Economic Observer Reporter Ouyang Xiaohong
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1 winter has not arrived, and the cold is coming. In just a few days, the unexpected hawkish " bet against " caused the stormy global financial market to undergo a drastic change.
During the trading session on September 23, 2022, the USD index soared to 113! The euro fell to 0.9692 against the US dollar, while the exchange rates of offshore RMB (CNH) and onshore RMB (CHY) against the US dollar both fell below 7.12, with a short-term decline of more than 10%; the yield on the US 10-year Treasury bond and the yield on the 2-year Treasury bond rose to 3.829% and 4.272% respectively! Many economies even "killed" stocks, bonds and foreign exchange.
On September 21, Eastern Time, the Federal Reserve raised interest rates as scheduled at 75 basis points to 3.0%-3.25%; it raised interest rates for the third consecutive time by 75 basis points, with a cumulative interest rate hike of 300 basis points this year, setting the highest intensive interest rate hike since 1981. Although this is expected, the global financial markets are still bleak. No one expected that the Federal Reserve's hawkish stance exceeded expectations and would set terminal interest rates at such a high (4.6%) level.
It's like the Fed's war to defend its credibility. Ping An Securities chief economist team believes that in the context of "mixed and mixed" inflation situation and uncertain inflation interpretation, the Federal Reserve firmly chooses to defend its credibility, which is bound to ensure that inflation falls, even if the possibility of a "soft landing" is sacrificed. For the market, the short-term market risks are relatively high, because the market is still in the stage of digesting the Fed's new policy ideas and the US economic recession has not yet been fulfilled. There is still room for adjustment in the pricing of US bonds and US stocks. The 75-bp rate hike pace is in line with the CME (Chicago Mercantile Exchange) interest rate futures market expectations since the Jackson Hall meeting in late August. In terms of balance sheet reduction, the Federal Reserve will accelerate balance sheet reduction starting from September according to its original plan. The Fed's statement in September was almost unchanged from July.
The Fed's dot chart shows that the Fed is not expected to cut interest rates by 2024; it suggests hawks. Market institutions evaluated that the final interest rate signal sent by the Federal Reserve was 4.6%; and predicted that another 100 basis points may be raised this year, or even 125 basis points, that is, 75 and 50 basis points rate hikes in November and December respectively.
Shangbo Strategic Income Fund Co-portfolio Christian, co-portfolio manager of ThornburgStrategicIncomeFund, believes that the Fed is still uneasy when interpreting the dot map , because it cannot reveal the consequences of the war of losing the inflation, nor can it expect the damage to the economy; but the authorities are still trying to find subtle changes in it to use as potential evidence to predict expectations for inflation and the economy.
Powell vowed to lower U.S. inflation to 2% on the same day, and said the Fed has many policy tools to restore price stability. Although the growth rate of (US economy) slows down, the labor market is quite tight. The job market continues to lack a balance between supply and demand.
US dollar index rose to 111.57 on the day, and non-US currencies collectively depreciated, continuing to hit a low; the euro fell to 0.9837 against the US dollar, with a low of 0.9815; the offshore RMB (CNH) was 7.0745, with a low of 7.0755.
It's more like a bet full of uncertainty - the Fed is trying to lead the market!
Jim Caron, portfolio manager and chief fixed income strategist at Morgan Stanley Investment Management, believes that the Fed rate hike 675 basis points as expected, as surprisingly, the policy rate at the end of the year will rise to 4.4% from the previous 3.4%, an increase of 100 basis points. "Another unexpected thing is that the Federal Reserve's forecast for its terminal policy interest rate has been raised from the previous 3.8% to 4.5%-4.75%. JimCaron said that the path to rate hikes echoes the 75 basis points rate hikes in November, the 50 basis points rate hikes in December, and the 25 basis points rate hikes in January. Despite aggressive pace of tightening policies, the Fed expects the labor market to remain strong, with unemployment rising to just 4.4%, while inflation drops to its target level of 2%-2.5%. "While the 'rate hike pre-emption' may solve inflation risks in the short term, it also increases the risk of a recession in the long run, and will also put pressure on asset valuations and have an impact on tightening financial conditions."
And the Fed's aggressive interest rate hike has pushed borrowing costs to its highest level since 2008.
rate hike "end point" may exceed expectations. ICBC International chief economist Cheng Shi. Judging from Powell's speech and the Fed's latest interest rate hike expectation , it is expected that the Fed's long-term terminal interest rate will exceed 4.5%.
