Introduction: Wednesday, 19 U.S. Eastern Time, the Federal Reserve announced after its monetary policy meeting that it decided to raise interest rates by 25 basis points, raising the target range of federal funds interest rates to 2.25% - 2.5%.
This is the fourth interest rate hike this year, the ninth in three years since the start of the interest rate hike cycle, and the first interest rate hike since 1994 in the face of a fall in the stock market. Meanwhile, the Federal Reserve hinted that it would raise interest rates twice in 2019.
The Federal Reserve issued an interest rate resolution at 3 a.m. Beijing time on Thursday, announcing a 25-point interest rate hike in the 2.25%-2.5% range, close to the bottom of the 2.5%-3.5% neutral rate estimated by policymakers, the fourth rate hike by the Federal Reserve in a year.
The lattice chart released after the meeting shows that the federal funds rate is expected to be 2.9% at the end of 2019, suggesting two interest rate hikes in 2019, while the latter in September implies three interest rate hikes in 2019. The policy statement still maintains that the risks facing the U.S. economic outlook are broadly balanced, with a monthly balance sheet reduction of $50 billion unchanged. Strong growth in economic activity, strong growth in expenditure and moderate investment. However, the rhetoric of further and progressive interest rate increase is reasonable has been retained.
It is worth noting that the Feds interest rate increase is the first time since 1994 to tighten monetary policy in the face of a falling stock market. At present, the S&P 500 index has fallen over the past three, six and 12 months, compared with only two of the 76 interest rate increases since 1980.
Federal Reserve Chairman Powerto/Xinhua News Agency
U.S. Gold stocks fell and U.S. dollar bond yields rose
Prior to the announcement of the interest rate hike decision, the three major U.S. stock indices rose rapidly after they were basically flat, with all three indices rising by more than 1% in the first half of the afternoon. The panic index VIX fell more than 9% to 23.26.
After the announcement of the interest rate hike decision, the three major U.S. stock indexes have narrowed their gains. The Dow index has risen by less than 100 points, and the Nasdaq index has turned down. Since this quarter, the three major stock indexes have fallen by more than 9%, and since December they have fallen by more than 6%.
Prior to the announcement of the interest rate hike decision, the dollar index fell by more than 0.5% on expectations of pigeon interest rate hikes, reaching a low of 96.55% since at least December 10, and the dollar hit a seven-week low against both the euro and the yen.
After the announcement of the rate hike, the dollar index rose short-term, approaching the 97-level mark.
Prior to the announcement of the interest rate hike decision, spot gold rose to 0.7% or $8.50, peaking at $1258 per ounce, and then to $1252. COMEX gold futures rose 0.5% to $1,260 an ounce in February, breaking the 200-day average, and closed up 0.2% on Wednesday at $1,256.40 an ounce, the closing high since July this year.
Before the announcement of the interest rate hike decision, the yield of the 10-year benchmark U.S. Treasury bond changed considerably. By midday, it had fallen by nearly one basis point to 2.816%, and on Wednesday, it had fallen below 2.80%, the lowest level since the end of May this year. Half an hour before the announcement of the decision, the 10-year yield rose by 0.3 basis points to 2.826%. The yield of short-term and medium-term US Treasury bonds, such as two-year, three-year and five-year bonds, rose, while the 30-year yield remained low.
After the announcement of the interest rate increase, the yield on 10-year Treasury bonds rose by 3 basis points to 2.855%, while the yield on two-year Treasury bonds rose from 2.668% to 2.694%.
This interest rate increase is rare in 40 years?
Wells Fargo & Co. A recent survey showed that most retail investors in the United States said the Federal Reserve should stop raising interest rates in December.
Jeffrey Gonlak, chief investment officer of DubleLine Capital, known as the new debt king, and Stanley Druckenmiller, a billionaire investor, have been opposing the Feds interest rate hike on the grounds of economic growth concerns.
In an interview with CNBC on Monday, Gondlak said the Fed should not raise interest rates this week on the grounds that the bond market is worrying and that the expectation of an economic slowdown in 2020 requires the Fed to reverse its policy.
The loudest objection came from President Trump, who was almost intolerable about the Feds interest rate hike. Trump has publicly criticized the Federal Reserve and Federal Reserve Chairman Powell many times this year. He even said that the Federal Reserve was crazy about monetary policy and that interest rates are too high.
