The following articles are from Li Meicen Investment Strategy. The author is professionally forward-looking global vision
Li Meicen Investment Strategy .
Li Meicen, chief strategy analyst of Caitong Securities . High degree from Peking University , High degree from the National University of Singapore . He has won New Fortune, Crystal Ball, Golden Kirin Best Analyst for many years. Representative works "Invest in Core Assets" and "Changniu: The Logic of Stock Market Operation in the New Era".
core viewpoint
Current interest rate hike cycle ends, overseas investors have disagreements on the path of interest rate hike . The market has repeatedly played against this, and US stock continues to fluctuate. Looking back at the macro conditions of the last round of interest rate hikes in history, it is expected that the macro pressure faced by the Federal Reserve will slow down in January next year, and the interest rate hikes may be terminated. Corresponding to asset prices, the starting point of the US bond market and stock market may be in December and January. A shares is expected to coexist with high returns and high volatility in the fourth quarter.
Rate hike: This round of interest rate hike has reached 300Bp, but it only lasts for 6 months. The rate hike is in place but not long enough. Historically, the duration is generally about 19 months, and the rate hike is about 300Bp. The short-term interest rate hike was due to the Fed's misjudgment of inflation as "temporary".
ends interest rate hikes 4 points: four indicators: prosperity, employment, wages, and inflation.
Current trend & forecast: The economic indicators have fallen, but the "wage-inflation" indicator represented by employment, wages, and core PCE is more sticky and is expected to be relaxed until January next year. Comprehensive analysis predicts the future path of the Fed's interest rate hike: 75, 75, and 25BP in November, December and January, and finally increases to 5%. Look at sub-item:
) Prosperity indicator: Manufacturing PMI, after a high of 6 months, and a strong inflation stickiness is down 8 months, it ushers in the last rate hike. The current September PMI is 50.9, and it has fallen 11 months since its high point, similar to the historical interest rate hike. combines import and durable goods indicators, both of which have been too high, verifying that the prosperity has declined.
) Employment indicators: The number of new non-agricultural employment has dropped from more than 300,000 to less than 200,000, or the rapid shrinkage after the interest rate hike meeting may push inflation back and attract the Federal Reserve's attention to employment. htmlNew non-agricultural population in September dropped from 315,000 in August to 263,000, and it will take time for the complete cooling of employment data. Refer to the trend of recruitment plans for small businesses, it may take three months to drop to 200,000.
) Salary indicator: The year-on-year growth rate of total wages needs to be downward for more than 3 months, breaking the "wage-inflation" spiral, such as 12.3%-10.8%-7.0% in 1984. Wage Medium Growth Rate (MA3) From June to September, the decline from the high point was only 0.4% lower than before; behind it is the decline in labor supply and demand at the same time, supply and demand continue to be tightly balanced, and wage stickiness is strong. It will take time to curb the "wage-inflation" spiral. expects the growth rate of some core PCE services to be high in January next year.
) Inflation indicator: The year-on-year growth rate of core PCE, referring to the 1980s, it needs to drop from above 5% to about 4%, and the final interest rate hike will continue to decline by about 0.3% in three months, with a certainty decline. 2 From August to September 122, the core PCE was 4.7% and 4.9% respectively, with strong resilience and rebound, making it difficult to temporarily delay. By item, the service part has a high point in January next year, and the housing part has lagged behind the housing price in December and the high-frequency rental data in June, and is expected to see a year-on-year improvement in March; Overall, inflation pressure will be alleviated until January next year.
Asset performance:
) US Treasury: 10-year US Treasury interest rate reached its peak in 2-4 months before the last round of interest rate hikes. If January next year is the last rate hike, it is expected that the U.S. Treasury bond interest rate will peak in December.
) US stocks: S&P 500 fluctuated before the last round of interest rate hikes, and after the interest rate hikes ended, welcoming an upward turning point.It is expected that US stocks will continue to fluctuate in the fourth quarter, and are expected to usher in a turning point of rebound at the end of the year and the beginning of the year.
) A shares: Corresponding to A shares in the cost-effective range, it is expected that high returns and high volatility will coexist in Q4 . 1) Economic fundamentals and global liquidity are both close to the bottom, and subsequent US bonds peak or domestic economic recovery will bring market conditions. 2) The interest rate hike is over, and the global number of unexpected increases, the market is sensitive to events and has different interpretations. The market is highly volatile due to the combined combination of the two.