Christian commented that the Fed is willing to continue hikes by 2023, even if it means slowing growth and rising unemployment. Additionally, Powell talks about attempts to control the currency situation, although this may cause unnecessary volatility to the market. The Fed is also trying to use the market to influence the real economy.
In the view of Zhang Zhiwei, president and chief economist of Baoyin Capital Management, the rate hike this time is in line with market expectations, but the members of the meeting's forecast of the policy interest rate in the next two years is more hawkish than market expectations, which aggravates the market's concerns about a hard landing in the US economy, and US stocks fell. The market expects that the U.S. Treasury bond interest rates may rise further and stay at high levels for a long time, so the US dollar exchange rate is easy to rise but difficult to fall. For emerging markets, strong dollar has adverse effects, especially high-debt countries, which may face the risk of intensified capital outflows. On the day of the interest rate meeting of
9 FOMC ( Federal Open Market Committee ) , the sudden rise and fall of US stocks indicated extremely unstable market sentiment, including the VIX panic index, which also fluctuated.
Global inflation remains high, and central banks in various countries continue to raise interest rates. For example, on September 20, aiming to deal with inflation, the Swedish central bank raised interest rates by 100 basis points to 1.75%.
Two days later, the Swiss National Bank raised interest rates by 75 basis points, raising the policy interest rate from -0.25% to 0.50%, ending the negative interest rate policy that lasted for eight years, and the interest rate level reached a new high since December 2008. At this point, the major central banks in Europe have bid farewell to the negative interest rate , marking the end of the era of negative interest rates.
In addition, because it is the mourning period of Queen Elizabeth II of , the Bank of England postponed interest rate meeting was postponed to the near future; on September 22, the Bank of England raised interest rates by 50 basis points as scheduled, raising the benchmark interest rate from 1.75% to 2.25%, and has raised interest rates for the seventh consecutive time.
Many experts began to worry that aggressive interest rate hikes from the Federal Reserve, including central banks in various countries, may increase the risk of economic recession and market collapse. Is this true for
? "Active intervention in the early stage will often reduce the possibility of a hard landing in the macro economy." Claudio Borio, chief economist at the Bank for International Settlements, urged central banks in various countries to continue to raise interest rates strongly. On September 19, the Bank for International Settlements "cleared" interest rate hikes in the United States and other countries, even if interest rate hikes could lead to a recession.
Among them, from the perspective of inflation, under the soaring energy prices, the Producer Price Index (PPI) in August released by the Federal Statistics Office on September 20 rose 7.9% month-on-month, a year-on-year increase of 45.8%; hit a record high.
A senior interest rate expert bluntly stated that the surge in Germany's PPI shows that its cost-driven inflation is out of control. As the world's mid-to-high-end manufacturing center, PPI soars like this, is really extraordinary. The driving force behind it is of course the superposition of the epidemic and the Russian-Ukrainian war.
He believes that rising inflation rates drive up interest rates, and the result is that government finances in Western countries with excessive government debt ratios are at risk of collapse. Although the US government's finances cannot withstand it, since the Federal Reserve prints the world's "hard currency", it is relatively difficult for the US government to deal with the fiscal crisis. "A sharp interest rate hike is wrong. Rate hikes can only be used to curb demand-driven inflation. The central bank is powerless to do anything about cost-driven inflation. That is, the key to current macroeconomic policies is not the central bank. Inflation is to make most people poor, and continuous interest rate hikes may lead to the collapse of the entire economy." The interest rate expert said.
. Powell seemed to be confident in fighting inflation. At the press conference, he admitted that there was no painless approach to getting rid of inflation (the CPI decline in August was lower than expected). But he believes that inflation expectations seem to be well controlled; and said that the rate of interest rate hikes depends on future data and at some point, the rate hikes will slow down.
Powell also said that historical records warn us not to cut interest rates too early, and it may reach a certain interest rate level and remain unchanged, but there is no such thing as yet.Before cutting rates, we must be very confident that inflation will fall back to 2%, and no one knows whether this process will lead to an economic recession and the extent of the recession.