On Tuesday, just before the Fed raised interest rates, Trump made his final statement on Twitter, saying:
I hope people at the Federal Reserve can read todays Wall Street Journal editorial before making another mistake. Dont let the market become less liquid than it is now. Stop abbreviating. Feel the market, dont just look at meaningless numbers. Good luck!
Despite Trumps threats, it is extremely rare for the Federal Reserve to raise interest rates when the stock market is performing so badly.
In fact, this is the first time since 1994 that the Federal Reserve has tightened its policy in a brutal market environment. At present, the S&P 500 index has fallen in the past three, six and 12 months, and only two of the 76 interest rate increases since 1980 have taken place against this background.
Although half of the S& P 500 is in a bear market and banks and transport stocks have fallen sharply in succession, some key economic data still support the Feds tightening policy.
Gluskin Sheff + Associates Inc., Canadas top wealth management company. David Rosenberg, chief economist and strategist, said: This puts the Federal Reserve in an interesting dilemma where financial markets tell them not to raise interest rates, but economic data show that further tightening is still appropriate.
Although the role of the market in the Feds policy considerations has been debated, the fact is that since 1980, interest rate increases have almost always occurred at a time when the stock market has risen. In the three, six and twelve months before the tightening, the S&P 500 index rose by an average of 4.1%, 6.9% and 11%. The exception occurred in the 1970s, when the Federal Reserve ignored market turmoil and raised interest rates to fight inflation at 7% a year.
Of course, the current economy does not look like that at all. Over the past six years, consumer prices have remained below 3% with a growth rate of 3.5%. It is difficult to identify gross domestic product (GDP) as overheating. It seems that the opposite worry is driving the stock market, and the recession has been mentioned more and more in professional reviews.
The Peoples Bank of China took the lead in launching big moves last night.
Focus on Three Core Signals
On the eve of the Feds final interest rate resolution of 2018, on the evening of December 19, the central bank decided to set up a medium-term lending facility (TMLF) to provide loans to small and micro enterprises and private enterprises. The funds can be used for three years. The operating interest rate is 15 basis points lower than the medium-term lending facility (MLF) interest rate, which is currently 3.15%.
At the same time, according to the situation that small and medium-sized financial institutions use re-loans and rediscounts to support small and micro enterprises and private enterprises, the central bank decided to increase the amount of re-loans and rediscounts by 100 billion yuan.
The TMLF has three main points of view:
First, it has a long period of time, and its operation period is one year, but it can be renewed twice when it expires, so that the actual use period can reach three years, which has strong sustainability.
Second, the price is low. The interest rate of directed medium-term lending facilities is 15 basis points lower than that of MLF, which is 3.15% at present, which is conducive to reducing the financing cost of private and small and micro enterprises.
Third, it covers a wide range of areas. Large commercial banks, joint-stock commercial banks and large city commercial banks that meet the requirements can apply for it. In addition to the convenience of directed medium-term lending, the Peoples Bank of China has also added 100 billion yuan in new loans and rediscounts to support small and medium-sized financial institutions to continue to expand loans to small and micro enterprises and private enterprises. It can be said that almost all financial institutions will receive financial support.
Analysts believe that the central banks move is equivalent to a targeted interest rate cut, which will help guide the medium and long-term interest rate downward, and that the central bank still needs to lower its benchmark in the future.
In fact, on the afternoon of the 19th, the Peoples Bank of China unexpectedly issued a non-routine notice saying that it has invested 400 billion yuan since this week. The Peoples Bank of China has further increased its liquidity investment. The market liquidity is reasonable and abundant, and the market interest rate is stable.
The central bank said:
Today (19) invested 60 billion yuan of liquidity through reverse repurchase operation in the open market. Since this week, it has invested 400 billion yuan, maintaining a reasonable and abundant market liquidity. The total liquidity of the banking system has risen, and the market interest rate has been stable. Todays weighted average interest rate of DR007 is 2.67%, which is 2 basis points lower than yesterday.
Why did the central bank choose to raise interest rates on the eve of the Feds announcement? The analysis of market experts can be summarized as the following key signals:
This is a choice that takes into account both internal and external equilibrium.
