The Fed cut interest rates again, but another time bomb is the biggest risk

 The Fed cut interest rates again, but another time bomb is the biggest risk

Trend of S & P 500 index in the past five years (photo source: Bloomberg)

After the Federal Reserve announced the interest rate cut, three major indexes of US stocks rose one after another:

Photo source: financial situation of Yingwei

The U.S. dollar index fell after suggesting that interest rate cuts would be suspended in the future.

In the policy statement, the Fed removed the phrase will take appropriate action to maintain expansion that has been used since June and replaced it with a more moderate one - in assessing the appropriate path for the target range of the federal funds rate, the FOMC will continue to monitor the impact of the forthcoming information (Economic data) on the economic outlook. We believe that monetary policy is in a good position, and the Federal Reserve continues to expect the economy to expand at a moderate rate, Fed chairman Powell said in a subsequent press conference. The current position of monetary policy may still be appropriate, and we will continue to respond if the outlook changes substantially.

After the Federal Reserve announced the interest rate cut, the Federal Reserve observation tool of Zhishang Institute showed that as of 2:19 on October 31, Beijing time, the probability of the Federal Reserve cutting the interest rate by 25 basis points again on December 11 was only 22.8%, and the probability of staying still was 76.3%.

Photo source: Zhishang Institutes Federal Reserve observation

Reporters noted that since trump took office, the U.S. federal deficit has expanded by nearly 50% and is expected to exceed $1 trillion by 2020. At present, the market expects that by 2029, the proportion of US debt to GDP is expected to reach the highest level since the end of World War II.

In addition, the annual budget deficit of the US government has increased for the fourth consecutive year, the first time since the early 1980s. Ironically, trump campaigned in 2016 promising to eliminate the deficit within eight years by cutting spending. On the contrary, trump has generally enacted comprehensive tax cuts and increased government spending to allow the deficit to expand.

US federal budget deficit trends source: Washington Post

That could be bad news for Trump - now that Trumps 2017 tax cuts cut revenue at the Treasury, the ballooning deficit is largely due to falling revenue. In fact, over the past two years, the U.S. governments tax revenue has decreased by more than $400 billion compared to the six months before the CBO passed the tax cuts in June 2017. In the last fiscal year, U.S. government spending grew at twice the rate of tax revenue.

Last week, durable goods orders fell 1.1% on month in September (market expectations fell - 0.55%), indicating that the current investment demand of the US economy is still weak. Shenwan strategy said in a research report that it is not surprising that the data of durable goods orders in the U.S. continues to be weak. At present, the U.S. industrial product inventory is divided relative to the sales ratio, and the retail industrial product inventory sales ratio data has improved, but the data of durable goods and wholesale industrial product inventory sales ratio are still high. Us durable goods stocks remain high, or will continue to suppress production and investment demand.

According to Shen Wan strategy, unlike the recession of direct consumption in 90s and 2008, the main reason for the slowdown in the US economy is the decline in investment growth (which is affected by the earlier high expenditure and the decline in global demand), while the decline in corporate capital expenditure is not obvious in terms of consumption and employment (the transmission of consumption and employment market is lagging behind). ) For example, data released in the evening of Beijing time yesterday (October 30) showed that US GDP grew by 1.9% in the third quarter, exceeding the expectation of 1.6%, but slightly lower than the growth rate of 2.0% in the second quarter, mainly due to the decline in business investment. Data released on October 30 showed that U.S. business investment fell 3% in the third quarter, in sharp contrast to + 4.4% in the first quarter of 2018 and + 4.8% in the fourth quarter of the same year.

U.S. business investment trend since the beginning of 2017 source: CNBC

In terms of sub sectors: basic materials (88.89%), health care (88.46%), consumer goods (85.71%), science and Technology (82.61%), the companys third quarter performance exceeded expectations by a large proportion, while the utility performance exceeded expectations by a small proportion, only 50%.

At present, the global central banks generally enter into the easing cycle. In recent years, the easing tide of the global central banks is still continuing. According to incomplete statistics, in the past three months, the global central bank has implemented 40 interest rate cuts. IMF President Georgieva has also warned that the global economy is slowing down at the same time, central banks should use monetary policy wisely, and pay more attention to the risk of negative interest rates. So what should the central bank do? In fact, Chinas central banks interest rate cut includes two ways: one is to reduce the benchmark deposit interest rate; the other is the monetary policy tool operating interest rate represented by reverse repurchase, MLF, etc.

Wang Qing, chief Macro Analyst of Dongfang Jincheng, believes that the current domestic monetary policy is characterized by I-oriented, and the influence of the interest rate policy of the Federal Reserve is weakened. Even if the Fed cut interest rates this time, the domestic rate probably wont follow. Since this week, the central bank has not carried out reverse repo operations. The announcement of open market business transactions on October 30 pointed out that the fiscal expenditure will be increased towards the end of the month, which can 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 reverse repo operation will not be carried out.

The reporter also noted that the central bank reformed and improved the formation mechanism of the quoted interest rate in the loan market in August this year. From August to October, the central bank has issued the LPR under the new mechanism three times. On October 21, the latest LPR quotation is: 1-year LPR is 4.20%, and 5-year LPR is 4.85%, which is the same as last months quotation. When the three quotations are combined, the LPR of one-year period is 15 basis points lower than the benchmark interest rate of the same period, and the LPR of more than five-year period is 5 basis points lower than the benchmark interest rate of the same period.

Sun Guofeng, director of the goods and Politics Department of the peoples Bank of China, said at the third quarter financial statistics press conference on October 15 that there is no basis for sustained inflation or deflation in China at present, but it is also necessary to prevent the spread of inflation expectations and form a vicious circle. Therefore, the central bank needs to pay attention to the expected changes and reduce the financing cost through reform. Through the implementation of sound monetary policy, the growth of money supply m2 and social financing scale is basically matched with the growth of nominal GDP, releasing a sound signal. At the same time, the benchmark interest rate of deposits remains stable, and the interest rate of loans mainly focuses on LPR through reform, which is also conducive to stable expectations.

According to UBS Research Report, Chinas GDP growth in the third quarter was 6% year-on-year. Industrial production rebounded year-on-year in September, real estate investment remained strong, and the year-on-year growth of retail sales of consumer goods rebounded (due to the year-on-year decline in auto sales narrowed). In addition, the strength of new RMB loans in September drove new credit to exceed expectations, and the market believed that the economic data in September was better than previously expected. Combined with MLF and LPR prices not lower than expected, investors expectations for further easing of monetary policy dropped significantly, and A-share consolidation also occurred last week.

Source: editor in charge of daily economic news: Yang bin_nf4368