CICC research report predicts that the Fed's dot chart shows that interest rates will rise further and will remain high for a long time. The rate hike is expected to bring more pain, the US economy may enter a recession in early 2023, and the unemployment rate is likely to rise. In the medium term, high U.S. government debt has imposed constraints on interest rate hikes, which may ultimately force the Fed to tolerate inflation. Although Powell tried to avoid creating a "recession panic", the market may still price in the direction of recession. "We believe that this recession is more likely to be a 'stagflation' recession, which means that the US 'stock and bond double killing' may not end, and we are still a long way from the 'market bottom'," he said. How will the global interest rate trend reprice the international financial markets that suddenly change dramatically? In particular, the 10-year U.S. Treasury bond yield, which can be called the anchor of asset pricing, was reported at 3.534% on September 21. Its rise may cause risky assets to face pressure from valuation to fall . Oriental Securities Chief economist Shao Yu pointed out that after the epidemic, inflation rebounded, and the 10-year U.S. bond bond interest rate once exceeded 3.5% in mid-June, and after a brief decline, it is hitting its previous high. For the bloated government debt leveraged and the huge Fed balance sheet, the interest burden and capital losses (books) corresponding to higher interest rates may be unbearable. This is the argument that researchers argue that interest rates are difficult to reach the level of the Volcker era (the three-layer meaning of "Volcker Shock").
US stocks are in turmoil, and A shares are also uneasy; on the same day, all three major indexes continued to close, with the Shanghai Composite Index, Shenzhen Component Index and ChiNext Index closing at 3117.18 (-0.17%), 11208.51 (-0.67%), and 2331.52 (-1.49%) respectively.
On the previous trading day, the MLF (medium-term lending facility) interest rate remained unchanged, while most state-owned banks and joint-stock banks lowered deposit listing rates and actual interest rates, the central bank authorized the National Interbank Offering Center to announce the September loan market quotation rate (LPR) quotation for September was unchanged.
market believes that since the MLF interest rate remains unchanged and the LPR quotation last month has been lowered, there is no need for continuous adjustments.
It is worth mentioning that the "Deepening the Reform of Market-oriented Interest Rate" published by the official website of the People's Bank of China on the same day pointed out that China has formed a central bank's policy interest rate system with open market operation interest rates as short-term policy interest rates and medium-term lending facilities as medium-term policy interest rates, and the interest rate corridor mechanism is effectively operated. The article
stated that with the gradual improvement of the market-oriented mechanism of deposit interest rates, in mid-September 2022, state-owned commercial banks took the initiative to lower the deposit interest rate, driving other banks to follow the adjustment. Many of them also adjusted the deposit listing interest rate for the first time since October 2015. This is an active behavior of banks to strengthen asset-liability management and stabilize liability costs, indicating that the market-oriented reform of deposit interest rates has taken an important step forward. This explains the "rate cut" that state-owned banks exceeded expectations not long ago; it seems that it also started from the day of the "rate cut", and the RMB exchange rate accelerated downward under the strong US dollar cycle.
In fact, including the central bank, it also admitted that "interest rate is the price of funds, and is an important macroeconomic variable , which determines the flow of funds and has important guiding significance for macroeconomic balance and resource allocation." In this way, exchange rate still follows the interest rate.
Since the LPR reform, corporate loan interest rates have dropped from 5.32% in July 2019 to 4.05% in August 2022, the lowest level since statistics were recorded.
The People's Bank of China explained that my country's monetary policy has always adhered to the principle of putting ourselves first, using static to prevent the market interest rate level from steadily falling, with better results. At present, the interest rate of fixed deposit in my country is about 1% to 2%, and the interest rate of loan is about 4% to 5%. The real interest rate is slightly lower than the potential real economic growth rate and is at a relatively reasonable level. It is the best strategy to leave room.
The People's Bank of China said, "At present, my country has formed a central bank's policy interest rate system with the open market operation interest rate as the short-term policy interest rate and the medium-term lending facility interest rate as the medium-term policy interest rate, and the interest rate corridor mechanism is effectively operated."
In the view of Fidelity International, when inflationary pressure forces most parts of the world to adopt interest rate hike strategies, China maintains a broader policy space. The central bank of China conducted its third rate cut this year in late August, exceeding market expectations, which was mainly caused by the slowdown in the real estate market, weak consumption and the epidemic. At the same time, exports caused by weakening overseas demand.
