article 丨Ming Ming Ming bond research team
Core viewpoint
In the future What will the pace of the Federal Reserve tightening? The inflationary pressure caused by the current supply side of has been alleviated, but demand is still resilient, and wage growth will still run at a high level in the short term. If geopolitical conflicts and the energy crisis of will not intensify further, the U.S. inflation level may be at 6.5%-7.5% by the end of this year. It is expected that in the first half of next year, driven by supply and demand, coupled with the base effect , U.S. inflation may decline sharply, or fall back to around 6% in the first quarter of next year. The US economy and labor market will face higher risk of deterioration by the end of this year and the first quarter of next year. Therefore, if there is no new impact on the supply side, the Federal Reserve will have a higher probability of stopping the rate hike of in the first quarter of next year. From the perspective of Taylor's rules and actual interest rates, although there is a possibility that the Federal Reserve's hike rate guidance will be raised again within the year, the end level of interest rate hike is around 5%, which is a desirable tightening level. The specific pace of interest rate hikes mainly focuses on the midterm elections and inflation trends. The probability of raising interest rates of 75bps and 50bps respectively in the remaining two meetings this year is relatively high.
on the eve of the hike of interest rates US bond interest rates are expected to rise trend. The recent rise in US Treasury bond interest rates is mainly due to the sharp increase in the Fed's policy interest rate end point in September. In addition, recent PMI data shows that economic resilience remains, which once again pushed up the Fed's expectation of a rate hike. Since the end point of this round of Fed interest rate hike is expected to be around 5%, and the high points of US Treasury bond interest rates are often consistent with the actual high points of policy interest rates, on the eve of stopping interest rate hikes, US Treasury bond interest rates are expected to rise in a trend, and US Treasury bond interest rates may appear at the end of this year or early next year.
Fed tightening has caused pressure on RMB exchange rate . has weakened rapidly recently, and its trend has deviated from actual supply and demand. Its depreciation pressure mainly comes from the continued strengthening of the US dollar index . The impact of the epidemic has expanded the differentiation level of the economic cycle between China and the United States, causing the monetary policies of China and the United States to part ways. The interest rate spread between China and the United States is inverted to the historical extreme level, and the RMB is under pressure. From the perspective of the balance of payments, the current account in my country's balance of payments may narrow in the future, but it can still maintain a certain scale; the outflow pressure of non-reserve financial accounts may continue, but the outflow pressure may also slow down compared with the previous period.
What is the impact of rising US bond interest rates on the domestic market? monetary policy space is limited, and it is necessary to rely on fiscal and loose credit policies to promote the recovery of economic fundamentals to support exchange rate . The continued differentiation of monetary policies between China and the United States has led to an intensification of the interest rate gap between China and the United States, which has imposed a certain inhibition on the decline in domestic bond market interest rates. The domestic bond market may fluctuate and run weakly in the future. Looking back at history, the Federal Reserve's tightening pushes up US Treasury interest rates has had a certain negative impact on the valuation of growth stocks, and it is expected that domestic growth stocks may still be under pressure in the fourth quarter of this year.
Conclusion: The Federal Reserve's pace of tightening slows down this year needs to wait at least until after the midterm elections in November. Since inflation levels are expected to fall slowly this year, the probability of the Federal Reserve raising interest rates by 125bps is relatively high this year, and the Federal Reserve's end-point interest rate level may be around 5%. In the future, US Treasury bond interest rates may rise trend, and their highs may appear on the eve of interest rate hikes. In the future, the US dollar index may break through 120. Against this background, the monetary policies of China and the United States continue to differentiate, the interest rate spread between China and the United States continues to deepen, the RMB exchange rate is under pressure, and the domestic monetary policy space is limited. It is expected that the domestic bond market will fluctuate and run weakly in the short term.
Risk factors: conflicts between Russia and Ukraine or other geopolitical conflicts intensify; hurricanes , tsunamis, earthquakes and other unexpected events have impacted the global price of commodities ; the Federal Reserve's monetary policy exceeded expectations.
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9 September interest rate meeting The Federal Reserve made a hawkish statement, and the market is still digesting the expectation of interest rate hikes , and the U.S. Treasury interest rates and the US dollar index continue to strengthen. Since it is expected that the US inflation will be more likely to show a desirable decline in the year, the probability of the Federal Reserve raising interest rates by 125bps this year is relatively high, and the probability of the Federal Reserve stopping interest rate hikes in the first quarter of next year is relatively high. Considering the Taylor rules and the actual interest rate level, the end point of the interest rate hike may be around 5%.It is expected that the U.S. Treasury bond interest rates will rise trend until 1-3 months before interest rate hikes are stopped, and the U.S. dollar index may break through 120. Against this background, the domestic monetary policy space is subject to certain constraints, and the domestic bond market may fluctuate and operate weakly.
What will be the future trend of US Treasury bond interest rates?
