policy, were detailed.
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The resolution statement showed that among the FOMC (Federal Open Market Committee) voting members, all 11 agreed to a 50 basis point rate cut, with only Federal Reserve Governor Bowman casting a dissenting vote, advocating for a 25 basis point rate cut.
Bowman thus became the first Federal Reserve Governor to cast a dissenting vote against the majority decision at an FOMC interest rate meeting since 2005.
However, further investigation reveals that there should be more than just Bowman among the Federal Reserve policymakers who support a 25 basis point rate cut.The meeting minutes revealed that some participants suggested that a rate cut of 25 basis points would have been a better choice, with some even indicating they might have voted for a 25 basis point cut instead of the Federal Reserve's announced substantial reduction of 50 basis points in September.
Some participants expressed that, given inflation is still somewhat high, economic growth remains robust, and unemployment remains low, they would prefer to lower the policy interest rate target range by 25 basis points.
In their view, a steady 25 basis point rate cut is more in line with the gradual path to monetary policy normalization and would give the Federal Reserve more time to assess economic progress.
When discussing the outlook for monetary policy, Federal Reserve policymakers also emphasized the importance of communicating to the public that the September rate cut of 50 basis points should not be seen as the Fed anticipating a bleak economic outlook.
Historically, each substantial rate cut by the Federal Reserve has coincided with a high degree of overlap with U.S. economic recessions.
This includes the oil crisis of the 1970s, the savings and loan crisis of the 1980s, the internet bubble at the turn of the century, the financial crisis of 2008, and the global COVID-19 pandemic in 2019.
However, participants who supported a more substantial rate cut emphasized that choosing a 50 basis point cut initially would align with the latest inflation and labor market data, thereby helping to maintain strong employment and economic growth in the United States while continuing to make progress in reducing inflation.
On the eve of the Federal Reserve's decision to cut rates by 50 basis points, the U.S. Bureau of Labor Statistics released the August non-farm employment report, showing an increase of 142,000 non-farm jobs in August, significantly below the expected 165,000.
All parties seem to have provided well-founded reasons for either a 50 basis point or a 25 basis point rate cut. Consequently, there was a clear divergence within the Federal Reserve regarding the 50 basis point rate cut in September.
The minutes indicate that if inflation continues to decline towards the Federal Reserve's 2% policy target and employment maintains an expansionary trend, adopting a more neutral stance over time may be appropriate.In terms of economic prospects, at the September interest rate meeting, Federal Reserve officials predicted that the US economy would remain robust; in terms of inflation prospects, almost all participants expressed their confidence that inflation would continue to converge towards 2%.
The expectation of interest rate cuts has been significantly reduced.
As expected, the US then dropped a "bombshell" into the market. The US Bureau of Labor Statistics announced on October 4 that the number of non-agricultural employees in the US increased by 254,000 in September, setting the largest monthly increase since March.
The data also showed that the US unemployment rate in September fell for the second consecutive month to 4.1%. And looking at the recent trend of inflation in the US, US inflation has been continuously converging towards 2%.
The strong expected economic data has provided strong support for the US economy to achieve a "soft landing", and has also significantly reduced the market's expectation of the Federal Reserve cutting interest rates this year.
The Chicago Mercantile Exchange's Federal Reserve observation tool shows that the market's expectation of the Federal Reserve raising interest rates by 50 basis points again at the November monetary policy meeting no longer exists.
At the same time, the market's expectation of the Federal Reserve cutting interest rates by 25 basis points is about 87%. Some investors even believe that the Federal Reserve's monetary easing policy this year may have already ended.
Since the US announced the latest employment data, the beautiful data performance has led several Federal Reserve officials to say that "the pace of interest rate cuts will be slowed down".
Boston Federal Reserve Chairman Collins said that as the Federal Reserve's inflation continues to cool down, the Federal Reserve may need to further cut interest rates, but the path of interest rate cuts may be adjusted, and there may be two more cuts of 25 basis points this year.