Risk warning: Fed monetary policy exceeds expectations, macroeconomic downward risk, and historical experience failure risk.
directory
body
. When will the Federal Reserve rate hike end? This round of interest rate hikes is enough, but the time is not enough
htmlOn October 13, the overseas market reversed tremendously. In response to the stubborn inflation data, overseas investors' understanding of the path of interest rate hikes has changed. One is that they tend to raise interest rates for the fourth consecutive (95% probability) and five times (77% probability) in November and December. The other is that after the benchmark interest rate hikes reached 4.75% by the end of the year, the current interest rate hike cycle may end. Discussions on whether the Federal Reserve will raise interest rates in December have been put on the table.
Compared with the 6 rounds of Fed interest rate hikes in history, the characteristic of this round is "urgent". 's first 6 interest rate hike cycles generally lasted for about 19 months, with an average rate hike of about 300Bp. This round of the Federal Reserve raised interest rates by 300Bp in just over six months. If the expectation of interest rate hike in November and December 2 was included, it would be a hike of 425Bp in 9 months. The last similar interest rate hike was from 2004 to 2006, but at that time, the interest rate hike cycle on the eve of subprime mortgage crisis lasted for a full 24 months.
This rate hike cycle is so "urgent" mainly because the Federal Reserve misjudged inflation as "temporary", which led to the rate hike cycle that may start late for nearly 6 months. The impact of interest rate hikes on the economy requires time to ferment. Economic cooling, employment decline, and inflation downward all need to wait. The range of this round of interest rate hike cycle may be possible, but the duration is not enough. It may be a better time to observe around the first quarter of next year.
Above we mainly analyze three issues that the market is concerned about:
) What macro conditions are needed for the Federal Reserve to end the interest rate hike.
) What is the future trend of inflation and employment conditions in the United States?
) How global assets perform before and after the last rate hike.
. The last interest rate hike meeting in history requires four macro conditions verification
.1. Summary of the macro conditions, and observe the last round of interest rate hike again in January next year
Booking from history, four indicators of prosperity, employment, wages and inflation can help determine whether the Fed has entered the end of interest rate hikes:
)Benefit indicators: Manufacturing PMI, the highest point averaged down by 6 months, the last rate hike has arrived. The inflation stickiness is strong for more than 8 months, and durable goods consumption and imports can help determine the economy. In September 2022, the US manufacturing PMI has fallen by 11 months to 50.9%.
) Employment indicators: New non-agricultural employment, falling from more than 300,000 to less than 200,000, or shrinking rapidly after the interest rate hike meeting, which may drive inflation to fall and attract the Federal Reserve's attention to employment. htmlNew non-agricultural population in September dropped from 315,000 in August to 263,000, and it will take time for the complete cooling of employment data.
) Salary indicator: Total wage growth rate year-on-year, with a trend downward of more than 3 months, breaking the "wage-inflation" spiral, such as 12.3%-10.8%-7.0% in 1984. Median wage growth rate (MA3) from June to September, the decline from the high was only 0.4% lower than before. It will take some time for this round of suppressing the "wage-inflation" spiral.
) Inflation indicator: core PCE growth rate year-on-year. Referring to the experience of the last interest rate hikes in the 1980s, it needs to drop from more than 5% to about 4%, and continue to decline by about 0.3% in 3 months after the last interest rate hike meeting, forming a certain downward trend. 2 From August to September 122, the year-on-year growth rate of core PCE in the United States was 4.7% and 4.9% respectively, with strong resilience and rebound, which is difficult to ease for the time being. CPI is weaker than core PCE in monetary policy decisions, and the trend drops to 4% may not hinder the easing of monetary policy. html CPI in September was 8.2%, and the highest point has fallen by 0.8%. needs to pay attention to the services and housing rents linked to salary in the future.
Overall, the subsequent interest rate hike paths may be: November, December, and January next year, 75Bp, 75Bp, and 25BP, and finally increase to 5%. Currently, the prosperity and demand indicators represented by manufacturing PMI, durable goods consumption, and imports have fallen, which is similar to the end of previous interest rate hikes. The "wage-inflation" indicators represented by employment, wages, and core PCE are more sticky and continue to hinder monetary policy easing: 1) There are still 263,000 new non-agricultural employment, which may drop to less than 200,000 around December. The data can be observed in early January next year to verify. 2) Referring to the experience of interest rate hikes under high inflation in 1984, the core PCE has not shown signs of a trend decline of more than 3 months, and the decline in the higher growth rate of core PCE and total wages is still far less than the last level of previous rounds of interest rate hikes.
