Shenwan Hongyuan Group: Real estate and manufacturing sectors sensitive to interest rates may benefit in the context of the Federal Reserve cutting interest rates.

Shenwan Hongyuan Group released a research report stating that the Federal Reserve's September meeting statement believes that progress has been made in reducing inflation, while new job growth has slowed down, and the risks of inflation and employment are roughly balanced. The meeting lowered the policy interest rate by 50 basis points and continues to shrink the balance sheet as planned. However, in the fourth quarter, there may be some potential for inflation rebound in the United States, mainly coming from three aspects: rent, durable goods inflation, and core non-durable goods. Against the background of the Fed's interest rate cut, interest rate-sensitive sectors such as real estate and manufacturing may benefit and have a spillover effect on Chinese exports of furniture, household appliances, decoration, processed metal products, industrial machinery, etc. This 50 basis point rate cut may stimulate the above two chains. Key points from Shenwan Hongyuan Group: On September 18, local time, the Federal Reserve held a Federal Open Market Committee (FOMC) interest rate meeting and issued a statement, focusing on: cutting interest rates by 50 basis points, adjusting the federal funds rate to 4.75-5.00%. The median forecast in the dot plot predicts two more rate cuts this year. Summary of economic forecasts: upward revision of unemployment rate, downward revision of PCE. September meeting resolution: interest rate cut by 50 basis points, risks of inflation and employment are roughly balanced The September meeting statement believes that progress has been made in reducing inflation, while new job growth has slowed down, and the risks of inflation and employment are roughly balanced. The meeting lowered the policy interest rate by 50 basis points and continues to shrink the balance sheet as planned. However, Shenwan Hongyuan Group believes that there may be some potential for a rebound in US inflation in the fourth quarter, mainly from three aspects: rent, durable goods inflation, and core non-durable goods. If the Fed's interest rate cut pace is "premature" due to event-driven shocks, and it turns out to be just a "recession panic," next year, inflation pressures may tend to rise. Press conference: The Federal Reserve is determined not to fall behind the curve, and does not recommend viewing the 50bp cut as a "standard" Key points of the press conference Q&A session: The Federal Reserve is determined not to fall behind the curve, the 50 basis points rate cut was timely and should not be seen as a new trend. If the Fed had known the July employment data before the last meeting, they might have cut rates at that time. In the future, the Fed will continue to make decisions at each meeting, adjusting policy more rapidly if the job market cools down quickly, but the Fed is not in a hurry to cut rates. The softening of the labor market is a source of downward risks in the economy. Since May, the unemployment rate has risen above 4% and briefly peaked at 4.3%, triggering a recession signal under the "Sam rule" and causing the Fed to be concerned about the downward risks in the economy. In the short term, the process of the US labor market moving from basic equilibrium to easing may continue, forming the basis for a dovish Fed policy stance. Summary of economic forecasts: upward revision of the unemployment rate, downward revision of PCE, reflecting the Fed's two main reasons for this rate cut: concern about a cooling job market and the outlook for inflation The summary of economic forecasts for September lowered the forecast for real GDP growth in 2024 by 0.1 percentage point, raised the forecast for the unemployment rate in 2024, 2025, and 2026 by 0.4, 0.2, and 0.2 percentage points, respectively, lowered the forecast for core PCE in 2024 and 2025 by 0.2 and 0.1 percentage points, and lowered the forecast for PCE in 2024 and 2025 by 0.3 and 0.2 percentage points, respectively. Dot plot: The median forecast predicts two more rate cuts this year, and the space for rate cuts in 2026 is compressed The overall dot plot of interest rates has shifted downward, "front-loading" rate cuts. The median rate for 2024 has been lowered from 5.1% to 4.4%, indicating that there is still room for two rate cuts this year, with the median rates for 2025 and 2026 being lowered by 0.7 and 0.2 percentage points to 3.4% and 2.9%, respectively. The space for rate cuts next year is 100 basis points (consistent with the June meeting), but the space for rate cuts in 2026 is only 50 basis points, highlighting the "front-loading" nature of this round of rate cuts. The long-term neutral rate expectation has been further raised from 2.8% to 2.9%. Financial market performance: Market expectations of a 250 basis point cut in this round of rate cuts, US stocks decline After the meeting, the OIS implied federal funds rate fell by around 5 basis points from the previous week's average, showing a clear downward trend since August. The probability of a 50 basis point rate cut in November increased from 15% last week to 34%. The current market expects a total rate cut of 250 basis points by the Fed, with an end-point rate of 3%. Following the announcement of the resolution, the US dollar and US bond yields briefly fell before rebounding, with significant volatility in US stocks. At the close of the US stock market, the Nasdaq fell by 0.3%, the S&P 500 fell by 0.3%, the Dow fell by 0.3%, the US dollar index rose to 101, and the 10-year US bond yield rose by 6 basis points to 3.72%. Gold and oil prices briefly rebounded before falling, with spot gold prices briefly rising above $2600. Focus on the recovery of interest rate-sensitive sectors after the rate cut, the trend of US bond yields is highly related to the Fed's rate cut pace Pay attention to interest rate-sensitive sectors in the US economy. Historically, under the background of Fed rate cuts, interest rate-sensitive sectors such as real estate and manufacturing may benefit and have a spillover effect on Chinese exports of furniture, household appliances, decoration, processed metal products, industrial machinery, etc. This 50 basis point rate cut may stimulate the above two chains. Will US bond yields experience a "reversal" similar to the second quarter of this year? On one hand, the Citigroup Economic Surprises Index has rebounded from its bottom, suggesting a potential rebound in US bond yields in the near future. On the other hand, limited experience of rate cuts in a "soft landing" scenario shows that the reversal of US bond yields is highly related to the pace of Fed rate cuts. If the pace of Fed rate cuts is "fast first, slow later," the timing of the reversal may be in the late stage of the rapid rate cuts, at the "first half" of the rate cuts, such as in 1998. Risk warning: Fed's easing measures may not meet expectations.