The recently released by the Bureau of Statistics China's August economic data in August was better than expected, and it seems to show marginal improvement; combined with the lower base last year, consumption rebounded sharply.
Chief economist of Yangtze Securities Wugo believes that some economic data are now on The driving force on the ground depends more on exogenous stimulation rather than endogenous momentum.
In Wu Ge's view, whether the economic data is sustainable or whether the pulse data is reasonable depends on the judgment of endogenousness. Overall, the infrastructure data is relatively strong, while the endogenous data is relatively weak.
It is worth noting that Wu Ge gave an example that loan interest rates have fallen for nearly 13 months, but the credit growth rate, especially the medium- and long-term credit growth rate, has continued to decline for 13 months. The decline in interest rates has not increased loans, which is difficult to see in the past. "What everyone is concerned about is not only the simple capital cost issue, but also affected by many factors other than economic factors. Interest rates cannot stimulate the investment or consumption motivation. "He said.
At the same time, China's current monetary policy is contrary to the global interest rate hike dominated by the United States. Fidelity International said that the resulting yield difference has had a huge impact on international currency market and global fixed income investors.
Fidelity International Fund manager Wang Taosha explained that revitalizing economic growth is the current primary goal. Compared with the high inflation environment in Europe and the United States, China has the advantage of inflation below 3%, so it can be the first to recover. Renewed economic growth. In the second quarter of this year, the yield on the 10-year U.S. Treasury bond exceeded China's 10-year Treasury bond for the first time in more than a decade. So far, the spread between the two has exceeded 60 basis points. On the surface, this seems to reduce the attractiveness of China's onshore sovereign bond to global investors, but the actual situation is not the case, especially considering the inflation-adjusted real yields of related bonds and the more complex macroeconomic environment.
's continued soaring energy prices and rising manpower Costs, as well as large-scale economic stimulus measures under the epidemic, have overheated the US economy, while the Russian-Ukrainian conflict has pushed European inflation levels to record highs. The inflation rates in the United States and the euro zone in July were as high as 8.5% and 8.9% respectively, while the Chinese consumer price index (CPI) was only 2.7% in the same month. Cheng Hao of the Fidelity Fixed Income Team said that China is in a cycle of interest rate cuts, coupled with the economic outlook, may cause the RMB to weaken further against the US dollar. Even so, given China's control measures on cross-border capital flows, and The size of foreign exchange reserves of up to $3 trillion is unlikely to cause major concerns for the People's Bank of China.
Inadvertently, the yield on the 10-year Treasury bonds and the 2-year Treasury bonds on September 23 have risen to 3.733% and 4.177% respectively.
Regarding the fixed income strategy when yields rise, Jim Caron said that as interest rates rise, the risk of the economy slowing down in 2023 will also follow, and long-term bond exposure may benefit, "We do not rule out this possibility." "
JimCaron admitted that asset allocation has adopted a barbell strategy. He said, "On the one hand, we recommend holding short-term and floating interest rate assets to manage the risk of rising interest rates; on the other hand, it is recommended to use a more traditional core fixed income and total income strategy with longer term expiration . ”
At the same time, the US dollar index was still rising sharply that day, with an intraday report of 113.02, with a high of 113.22; non-US currencies collectively depreciated, continuing to hit a new low; the euro against the US dollar was 0.9692, falling to 0.9668, continuing to hit a new low in 20 years; CNH and CNY were 7.1389 and 7.1298 respectively; it seems to have entered the track of the largest annual decline since 1994 - if it is, if the overall situation of China's economy is affected by the unstable currency value, the People's Bank of China will not sit idly by. There is a view that 7.2 may be the "bottom".At that time, facing the US dollar holding the "Volk Steel Knife", the management may also use its "trump card" and use relevant tools to stabilize the exchange rate again.
Zhang Zhiwei explained that for China, the central bank's interest rate cut space during the Fed's interest rate hike cycle is limited because it is necessary to avoid further widening the interest rate gap between the two countries and excessive fluctuations in the bilateral exchange rate of the RMB. However, we must also see that the depreciation of the RMB against the US dollar is mainly due to the appreciation of the US dollar compared with other currencies.
"The exchange rate of RMB against non-USD currencies has been relatively stable this year, with a large trade surplus, a small scale of foreign debt, and capital outflows are not the main problem facing the Chinese economy," he said.
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