On October 5th, although the latest speeches of the Fed directors continue to be released, San Francisco Fed President Daley said that inflation is a corrosive ill, and the Fed needs to push up borrowing costs and then maintain these restrictive policies, but Wall Street , represented by Bank of America , is waiting for the Fed to surrender, betting that the Fed may usher in a "dove turn" signal.
Federal Chairman Powell
even, United Nations also asked developed countries to stop hikes and turn to price control on October 4, while the RBA's interest rate hikes were unexpectedly lower than expected, which made the market rekindle the Fed turn like the Bank of England.
As shown in the figure below, after the Federal Reserve pushed the US economy into recession expectations faster and the bond markets, stock markets and foreign exchange markets of developed countries such as the United States, the United Kingdom, Europe, and Japan, Wall Street's expectations for the Federal Reserve's subsequent interest rate cuts soared again, and it will cut interest rates as early as May next year. The peak of policy interest rates in 2023 is expected to drop to 4.47% (the dot plot shows 4.62%, which was previously expected to reach 5%.
Since Fed Chairman Powell attended the August Global Central Bank Annual Meeting to send a "faster, higher and longer-lasting" interest rate hike signal, including Greg Manquin, known as the "Feder Market Master", Bill Dudley, senior economist at Princeton University, economist Roubini, , and economist Iqbal, who predicted the 2008 US financial tsunami, and Iqbal, an economist in Wells Fargo, have warned that the nuclear bomb in the US financial market may be detonated by the Federal Reserve, and the risk of a "hard landing" of the US economy has increased, and even a longer recession has occurred.
For example, the expansion of the US manufacturing purchasing managers index in September was close to a complete stagnation, and new orders and employment indicators both fell below the 50 boom and bust dividing line, setting the largest decline in two and a half years. The real estate market cooled rapidly, and high inflation was also eroding the purchasing power of American consumers. As the pace of the Federal Reserve's interest rate hike continues to advance, Wall Street's concerns about the US economic recession began to soar.
"Fearless Girl" before the New York Stock Exchange
plus the US credit pressure indicator is close to the critical point of the crisis, the US Treasury market is close to collapse, the cost of debt burden exponentially, and the hype Credit Suisse crisis have also made investors bet that the Fed will eventually have to adjust its policies in the US economic recession and financial market turmoil, causing the Fed to surrender in the radical path to shrink monetary policy.
Because, the strong dollar will eventually backfire the US economy, and ultimately force the Federal Reserve to turn in the "prisoner's dilemma" and have to make changes to reduce the rate hike. As shown in the figure below, Powell tracks the credit risk pressure indicator FRA-OIS every day.
analysis believes that as the dollar index continues to refresh its 20-year high, bringing volatility to the global stock and bond markets, the Federal Reserve may be losing control of the U.S. yield curve, and the dominant force behind this is that Japan is contributing to the historic collapse of U.S. bond in defending the upper limit of Japanese Treasury bond yields and the yen may be contributing to the historic collapse of U.S. bond .
Citi analyst Ryota Sakagami said that according to the current situation, it is "almost inevitable" that the Japanese bond market fell into a bear market, causing some smart funds with a keen sense of smell to quietly withdraw from Japan. According to data released by Japanese officials on October 4, in the three weeks ended October 1, a total of 2106.8 billion Japanese funds quietly withdraw from Japanese financial market , of which 1046.5 billion yen of foreign capital was withdrawn from the Japanese bond market.
Goldman Sachs believes in a report released on October 5 that in the past two days, the US dollar index hit a new two-week low and fell below the 111 mark will not last long, and the yen may continue to fall, so this will also make Japan, as the largest cornerstone buyer of US bonds, actively sell US bonds to defend the Japanese financial market.
A corner of Tokyo City, Japan
The bank's macro strategist estimates that the US dollar may rise by about 8% if the Federal Reserve hawkish policy does not clearly turn. If the yield on the US 10-year Treasury bonds rises back to 4.5%, and the Bank of Japan insists on its yield curve control policy, the US dollar may rise to around 155 against the yen, exceeding the level before the Asian financial crisis around 146, bringing greater selling pressure on Japanese Treasury bonds. Since March, the yen has depreciated by 21%.
On October 5, the yen rose 0.4% against the US dollar, staying below 145 yen. We noticed that this is the first time that the Japanese authorities have risen above this level since selling US bonds on September 22 to support the yen. Immediately afterwards, the Japanese Finance Minister reiterated that "if the yen "sharp and unilateral" trend continues, we will be ready to enter the market decisively and intervene at any time."
According to data released by the Japanese Ministry of Finance on October 3, Japan's selling of US debts to support the yen was very fierce. In the week of October 2 alone, the Bank of Japan spent as much as 2.8 trillion yen (US$19.7 billion) to interfere in the foreign exchange market to support the yen, consuming nearly 15% of the funds.
. According to statistics released by the Japanese Ministry of Finance, since March this year, in addition to the Bank of Japan, Japanese official institutions including Japan's pension funds, Japan Bank funds, etc. have continued to sell up to US$210 billion in US bonds, making the net short position of SOFR futures US bonds a record short position of 69,803 contracts, setting the longest continuous selling record since 2005.
A large Japanese fund think tank Totan Research said that if the Bank of Japan loses control of the yield curve of Japan's treasury bonds, and the yen, Japan may create the Pearl Harbor incident. Then, in addition to selling off US$135.5 billion in deposits stored in the International Settlement Bank (BIS), the Bank of Japan also needs to sell about US$1.04 trillion in US dollars of US dollars of bonds. If the yen continues to depreciate beyond the level of 146, there is even a possibility of clearing up the position. Each intervention will cause a sharp increase in US yields. Data shows that Japan holds about US$1.26 trillion in international reserve (mainly in the form of US Treasury bonds).
In this regard, the founder of the world's largest hedge fund Bridgewater also pointed out that "the current US financial market is similar to the Great Depression in the United States in the 1930s. He expects that the impact of US dollar assets will be weakened, while other monetary assets will rise."
analysis shows that as the volatility of US Treasury yields intensifies, Japan will continue to increase its RMB reserves, allowing it to accumulate more RMB in foreign exchange reserves to reduce the risk of exposure to US Treasury bonds and reduce the risk of bilateral transaction costs and US dollar exchange rate fluctuations. For example, a Japanese pension insurance company said, "Since May this year, we are investing in RMB treasury bonds." (End)