The recent rise in U.S. Treasury interest rates are mainly due to the sharp increase in the Fed's policy interest rate end point in September. In addition, recent PMI data shows that economic resilience remains, which once again pushed up the Fed's expectation of a rate hike. 9 interest rate agenda meeting of the Federal Reserve strong hawks raised the policy interest rate end to 4.6%. Fed officials then reiterated the Fed's determination to raise interest rates and the rationality of the current tightening path. Therefore, the market continues to digest new interest rate hikes, resulting in US Treasury bond interest rates rising along with expectations of interest rate hikes. At the same time, the recently disclosed Markit PMI in September all rose beyond expectations, especially the service industry PMI, which reflects that there is still a certain amount of room for the Fed's interest rate hike, and market interest rate hike expectations have further heated up. On September 28, as the UK announced that it would buy long-term Treasury bonds to calm the turmoil in the financial market, the U.S. bond interest rates fell on the same day, but it is expected that the impact may be relatively short. The Federal Reserve hawks expect that they will still support the upward trend of U.S. bond interest rates.
expects a sharp decline in inflation to wait for at least next year, so the Fed may stop hikes in the first quarter of next year, and the end of the hike may be around 5%. The current inflationary pressure caused by the supply side has been alleviated, but demand is still resilient, and wage growth will still run at a high level in the short term, resulting in a high viscosity of inflation between core commodities and core services. If geopolitical conflicts and energy crisis do not intensify further, the U.S. inflation level is expected to be at 6.5%-7.5% by the end of this year. It is expected that driven by supply and demand in the first half of next year, coupled with the base effect, U.S. inflation may decline sharply, or fall to around 6% in the first quarter of next year. The US economy and labor market will face higher risk of deterioration by the end of this year and the first quarter of next year. Therefore, if there is no new impact on the supply side, the probability of the Federal Reserve stopping interest rate hikes in the first quarter of next year is high. From the perspective of Taylor's rules and real interest rates, although there is a possibility that the Federal Reserve's interest rate hike guidance will be raised again this year, the end level of interest rate hikes is around 5% which is a desirable tightening level.
For the specific rhythm of interest rate hikes, it mainly focuses on the midterm elections and inflation trends. The probability of raising interest rates of 75bps and 50bps in the remaining two meetings this year is relatively high. Although political pressure may ease after the November midterm elections, the overall rate of inflation decline this year is slow. It is expected that the decline in inflation before the November interest rate meeting will drive the probability of the Federal Reserve raising interest rates by 75bps. At the same time, there is a risk of supply shocks in the fourth quarter leading to a new rise in commodity prices, and it is not ruled out that the possibility of exceeding expectations in the two interest rate meetings this year's interest rate hikes are significantly higher than expected.
The high point of the US Treasury bond interest rate is often consistent with the actual high point of the policy interest rate. The high point of the US Treasury bond interest rate may appear at the end of this year or the beginning of next year. On the eve of the suspension of interest rate hikes, the US Treasury bond interest rate is expected to rise in a trend. After the Federal Reserve once again used the federal funds rate as the target of in 1988, during each round of interest rate hikes, the U.S. Treasury bond interest rates often rise to a level near the high point of the policy interest rate, and the high point of the U.S. Treasury bond interest rate often appears 1-3 months earlier than the high point of the policy interest rate. Therefore, it is expected that this round of interest rate hikes will be trending upward on the eve of the hikes (1-3 months before the actual interest rate hikes are stopped).
Federal tightening has caused pressure on the RMB exchange rate
The current RMB trend has deviated from actual supply and demand, and the depreciation pressure is mainly due to the continued strengthening of the US dollar index. Recently, the surplus of foreign exchange settlement and sales of banks on behalf of customers has continued to expand, but the RMB has weakened recently, mainly due to the continued strengthening of the US dollar index. As the Federal Reserve hawks exceeded expectations, the policy interest rate path was significantly raised, and the European energy crisis further caused market concerns after Russia's unlimited deadline for supply cuts and natural gas pipelines leaked. In addition, the UK recently announced the issuance of bonds and tax cuts, the UK faces a high inflation crisis and government debt pressure that may drag down the economy's recession risk. The US dollar continues to strengthen, approaching 115 (as of September 28, 2022), and there is a possibility of breaking through the 2001 resistance level 120 in the future.Against the backdrop of a strong dollar, most mainstream non-US currencies have experienced depreciation to varying degrees this year. Since late August, the RMB exchange rate has begun to be linked to the trend of the US dollar index again. This round of RMB depreciation is more due to the passive depreciation pressure under the background of a strong dollar, which is somewhat different from the actual demand of the RMB.
The further differentiation of the economic cycle between China and the United States has led to the separation of China-US monetary policies, the interest rate spread between China and the United States has been inverted to the historical extreme level, and the RMB is under pressure. The impact of the epidemic has expanded the differentiation level of the economic cycle between China and the United States. The current US economy is getting closer and closer to the recession, while China's economy is in a weak recovery stage after the epidemic disturbance in some areas. In terms of monetary policy, the Federal Reserve continues to be hawkish, and the September interest rate meeting significantly raised the policy interest rate end point. The domestic central bank cut interest rates beyond expectations in August, which once again exacerbated the differentiation of monetary policies between China and the United States. Although the actual pressure of capital outflows brought by interest rate cuts may be relatively limited, in the context of the global interest rate hike, the differentiation of monetary policies between China and the United States still puts certain pressure on the RMB.
