In the early morning of September 22, the United States FOMC meeting was scheduled as scheduled. interest rate hikes 275 basis points. US dollar index rose more than 1% to 111.83, a record high since 2002. US stock three major stock indexes closed down collectively, which led to the offshore US dollar against RMB exchange rate breaking through 7.1 during the session on Thursday.
On September 15, offshore RMB fell below 7.0 against the US dollar, and onshore RMB also "breaks 7" against the US dollar on September 16. This is the first time since July 2020 that the exchange rate of the people against the US dollar has exceeded 7.
In one week, the RMB continued to depreciate. Market insiders said that the US dollar is expected to continue to be strong in the short term, which puts certain pressure on non-US currencies. The pressure on RMB exchange rate depreciation remains unabated. However, due to the greater depreciation of other non-US currencies, the RMB remains strong against a basket of currencies, and the risk of a sharp depreciation is not high. We need to pay close attention to the trends of domestic central bank in the near future.
In this week's resolution statement, Feder reiterated that continuing to raise interest rates is appropriate, paying close attention to inflation risks, and continuing to strongly promise to lower inflation rate to the Fed's target level.
What did Powell say? Tolerate economic slowdown, reiterate insisting on hikes and not starting interest rate cuts too early
At the press conference, Federal Reserve Chairman Powell mentioned that the economic slowdown is the "unfortunate price" of inflation reduction, and the impact of tightening on prices is lagging. Similar to the speech at the annual meeting of the global central bank in August, Powell said that "reducing inflation takes time and it requires strong use of policy tools to achieve a balance of supply and demand."
During this process, Powell believed that "needs economic growth to be lower than the trend for a period of time", which may cause "soften employment market", but they are all "unfortunate costs" to reduce inflation, otherwise "greater pain" will be ushered in, suggesting that a "hard landing" may be inevitable. Areas of interest rate sensitivity such as real estate have already felt the impact of interest rate hikes, but it may take some time to see the impact of tightening on prices
Regarding the extent of interest rate hikes in the two meetings in November and December, although Powell still stated that he would not give clear guidance on interest rate hikes as in the past. The specific extent depends on data performance, he mentioned that "the interest rate will be raised by 100-125bp this year." Although Powell said that "as policy stance further tightens, the Fed may slow down interest rate hikes at some point in the future", it also reiterated historical experience that "the rate hike must be maintained until the goal is completed."
The current economy of the United States is not bad. Compared with the last meeting statement, the Fed believes that the recent production and consumption indicators are growing moderately (the indicators are weak in July meeting); and stressed that employment growth has been strong in recent months and the unemployment rate has remained low. Overall, we remain optimistic about the economy and employment. In addition, Powell pointed out that the US economy is strong and there is still a lot of savings to support economic growth, and economic growth may be stronger than the Fed expects. This may also indicate that the Fed still has expectations for a soft landing in the future.
As of August, the U.S. unemployment rate remained at a historical low of 3.7%; as of September 10, the U.S. weekly economic index fell from its high, but was still around 1.9%, better than the pre-epidemic level (before March 2020). Overall, the current economy of the United States is not bad. However, economists are increasingly worried that over time, the Fed's sharp interest rate hike will lead to sharp layoffs in US companies, rising unemployment rates, and a full-scale economic recession at the end of this year or early next year. Associated Press also commented in the report that aggressive rate hikes have increased the risk of the United States falling into a recession.
Considering factors such as high housing prices, tight labor markets, and geopolitical risks have not been eliminated, it is expected that US inflation will still be difficult to fall. As of August, the median inflation that we followed and observed, and the 16% cut-off average inflation continued to hit a new high since the data; the US core elastic CPI rebounded year-on-year, and the core sticky CPI has continued to rise to a new high since 1991 year-on-year.
The situation of high inflation, strong US dollar, US bond interest rates rising, and weak US stocks may be difficult to alleviate this year. In addition, the Federal Reserve's monetary policy will affect global liquidity, emerging currencies will still face depreciation pressure, and monetary policy space is limited.
expectation of rate hike
The most important thing is that the Fed continues to raise its forecast for the end point of rate hike.
The Federal Reserve raised its interest rate center this year from 3.4% to 4.4%, and next year's interest rate center from 3.8% to 4.6%, and will continue to maintain a rate hike forecast next year. This means that in the next two interest rate meetings this year, the Federal Reserve may have to raise interest rates for another 125BP, and may raise interest rates for a total of 17 times throughout the year, and the market's expectation of interest rate hikes has also been raised.