.2. The conditions for prosperity, employment, wages, and inflation at the end of previous interest rate hikes
Prosperity indicator: Manufacturing PMI, the highest point averaged down by 6 months. On average, the tightening has lowered the US manufacturing PMI from a high of 60.9% to 52.8% at the last rate hike (the Federal Reserve did not wait until the recession to end the tightening), and continued to drop to 49.7% three months after the interest rate meeting. The lag from the decline of the PMI high to the end of the Fed's interest rate hike may depend on the effect of the economic downturn to suppress inflation. In 1984, 1989 and 2006, the lag was more than 8 months. This round of US manufacturing PMI high was 61.1% in November 2021, and fell to 50.9% in September 22, which made the US stock market usher in a carnival in early October and bet tightening and eased. From the perspective of imports and durable goods consumption, the total demand in the United States was in the last rate hike in history, the year-on-year decline in durable goods consumption was more than 7%, and the year-on-year decline in imports was about 4%. The current compound growth rate of durable goods and imports has declined by 4 months in three years, with a decrease of 1.6% and 2.2% respectively.
Employment indicator: The number of new non-agricultural employment has dropped from more than 300,000 to less than 200,000, which may drive inflation to fall and attract the Federal Reserve's attention to employment. The decrease in new jobs will not only alleviate inflation concerns, but also trigger the Federal Reserve to rebalance inflation and employment. In the first three months of the last round of interest rate hikes, the average number of non-farm employment was about 300,000, and the average number of people was less than 200,000 in the three months after the last round of interest rate hikes. After the last rate hike in 189, 95, 00, and 2018, the employment data shrank sharply to single digits or negative growth; however, it should be noted that the Fed ended interest rate cuts not waiting for the unemployment rate to soar, and the unemployment rate was at the historical bottom and had not yet risen. htmlNew non-agricultural stocks in September fell from 315,000 in August to 263,000, and it will take time for the complete cooling of employment data.
Salary indicator: The year-on-year growth rate of total wages, with a trend of more than 3 months. The main focus of the Federal Reserve's policy on inflation is to prevent the "wage-inflation" spiral. The total wage data includes information on average hourly wages and working hours. After the last interest rate meeting, the growth rate of total wages continued to decline in trend (12.3%-10.8%-7.0% in 1984), which may push the Federal Reserve to stop tightening measures at its next meeting. The median wage growth rate (MA3) of the Atlanta Fed concerned has reached a high of 7.1% in June and a drop of only 0.4% in September, which is not as good as before. Therefore, this round of suppressing the "wage-inflation" spiral will need to raise interest rates for some time.
inflation indicator 1: The year-on-year growth rate of core PCE, referring to the experience of the last interest rate hikes in the 1980s, it needs to drop from more than 5% to about 4%, and continue to decline by about 0.3% in 3 months after the last interest rate hike meeting, forming a certain downward trend. From May to September 2022, the year-on-year growth rate of US core PCE was 4.9%, 5.0%, 4.7% and 4.9% respectively, with strong resilience and rebound, making it difficult for the Fed to ease its tightening policy.
Inflation indicator 2: CPI year-on-year growth rate, the trend drops to 4% may not hinder the easing of monetary policy. The proportion of energy and food weights in CPI is high, has a large fluctuation, and is susceptible to exogenous factors. It is weaker than the core PCE in monetary policy decisions. The Fed does not need to wait until the CPI completely falls. The CPI in September was 8.2%, and the highest point has fallen by 0.8%. However, considering that the current high value and downward trend of CPI are dominated by energy declines, we need to pay attention to the service CPI and housing rent linked to wages in the future.
. The current stickiness of inflation and employment is still very strong. The storm in the fourth quarter will not be small.
dismantling the current US inflation, mainly showing two characteristics: 1) Supply chain category sub-easing, includes transportation with a high correlation with oil prices. If the oil price remains around $90 by the beginning of next year, considering the extremely high oil price base at the beginning of this year, the CPI reading will drop significantly; ) Food, rent and service analysis is strongly sticky, reflects that the housing and labor markets may still be balanced. We expect a clearer signal may not be until mid-first quarter next year. Corresponding to the fourth quarter, the decline in inflation will not happen overnight. Investors expect that it may repeatedly impact the market, and the market storms will not diminish.
The actual housing rent pressure in the United States has been alleviated, but the statistical sub-items will continue to drag down the CPI.
) According to the three-party statistics, compared with January 2020, the average rent in the United States rose from US$1,666/month to US$2,089/month, with rising by 5%, and the disposable income of residents increased by only 10.5% during the same period. The rise in housing rents is quite different from the income growth level, but the road to decline may also be longer. The month-on-month decline in may be a signal of inflation relief that the market understands.
) From the high-frequency data, the month-on-month growth rate of the United States average rent has dropped from 1% at its June high to 0.5% in September. is likely to fall back to the historically acceptable level of 0.2%-0.4% in the next three months, which means the ease of actual rent inflation pressure. In terms of year-on-year growth rate of , it dropped from 17.2% in February to 11% in September. The third and fourth quarters of last year were periods of rapid growth in rents and high bases, so it may fall back to around 9% at the end of the fourth quarter.
