CITIC SEC: It is expected that the Federal Reserve will cut interest rates by 25 basis points twice within the year, and the market may experience a short-term "soft landing" in trading.

date
19/09/2024
avatar
GMT Eight
CITIC SEC released a research report stating that the Federal Reserve's rate cut of 50bps at the September 2024 meeting exceeded market expectations. The statement from the meeting showed a significant change compared to previous meetings, reflecting the Federal Reserve's confidence in cooling inflation and supporting the labor market. The Federal Reserve's 50bps rate cut was a proactive move to maintain the current economic and job market conditions, while also allowing for flexibility in future policy adjustments. It is expected that there will be two more 25bps rate cuts before the end of the year. After the overnight trading rate cut expectations were met, the market is expected to possibly return to a "soft landing" trading scenario in the short term. The downside potential for US bond yields is limited, and the stock market may continue to experience high volatility, with sectors such as biotechnology and real estate performing well in "soft landing" rate cut environments. Key points from CITIC SEC's analysis include: - The Federal Reserve brought the target range for the federal funds rate down to 4.75-5%, which was beyond market expectations. - The decision to cut rates was not unanimously agreed upon, with dissention for the first time since 2005. - Economic indicators show continued steady economic expansion with slowing job growth and rising unemployment rates. - The Federal Reserve remains committed to supporting maximum employment and achieving a 2% inflation target. The dot plot from the meeting indicates a central target rate of 4.4% for the year, below the June meeting's 5.1%, with adjustments to next year's rate target levels, inflation forecasts, and economic growth predictions. It is worth noting that the dot plot has raised its long-term rate level assessment from 2.8% to 2.9%. Overall, the Federal Reserve's decision to cut rates by 50bps was a proactive move to support the economy and maintain stable job market conditions. There were slight adjustments to economic forecasts compared to the June meeting, with a focus on continued support for employment and inflation targets. Federal Reserve Chairman Powell emphasized that rate cuts are not predetermined and decisions will be made on a meeting-by-meeting basis, with a commitment to maintaining flexibility in policy adjustments.The victory against inflation has not been declared, but the Federal Reserve's confidence in inflation returning to target levels has strengthened.In the end, regarding the dual mandate, Powell reiterated the content of the press conference and believed that the risks at both ends are roughly balanced. Overall, Powell is optimistic about the economic situation and job market, still depicting a "soft landing" scenario. The Fed's 50 basis point rate cut this time is a preemptive rate cut aimed at maintaining the current economic growth and employment market conditions, while maintaining flexibility for subsequent policies. It is expected that there will be two more 25 basis point rate cuts within the year. First, this 50 basis point rate cut differs from the past forced large rate cuts to counter risks and shocks, overall it is still a preventive rate cut. On one hand, Powell stated during the press conference that if the Fed had seen the July non-farm payroll report released a few days after the July FOMC meeting, they may have cut rates for the first time in July; on the other hand, considering the long interval between the September FOMC meeting and the November FOMC meeting, this rate cut is a front-loading measure. The combination of looking back and looking forward formed the basis for this 50 basis point rate cut. Second, currently, US inflation has returned to a cooling track, with CPI falling to 2.5% year on year, GDP in the second quarter dropping to 3%, consumption growth at 2.9%; unemployment has increased slightly (4.2% is still historically low), and unemployment is mainly affected by increases in labor supply rather than significant layoffs. The current data combination still depicts a "soft landing" scenario. Although the Fed's statement indicated that the risks at both ends are roughly balanced, the meeting statement highlighted the Fed's willingness to support the job market. From Powell's statements during the press conference, it is clear that guiding economic growth and keeping the job market stable while achieving a soft landing for the US economy is the Fed's primary goal. After the overnight rate cut expectations were met, it is expected that the market may return to a "soft landing" trading in the short term, with limited downside space for US bond rates, and US stocks may continue to show high volatility. Sectors such as biotechnology and real estate often perform well during "soft landing" rate cuts. After the September rate decision announcement, the three major stock indexes rose and then fell, the US dollar index and US bond rates fell and then rose. As the market had already priced in the rate cut expectations and Powell showed no urgency for further rate cuts, the market's performance after the decision reflected a certain degree of expectations being met and the bullish outlook being exhausted. In the short term, with the combination of a significant rate cut and relatively stable economic data, the market may return to a "soft landing" trading. It is expected that long-term US bond rates will have limited downside space in a "soft landing" scenario and may rise with improved economic data; however, continued rate cuts may cause short-term rates to follow policy rates downwards. Despite the market already pricing in rate cut expectations, the downward movement may be limited. It is expected that the US dollar index will initially fall with policy rates, and then rise as the US economy stabilizes and improves. A "soft landing" for the US economy is unlikely to lead to a sharp decline in US stocks, but high volatility is expected to continue. Historically, sectors such as biotechnology and real estate tend to perform well during rate cuts under a "soft landing" scenario. Risk factors: Unexpected rebound in US inflation; Unexpected fragility in the US financial system; Unexpected weakening in the US labor market; Underperformance in related industries.

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