Federal Reserve Governor Jefferson also pointed out that when considering further interest rate cuts, attention will be paid to the latest economic data, economic prospects, and risk balance.Goldman Sachs believes that the possibility of the Federal Reserve cutting interest rates by another 50 basis points is very small, and it is expected that the Federal Reserve will slow down the pace of rate cuts to 25 basis points in November.
Following the release of strong non-farm data for September in the United States, market expectations for interest rate cuts by the Federal Reserve within the year have been significantly reduced. The offshore renminbi exchange rate against the US dollar also depreciated and broke through 7 during the same period.
Some analyses suggest that under this background, global macro constraints may tighten again, and there seems to be a force competing for capital behind this.
A large amount of capital has flooded into the Chinese market.
Historically, every switch between tightening and easing dollar cycles has always caused shocks to the global economy and financial markets.
Previously, under the whirlwind harvesting effect of the high-interest-rate cycle in the United States, global assets and exchange rates continued to be impacted, constantly stimulating some funds from other national economies to flow into the US market with higher returns.
The yen, Indian rupee, Korean won, and several other countries' currencies have fallen into a "vulnerable mode" of severe currency devaluation. Rumors about "large-scale withdrawal of foreign capital from China" have also been rampant.
The United States' aggressive interest rate hike policy has greatly attracted global capital inflows into the United States, causing a strong siphoning effect on other economies.
The underlying logic is that when the Federal Reserve raises interest rates, the US dollar tends to appreciate, attracting global capital to flow into the United States in search of higher returns and more stable asset preservation.
Conversely, when the Federal Reserve lowers interest rates, the US dollar may weaken, and capital may flow to other regions in search of new investment opportunities.As the Federal Reserve lowers interest rates, Wall Street prophet Peter Schiff warned on October 3rd that the Fed has made a significant policy mistake. Following the rate cut, quantitative easing and the return of high inflation will lead to more debt and deficits, and at least potentially cause trillions of dollars of foreign buyers' funds to withdraw from the U.S. asset price market within a few years.
At the same time, Bob Michele, the portfolio manager of J.P. Morgan Asset Management, believes that the U.S. money market fund assets, which have doubled in size over the past five years to $6.46 trillion, may see yields drop to 3% or even lower under the expectation that the Fed will start a rate-cutting cycle and continue to shrink its balance sheet. This will further drive the outflow of U.S. bank deposits and cause some funds to shift their focus eastward, turning to the Chinese market.
Citing data from EPFR Global, U.S. Bank reported that as of the week ending October 3rd, global emerging market equity funds recorded an inflow of $15.5 billion, the second-highest in history. Among them, the Chinese stock market saw the largest inflow, with $13.9 billion flowing into the Chinese market that week, the second-highest on record.
With the Fed lowering interest rates and the country subsequently announcing a series of measures to stimulate economic growth, the A-share market also welcomed cheers on the eve of the National Day holiday.
However, now that the expectation of the Fed's rate cut has weakened, the A-shares have coincidentally experienced a sharp decline, and many attribute one of the reasons to the Fed stepping on the brakes in the financial war. "Because the Chinese stock market has started crazily, a large amount of funds may flee the U.S. in the short term, which will be a huge pressure for the U.S."
The "internet celebrity economist" Ren Zeping claims that the financial war between major countries has never stopped. Driven by unprecedented and inspiring domestic policies, A-shares and Hong Kong stocks have just surged, and global funds are pouring into RMB assets. He believes we will win.
Xingye Securities' Global Chief Strategy Analyst Zhang Yidong had already predicted in an online exchange meeting on October 7th that A-shares are very likely to see a sharp rise in the short term, followed by significant fluctuations and divergences in the medium term.
He believes that the historical mission of the "mad bull" has been completed, and the pace needs to slow down. We should cheer for the fluctuations. "Whether it's A-shares or Hong Kong stocks, this is not just a bottom rebound, it could be a more optimistic reversal logic."
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