) The statistics of CPI housing rent sub-item lag about 12 months behind housing prices and about 6 months behind high-frequency rental data. From the perspective of time lag order, the month-on-month growth rate of CPI housing rent may have a significant decline starting from December this year, and there may be an improvement in the year-on-year dimension around March next year.
In terms of employment, the labor demand side has declined, but the supply of more labor has exited the market, resulting in a tight balance between supply and demand and strong wage stickiness, which still needs time to digest at the moment.
) Demand side: The trend of the US small business survey recruitment plan and the number of new non-agricultural employment has declined for nearly one year. The former is very obvious, and new non-agricultural employment may fall back to about 200,000 within 3 months.
) Supply side: labor-participated population has dropped by 2.3 million, and the age group of 15-24, 24-54, and 55-64 years old is 41, 1.31, and 550,000, respectively. The elderly labor force has dropped a lot and is irreversible in the future. Possible reasons: , the new crown is unable to work; assets rise sharply without wages, etc.
) Wage stickiness: Labor demand, labor supply and demand difference (vote rate), and wage growth rate are about 3 months. It is expected that the growth rate of some core PCE services will be in January next year and will generally ease after April.
. How does the global market perform before and after the last rate hike?
We believe that in the state of tight balance of employment and sticky wages, the future path of the Fed's interest rate hike may be: 75Bp, 75Bp, and 25BP in November, December, and January next year, and finally increase to 5%. So how will global asset prices change under the benchmark assumption? Reference historical experience:
U.S. bond : 10-year U.S. bond interest rate reached its peak in 2-4 months before the last round of interest rate hikes. 0-year U.S. Treasury interest rate pricing includes three parts: benchmark interest rate, growth expectation, and inflation expectation , which mostly peaked before the last rate hike. The current 10-year U.S. Treasury bond interest rate is 4.14%, which is still rising. If the last rate hike is next January, it is expected that the U.S. Treasury rate will rise to its peak in December and then turn to a continuous downward trend.
U.S. Stocks: S&P 500 fluctuated before the last round of interest rate hikes, and after the interest rate hikes ended, welcoming an upward turning point. interest rate hike cycle ends. Regarding when monetary policy will ease, US stocks often experience expected and actual discounts to return to , maintaining fluctuations; after the interest rate hike is stopped, the market began to rise steadily. Since October, with the release of different economic indicators, expectations of interest rate hikes have changed repeatedly, and stock indexes have risen and fallen, and continued to fluctuate. is expected to continue to fluctuate in the fourth quarter, and it is expected to usher in a turning point of recovery at the end of the year and the beginning of the year.
corresponds to A-shares in the cost-effective range. It is expected that high returns and high volatility will coexist: 1) The current economic fundamentals and global liquidity are close to the bottom, and market sentiment is also at a low level. Whether the subsequent US Treasury yields peak and fall as expected at the end of the year, or the domestic economy recovers to an upward trend, the recovery of A-share valuations or earnings expectations will bring about a wave of market conditions, with considerable returns. 2) At the end of the current interest rate hike, the market is extremely sensitive to various events and has different interpretations. Market fluctuations are amplified under the long-short game; coupled with the end of the interest rate hike, the global fluctuation is unexpectedly increased, and market fluctuations will further increase under the impact of various events.
. Risk warning:
) The monetary policy of the Federal Reserve exceeded expectations; 2) Macroeconomic downward risks; 3) Historical experience failure risk.
This report contact person
Li Meichen [email protected]
Zhang Risheng [email protected]
Recent key reports
September 12"Switching is accelerating--A-share strategy special report"
September 18"Switching is still preferred --Special Report on A-share Strategy"
9-25 "Switching is the main theme--Special Report on A-share Strategy"
0-08 "Betting on the Fed has eased again, deep pressure on interest rate hikes appears--Review of the performance of global assets in National Day"
0-09 "October 3 Quarter Report-October Monthly Strategy"
/16 " Offensive Tug-of-Course Market Strategy Outlook"
/17 " Energy Cost Perspective, European Energy Crisis Benefits Industry-Energy Security Series 1 》
October 19"British Pension Crisis: A Micro of European Political Dilemma-European Storm Series 1"
Note: The report in the article is excerpted from Caitong Securities Research Institute's public release research report. For details on the specific report content and related risk warnings, please refer to the full version of the report.
Securities research report: When will the Federal Reserve rate hike be closed?
Outside release time: October 20, 2022
Report release institution: Caitong Securities Co., Ltd. (Securities investment consulting business qualifications licensed by China Securities Regulatory Commission )
Analyst for this report: Li Meicen SAC Practice Certificate Number: S0160521120002
Zhang Risheng SAC Practice Certificate Number: S0160522030001
