The Fed cut interest rates for the third time in the year

 The Fed cut interest rates for the third time in the year

The US dollar index DXY rose more than 10 points to 97.83 in the short term and the US dollar / yen rose more than 10 points to 108.98 in the short term after the US Federal Reserve announced the interest rate resolution.

(five minute trend chart of US dollar index, source: fx168 finance and Economics Network)

Spot gold fell about $4 to $1489.28 in the short term, then quickly recovered some of its losses, now at $1491.80 and $17.73.

(five minute trend chart of spot gold, source: fx168 finance and Economics Network)

Three major indexes of US stocks fluctuated in a narrow range:

Will we continue to cut interest rates this year? Key hints from the Fed

The Fed also hinted at a higher threshold for easing in the future.

The FOMC deleted a key phrase that appeared in its post meeting statement since June, saying it was committed to taking appropriate action to sustain economic expansion.

Powell used the phrase in early June to prepare for a rate cut in July, and it has been in the official language since then. Instead, more moderate language.

The committee will continue to monitor the impact of forthcoming information on the economic outlook and assess the appropriate path for the target range of the federal funds rate, the statement said.

At the same time, Powell said: the Fed does not consider raising interest rates at present; as long as the economic outlook meets the expectations of the Fed, the current monetary policy position will be appropriate.

Picture / Xinhua News Agency

Market participants have been concerned about the possibility of the Fed starting to signal the gradual end of policy easing after nine rate hikes since December 2015.

The new wording shows the Feds increased reliance on data rather than its ongoing intention to cut interest rates.

Ahead of the Feds announcement, data from the Chicago Mercantile Exchange (CME) showed that although the market expected a rate cut of about 100% at the meeting, traders thought the probability of a rate cut in December was only about 25%.

Previously, Standard Chartered bank expected the Federal Reserve to cut interest rates in December. In its research report, the bank pointed out that signs of slowing economic growth and moderate inflation expectations provided conditions for interest rate reduction, while the decline in corporate marginal profits and slowing growth in consumer spending should alert the Federal Reserve.

Swiss Baida asset management predicted that the Fed would cut interest rates for the last time this year. However, the agency believes that interest rates may be cut again next year, as US economic data will remain weak. The market has largely reflected interest rate cut expectations. The central banks release of funds is not enough to drive the stock market. The market needs more other impetus.

Image from Chicago Mercantile Exchange

Zhishang Institutes Federal Reserve observation tool forecasts the target interest rate of federal funds in December 2019. Image from Chicago Mercantile Exchange

As of the publication, the Chicago Mercantile Exchanges Federal Reserve observation tool shows that the probability of predicting the federal funds rate of the Federal Reserve of 1.50% - 1.75% in December 2019 is 77.0%, and the probability of reducing the interest rate to 1.25% - 1.50% is 20.8%.

Signs of struggle in the US economy?

Trumps bombardment: raising interest rate too fast, cutting interest rate too slow

In fact, with the global economic slowdown this year, the U.S. economy is beginning to show signs of struggle.

According to the national economic situation survey report released by the Federal Reserve on October 16, since late August, the overall economic activity of the United States has expanded at a moderate speed, but the continuous trade tension and global economic growth slowdown have hindered economic activities in some jurisdictions.

In terms of industry, manufacturing activities continued to decline slightly, tourism and related expenditures increased slightly, while the real estate market did not change much. At the same time, affected by bad weather, weak commodity prices and trade situation, the agricultural situation has further deteriorated. In addition, the growth rate of non residential fixed investment of enterprises slowed down slightly.

In addition, after the negative month on month growth of US retail sales data in September, the market also raised the expectation of the Feds interest rate cut.

Neil Kashkari, President of the Federal Reserve Bank of Minneapolis, said earlier that the Feds interest rate target range was higher than the 10-year Treasury yield. In his view, such a level of interest rates may have a limiting effect on the economy, because given the risks facing the economy, interest rates should be looser.

It is worth mentioning that on the night of the 24th, President trump shelled the Federal Reserve again. Trump said it would be a breach of duty for the Fed if it did not lower interest rates or even, ideally, not take stimulus measures. The Fed is raising rates too fast and cutting rates too slowly!

Picture / Xinhua News Agency

James McCann, an economist with standard investment, previously told the media that factors such as inflation, trade and the global economic slowdown have not improved significantly compared with the recent two rate cuts of the Federal Reserve, which are turning into early signals of weaker corporate profit prospects, lower investment willingness and slower employment growth. As signs of an accelerated slowdown in the US economy become clear, there are few policy options left for the Fed.

Earlier, the bank said that the recent interest rate cut is only an insurance policy, and the Federal Reserve may suspend action in any future monetary decision. But the pause is short-lived, with economic data expected to force the fed to cut interest rates further by the spring of 2020. In addition, the details of the balance sheet is also one of the key points to be concerned.

The previous ministerial and Deputy meetings of the G20 finance and central banks were held in Washington, D.C., on October 17-18.

It is generally believed that the global economy continues to expand, but the growth rate is weak. Loose monetary policy and the improvement of economic situation in some emerging market economies are conducive to the improvement of the global economy. However, trade frictions, geopolitics and other factors may still have an impact on the global economy, and the risk tends to decline. All parties agreed to strengthen dialogue and use various policy tools such as monetary policy, fiscal policy and structural reform to promote strong, sustainable, balanced and inclusive economic growth.

This means that the meeting believes that there is still downward pressure on the global economy and that it is still necessary for monetary policy to adjust in the direction of easing. This time, the Federal Reserve cut interest rates again, and the space for further easing of monetary policy of central banks around the world will be opened again, follow-up interest rate cut will appear again.