The Fed's dot chart also shows that 19 members expect to raise interest rates at least 15 times to 3.75% (25BP each) in 2022. Among them, more than 90% of members believe that they will raise interest rates 16 times, and more than 50% of members believe that they will raise interest rates 17 times to 4.25%.
Based on the 17 interest rate hikes in 2022, more than 60% of the members believe that they will raise interest rates by 1-2 times in 2023, and only one member believes that they will cut interest rates. On the basis of raising interest rates to 4.5% in 2023, nearly 90% of members believe that interest rates will be cut in 2024; nearly 80% of members believe that interest rates will be cut more than once.
According to CME's "Federal Observation", as of September 21, the market expects that the probability of raising interest rates by 75BP in November is more than 70%; the probability of raising interest rates by 50BP in December is nearly 70%.
Federal interest rate hike pushes the dollar up sharply. Matt Weller, senior analyst at Jiasheng Group, believes that for the rest of the week, market traders will digest the impact of the Federal Reserve meeting, and the recent trend of U.S. Treasury yields and the dollar rise, and stock markets and risky assets declines may continue.
Guotai Junan Macro chief analyst Dong Qi predicts that further policy intervention will be made in the subsequent depreciation of the RMB exchange rate to avoid depreciation too quickly and excessively large.
The expectation of an economic recession strengthens again: strong US dollar, high interest rates, weak US stocks
The Fed continues to lower its economic expectations for the future. From the perspective of the Federal Reserve, the US economy will no longer grow by more than 2% for many years in the future, and the cost of fighting inflation is huge. At the same time, the Federal Reserve raised its future unemployment rate expectations, and it expects that the unemployment rate will be higher than the 4% " natural unemployment rate " in the next few years. Regarding inflation expectations, the Fed believes that it will not return to the 2% inflation level until 2025.
The Federal Reserve has continuously lowered economic expectations and raised unemployment and inflation expectations, which itself reflects that the difficulty of the "soft landing" of the economy is getting greater and greater.
For major assets, the US dollar will remain strong in the short term, while the bear market of US stocks will be difficult to reverse for a long time.
The strength of the US dollar is related to Fed policies on the one hand, and is affected by economic fundamentals on the other hand.
USD will remain relatively strong in the short term, and there may be another phased surge this year, bringing greater risks to the global capital market. But the foundation for the long-term strong dollar is not solid and is expected to weaken next year as the U.S. economic recession.
US stocks are facing long-term adjustment pressure. Whether it is "stagflation" or "recession", it is a pressure for US stocks to be under sufficient pricing, and the bear market of US stocks is hard to say.
A shares are suppressed, but it will not be too long
A shares have a certain degree of independence, but as the pressure on the depreciation of the RMB continues to accumulate and the fluctuations in overseas markets may intensify, its pressure on the domestic market should not be ignored. We believe that the main risks in the current stock market tend to be peripheral risks. The Federal Reserve has aggressive interest rate hikes, increasing expectations of recession in Europe and the United States, and uncertainty about the trend of Sino-US relations will be difficult to eliminate this year, and it may still take some time for the full recovery of stock market sentiment.
In the context of global high inflation and energy crisis , since the US economy's dependence on energy is much lower than that of most developed economies such as Europe and Japan, its economic development is more resilient and also supports the US dollar from a fundamental perspective, and safe-haven funds have returned to the United States one after another. In this sense, Europe has become the main victim of the Russian-Ukrainian conflict and has also become the target of harvest by the United States in this round of crisis.
As for China, benefiting from the strong industrial chain foundation and strong manufacturing capabilities, as well as the relatively stable domestic energy prices, my country's manufacturing industry's export supply capacity and export prices have relatively advantages, and its export share has expanded against the trend, which has to a certain extent seized the order gap caused by the decline in European manufacturing competitiveness.In this sense, our country is also one of the beneficiaries of this round of Russia-Ukraine conflict.
's export competitiveness has provided support for the RMB exchange rate, which is also an important reason why the RMB can remain strong against currencies such as the euro and the Japanese yen in addition to depreciating against the US dollar.
Considering the arrival of peak energy demand in winter, it is difficult for energy problems to substantively ease in the short term. The US economy's safe-haven attributes are still strong, accelerating blood-sucking from neighboring countries, strong economic resilience, and the Fed's currency has greater room for raising interest rates, which will also have a stronger support effect on the US dollar exchange rate. After the energy crisis eases, this support effect disappears, which will also drive the dollar to weaken and the RMB to strengthen relatively.
This article is from Tonghuashun Finance
