Shenwan Hongyuan Group: The Fed may cut interest rates by 25 basis points at the September meeting.

Shenwan Hongyuan Group Securities released a research report stating that the Federal Reserve may cut interest rates for the first time in September at its meeting, but there is still no consensus on the extent of the rate cut (25bp or 50bp), and there is a significant divergence. Shenwan Hongyuan Group tends to believe that the Fed will cut rates by 25bp at the September meeting. If external risks are not considered, the benchmark for this round of rate cuts is 75bp + 75bp, with a faster pace of rate cuts initially. The main points of Shenwan Hongyuan Group are as follows: At 2:00 am Beijing time on September 19, the FOMC will announce the decision of the September meeting. A rate cut is already expected, but the extent and overall pace of the rate cut are still uncertain. Similar to the rate hike cycle, the Fed's rate cuts are also "behind the curve". So, will the pace of rate cuts also be "front-loaded"? Can US bond yields further decline? I. Outlook for the September FOMC meeting: Rate cut, front-loaded pace? At the September meeting, the Fed may cut interest rates for the first time, but there is still no consensus among market participants on the extent of the rate cut (25bp or 50bp), and there is a significant divergence. As of September 15, the implied probability of a 25bp or 50bp rate cut from CME FedWatch is 50%. Dynamically, the probability of a 50bp rate cut priced by the market has increased from 25% to 50% in the past month. We tend to believe that the Fed will cut rates by 25bp at the September meeting. In September, the Fed has sufficient reasons to cut rates, but the reasons for a substantial rate cut are not sufficient. Firstly, the market has priced in a 100bp+ rate cut for the year, and the effects of monetary easing have already been seen; secondly, the Fed can release "dovish" signals through adjusting rate guidance in the SEP or through press conferences; in addition, a 50bp rate cut for the first time would increase the discontinuity of subsequent rate cuts. In history, the pace of precautionary rate cuts has often been "small steps". At the September meeting, the Fed will update the Summary of Economic Projections (SEP), which includes key information on economic fundamentals and the guidance on the federal funds rate. We believe that the Fed may maintain GDP growth and PCE inflation forecasts unchanged, but slightly revise upwards the expected unemployment rate. Based on this, the Fed may lower the FFR target. We expect the year-end FFR target to be 4.6%, implying two more rate cuts during the year; the year-end 2025 FFR target is 3.9%, implying three rate cuts next year. We believe that if external risks are not considered, the benchmark for this round of rate cuts is 75bp + 75bp, with a faster pace of initial rate cuts and a slower pace later. The first 75bp is for this year (interpreted as the upper limit) and the second 75bp is after 2025. Because, on one hand, we believe that a "soft landing" is still the benchmark assumption for the US economy; on the other hand, the risk of a "second rebound" in inflation after the rate cuts is worth noting, and after the dust settles on the election, the risk of inflation from CKH HOLDINGS may be balanced once again. August's US CPI inflation is a "risk warning." There is a potential rebound in US inflation in the fourth quarter, mainly coming from three areas: rental inflation, durable goods inflation, and core non-durable goods inflation. Rental inflation mainly reflects the transmission of previous house price increases, durable goods inflation mainly reflects the transmission of used car prices, and core non-durable goods inflation mainly reflects the rise in previous import prices. If US inflation shows signs of stickiness again in stages, this may mean that the probability of a 50bp rate cut in one go is not high for the Fed. As at the beginning of this year, US bonds have already priced in and overreacted to the Fed rate cuts. Will US bond yields experience a "reversal" similar to the second quarter of this year? From a trading perspective, it is important to distinguish between a "rebound" and a "reversal". On one hand, the Citigroup Economic Surprise Index has already rebounded from its bottom, indicating the risk of a rebound in US bond yields in the near future. On the other hand, the experience of rate cuts under a background of a "soft landing" shows that the reversal of US bond yields is highly correlated with the pace of Fed rate cuts. Risk Warning Escalation of geopolitical conflicts; the Fed turning "hawkish" again; accelerated contraction of financial conditions.