Liaison Securities Liqilin and Zhong Linnan:
This is a choice that takes into account both internal and external balance. At present, the short-end spread (DR001-Federal Fund Rate) between China and the United States fluctuates around 20-40BP, and there is a possibility of inversion after the Federal Reserve raises interest rates. In the context of the need for monetary easing to support internal credit and growth, continuing to lower the benchmark may make the short-end downward margin too large, which is not conducive to maintaining external equilibrium. TMLF? Is a one-year fund with a cost of 3.15%. It can bring long money to the banking system, ensure a reasonable and abundant liquidity, escort broad credit, and stably raise short-end interest rates to a certain extent, taking into account both internal and external equilibrium.
After the creation of TMLF, the central bank may use it as a substitute for the benchmark reduction to make directional easing. The expectation and possibility of the benchmark reduction will be reduced, and the yield curve will be further flattened. But for the market, the announcement by the central bank on the eve of the Feds interest rate hike that long-term liquidity will be released in the future still exceeds expectations and has a positive impact on the whole, and the resistance to the downward trend of long-term yield is relatively weakened due to lower TMLF interest rates.
The Central Bank of China and the United States is the top player in the game.
CITIC Fixed Income Research:
The Federal Reserve announced that it would continue to raise interest rates in December. Previously, there were also opinions that disagreed with our judgment that the US interest rate hike was not completed and that we should not relax ahead of time. In this regard, we believe that Chinas monetary policy must serve its own economy, not passively lose its independence. Secondly, the US market has fluctuated sharply recently, US bond interest rates have dropped sharply, and the Federal Reserve itself is under great pressure, so our external constraints have been reduced.
Finally, the game between the Central Bank of China and the United States, and the Peoples Bank of Chinas choice to announce the interest rate reduction policy in advance, also shows the wisdom and determination of the Central Bank of China. It is a good move that the so-called chess player should be the first to become the passive player.
There is still a need for further calibration
Tang Jianwei, Chief Researcher of Bank of Communications Finance Research Center:
The Federal Reserve first announced an interest rate increase, which is expected to put pressure on the domestic market in the short term. The sustained adjustment of the domestic stock market in recent days should have the expected impact in this respect. In order to cope with external pressure, internal policy certainty should be used to deal with external uncertainty.
There is still a need for further calibration in the future. Because SLF and MLF are both short-term and medium-term liquidity, the regulatory requirements of net stable fund ratio (NSFR) limit the ability of commercial banks to put in low-liquidity long-term loans. Although the TMFL has a one-year term and can reach three years through continuous succession, it is only 100 billion in scale and relatively limited. The reduction of the benchmark can release long-term funds, and the cost of the reduced funds is much lower than that of TMLF. However, this operation eased the urgency of recent calibration. It is expected that the central bank will continue to reduce its benchmark several times next year. ?
One minute to understand: The Federal Reserve raises interest rates again, how does it affect your investment?
Cartography/21st Century Economic Report
Next years U.S. stock market volatility?
Currently, the U.S. cyclical sector lags behind the defensive sector by 5% (mainly due to the adjustment of technology stocks), while the overall index remains flat. If such intra-plate pessimism persists, institutions expect U.S. stock volatility to continue to expand, making it difficult to outperform other regions.
Romain Boscher, head of global equity investment at Fidelity International, recently told reporters that in the first three quarters of 2018, the US stock market was affected by a series of one-time factors, including the reduction of corporate tax rate in the United States, the relaxation of regulation and the sustained strengthening of economic momentum in the United States. US stock earnings increased significantly, with earnings per share increasing by about 24% year on year, which helped the US stock market to outperform other countries:
We expect the impact of these one-off factors on corporate earnings growth to fade in 2019. U.S. corporate earnings will continue to increase, but growth will fall to the same level as real economy growth. Assuming that in 2019 the US macroeconomic growth rate is about 3% to 4%, inflation rate is about 2%, and stock repurchase level is about 3%, we expect that this will keep the US EPS growth in line with the rest of the world at around 8%.
Boscher also mentioned that in 2019, U.S. companies may face more disadvantages, including rising costs, among which labor-intensive industries will bear the brunt. These costs will eventually be passed on to consumers, but we believe that businesses will have to bear part of the burden, so this will put pressure on corporate profits.
At present, one-year cross options are expected to have a larger range of S&P 500 index prices next year. The break-even level of S&P index (when it matures) is 302 5 and 2240, compared with the range of 2530-2940 in 2018. The agency believes that if pessimism persists, the lower limit of the 2019 forecast range is not untouchable. As a result, institutions have been overqualified for long-term U.S. debt since October.
Source: Ji Xueying-NN6784, Responsible Editor of 21st Century Economic Report