Shortly after the Federal Reserve announced a rate cut, the Central Bank of Kuwait announced a 25 basis point cut in the discount rate to 2.75%.

Regarding Chinas economic situation and monetary policy trend, Yi Gang, governor of the peoples Bank of China, said in a speech at the G20 finance and central bank ministerial and Deputy meetings that despite downward pressure, Chinas economic operation is generally stable and its economic structure continues to be optimized. The peoples Bank of China has implemented a sound monetary policy, further deepened the reform of interest rate liberalization, steadily increased monetary credit and kept the market interest rate low. The exchange rate of RMB remained basically stable. The peoples Bank of China will continue to implement sound monetary policy and create a suitable monetary and financial environment for high-quality economic development.

According to the latest data released by the National Bureau of statistics, economic growth fell to 6.0% in the third quarter, while CPI exceeded 3% in September. From the perspective of macroeconomic operation, the current monetary policy faces a dilemma: on the one hand, the upward CPI requires monetary policy to be tightened; on the other hand, the downward economic growth requires monetary policy to be relaxed.

After the LPR reform, interest rate reduction is divided into two dimensions: one is the central banks policy interest rate (such as MLF, reverse repo), the other is the LPR quotation.

The policy rate has remained unchanged this year, with the 7-day reverse repo policy rate of 2.55% and the one-year MLF rate of 3.3%. LPR has made three quotations. In the past three months, the reduction of LPR has gradually narrowed down: on August 20, the one-year LPR has been reduced by 10bp, and the five-year LPR has been reduced by 5bp; on September 20, the one-year LPR has been reduced by 5bp, and the five-year LPR has remained unchanged; on October 21, both interest rates have not changed.

According to wind data, there will be 60 billion reverse repos due on October 31, and the market is also focusing on the operation of the central bank. There are 500 billion reverse repos due this week, but none of them have been operated by the central bank. On October 30, the peoples Bank of China announced that the fiscal expenditure at the end of the month would be increased to hedge the impact of factors such as the maturity of the central banks reverse repo. In order to maintain the liquidity of the banking system, the bank would not carry out the reverse repo operation on the current day.

The current inflation expectation is further strengthened. On October 30, the yield of 10-year Treasury bonds reached 3.32% again, showing the markets concern about CPIs upward trend. This also shows to some extent that the market does not expect the central bank to follow the fed to cut interest rates this time.

Li Qilin said that for China, under the combination of the principle based on myself and the uncertain path of the Feds interest rate reduction, the central bank may not follow the Feds interest rate adjustment in the short term, and the monetary policy still adheres to a neutral tone, but with the fundamentals still actively destocking, the yield of domestic bonds still has a certain downward space.

Wang Qing, chief Macro Analyst of Dongfang Jincheng, said that the current domestic monetary policy is characterized by I-oriented, and the impact of the Feds interest rate policy is weakened. Even if the Fed cut interest rates this time, the domestic rate probably wont follow.

How do we get to American stocks and debt?

US stock

UBS: dont expect the fed when the bear market in US stocks falls

Although U.S. stocks hit a record high on Monday, Tuesdays situation became grim as Googles parent company, alphabet, reported disappointing results.

UBS warned that earnings expectations are a huge threat to US stocks.

Every bear market in the past 50 years has been accompanied by a real decline in the expected earnings of S & P 500 companies, said Francois Trahan, chief strategist at the bank.

He explained that analysts forecast for earnings growth for the S & P 500 index had fallen to just 1% from its peak of 23% in September 2018. At the same time, leading economic indicators (LEI), which are used to predict future activities and can provide clues to future earnings trends, also indicate that there will be more weak performance in the future.

In the end, the most vulnerable macro context for the stock market is that expected earnings growth turns negative as leading economic indicators show a downward trend (and drive the P / E ratio down), said Trahan.

He also hinted that investors should not expect the Federal Reserve to throw lifeline to the stock market, because the current interest rate and stock market trend are positively related, which means that if the interest rate falls, the stock market will also fall, just like the reaction of the market after the previous two interest rate cuts.

LPL financial, a financial services company, offers another forecast. The data they provide shows that although policymakers may be worried about another record or near record easing of monetary policy in the stock market, historical data show that after three consecutive interest rate cuts of 0.25 percentage points, the stock market tends to continue to rise.

How high is the rate of return during the period when the Fed has cut interest rates by 25 basis points three times? In the six and 12 months after the Federal Open Market Committee made these decisions, the stock indexs gains were remarkable.

According to LPL financial, the S & P 500 index rose by more than 10% and 20% in the following six months and one year after interest rates fell in 1975, 1996 and 1998.

This may be hard to understand given the super high return on equity investment this year. So far this year, the S & P 500 is up 21.3%, the Dow Jones industrial average is up 16.14%, and the Nasdaq composite is up nearly 25%.

Weve seen three consecutive 25 basis point cuts during the slowdown, most recently in the mid and late 1990s, said Ryan Detrick, senior market strategist at LPL financial. The good news is that the interest rate cut after the slowdown can accelerate the rebound of economic growth, and the stock market certainly performs well.

US debt

Li Qilin, chief economist of lianxun securities, said that for US bonds (based on the 10-year period), the best layout for long-term interest rate reduction is actually concentrated in the three or six months before interest rate reduction, with a downward range of interest rate of at least 65bp.

Source: responsible editor of 21st century economic report: Yu changzong ue5e5 nbj11145