From the perspective of the balance of payments, the current account in my country's balance of payments may narrow in the future, but it can still maintain a certain scale; the outflow pressure of non-reserve financial accounts may continue, but the outflow pressure may also slow down compared with the previous period. December 2015-March 2016 and April 2018-July 2019 are two typical periods of "differences between China and the United States in monetary policy, sharp convergence of interest rate spreads between China and the United States, and depreciation of the RMB." Observe the balance of payments at that time : (1) From 2015 to 2016, the reason for the depreciation of the RMB was that there was a full-scope capital outflow in financial accounts of non-reserve nature; (2) From 2018 to 2019, the main reason for the depreciation of the RMB was that my country's current account narrowed significantly under the Sino-US trade friction. In the first half of this year, my country's balance of payments has changed from last year's "double surplus" pattern to "one forward and one reverse", that is, the current account surplus is still stable, but non-reserve financial accounts have changed from surplus to deficit, among which the pressure of capital outflow is mainly concentrated on the "security investment" account, that is, the outflow of the stock market and bond market. Looking back, the expected decline in exports in August also confirms that the overall drop in foreign demand has begun to show that the impact of my country's exports has begun to appear, and the subsequent trade surplus may narrow compared with the high in the first half of the year, but due to weak imports, the trade surplus may still be maintained at a certain level. At the same time, with the opening of my country's stock and bond market, the outflow of stock and bond funds in current securities accounts has become the main pressure for the outflow of current financial accounts. Judging from high-frequency data, the scale of foreign capital reduction in RMB bond assets in July and August has narrowed; observing the inflow of northbound funds in the stock market, northbound funds have maintained a net inflow in June, and northbound funds have generally shown a slight outflow since July. Therefore, it is expected that my country's non-reserve financial accounts may still be in a outflow trend, but the pressure of outflow has also slowed down compared with the previous period.
What is the impact of the jump in US bond interest rates on the domestic market?
The space for monetary policy is limited, and it needs to rely on fiscal and credit ease policies to make efforts. Traditional loose monetary policies such as interest rate cuts and reserve requirement ratio cuts have a relatively direct impact on the financial market, but the chain transmitted to the real economy is relatively long, which can easily lead to loose liquidity and downward interest rates. In the current environment where the US dollar index has risen sharply and the interest rate gap between China and the United States is deeply inverted, it is not conducive to controlling capital flows and stabilizing exchange rates. In contrast, fiscal policy and policy-based financial policies have better effect on reaching entities, which will help promote the recovery of economic fundamentals and thus support the RMB exchange rate.
The differentiation of China-US monetary policy has led to an intensification of interest rate spread between China and the United States, and the domestic bond market may fluctuate and run weakly. The Federal Reserve has continued to raise interest rates at a fast pace since March this year, resulting in a rapid increase in short-term interest rates from near zero to around 4%, while domestic monetary policy maintains a steady tone and maintains a reasonable level of liquidity. The continued differentiation of monetary policies between China and the United States has led to a rapid narrowing of the interest rate gap between China and the United States and the United States. The current one-year interest rate gap between China and the United States has been inverted to around 230bps, gradually approaching the historical low level in 2006.As the Fed's expectations of tightening may further heat up in the future, the upward trend of US Treasury bond interest rates may continue, so there is a risk of further deepening the inversion of interest rates between China and the United States, which will pose a certain inhibition on the decline of domestic bond market interest rates. In the future, the domestic bond market may fluctuate and run weakly in this context.
Fed tightening drives rising U.S. Treasury interest rates have a certain negative impact on the valuation of growth stocks. Looking back at the historical cycle, growth stocks often weaken during the Fed's interest rate hike. During this round of Fed's interest rate hike expectations, the US Treasury bond interest rate began to enter an upward channel. Since then, the relative performance of growth stocks has declined with the rise of US Treasury bond interest rates. Considering that the Federal Reserve may stop hikes in the first quarter of next year, domestic growth stocks may still be under pressure in the fourth quarter of this year.
Conclusion
The Fed's tightening pace will slow down this year and need to wait at least until after the November midterm election. Since inflation levels are expected to fall slowly this year, the probability of the Fed raising interest rates by 125bps is high this year, and the Fed's end-point interest rate level may be around 5%. In the future, US Treasury bond interest rates may rise trend, and their highs may appear on the eve of interest rate hikes. In the future, the US dollar index may break through 120. Against this background, the monetary policies of China and the United States continue to differentiate, the interest rate spread between China and the United States continues to deepen, the RMB exchange rate is under pressure, and the domestic monetary policy space is limited. It is expected that the domestic bond market will fluctuate and run weakly in the short term.
risk factors
Russia-Ukraine conflict or other geopolitical conflicts intensify; the occurrence of unexpected events such as hurricanes, tsunamis, earthquakes and other accidents have had an impact on global commodity prices; the Federal Reserve's monetary policy exceeded expectations.
This article is from the securities company research report selected
