Tianfeng: The Federal Reserve cut interest rates by 50 basis points, how do you see the domestic bond market?

Tianfeng released a research report stating that the RMB may still trend towards strength in the short term. However, considering that the US dollar may not significantly weaken after the Fed rate cut, and domestic fundamentals have not been boosted, the area around 7.00 may be a resistance level for this round of appreciation. As the Fed rate cut is implemented, the market may realize some of the rate cut expectations, especially for institutions engaging in left-side trading. However, considering that fundamentals and policies determine the direction of interest rates has not changed, it seems unnecessary to take profits even if the domestic rate cut occurs. Tianfeng's main points are as follows: Why did the September interest rate meeting cut rates by 50bp? From market pricing, Fed materials, and officials' statements, the key reason for the 50bp rate cut is the downward risk in the labor market. We believe that the Fed's consideration may be to avoid a rapid weakening of the labor market by cutting rates by 50bp, guiding the economy towards a soft landing, and managing expectations to control the risk of secondary inflation. How do we view the Fed's subsequent actions? As the US economy experiences a soft landing, we tend to believe that the Fed will cut rates twice more this year, with a total reduction of 75bp. Constraints on the Fed's rate cuts due to the risk of secondary inflation may be limited. The pressure of an economic and financial recession in a high-interest rate environment cannot be ignored. Behind the resilience of the US economy lies supply-side stimulus policies that help maintain relatively stable inflation expectations. For key areas such as housing inflation, the impact of rate cuts on housing supply and housing inflation is uncertain, and the Fed can guide the economy through managing expectations. Additionally, the Fed has not finished withdrawing its balance sheet. How do we view US bonds and the US dollar? We believe that the central rate of US bonds may continue to fluctuate downward, and due to the Fed's expectations to guide rates to prevent inflation risks, the downward movement of US bond rates may be a gradual process. The 10-year US bond range within 2024 may be between 3.2-3.7%. As for the US dollar, based on historical rate cut cycles and the current performance of the Eurozone and Japan, the US dollar index may continue to operate near 100 this year. Will China follow suit with rate cuts? The state of effective demand determines that monetary policy is in a loose cycle, making rate cuts inevitable. However, the timing, pace, and specific methods of rate cuts need to balance multiple objectives and involve some uncertainty. How do we view the RMB exchange rate? We believe that the RMB may still trend towards strength in the short term. However, considering that the US dollar may not significantly weaken after the Fed rate cut and domestic fundamentals have not been boosted, the area around 7.00 may be a resistance level for this round of appreciation. How do we view the domestic bond market? As the Fed rate cut is implemented, the market may realize some of the rate cut expectations, especially for institutions engaging in left-side trading. However, considering that fundamentals and policies determine the direction of interest rates has not changed, it seems unnecessary to take profits even if the domestic rate cut occurs. Subsequent concerns are twofold: first, stricter regulation of the bond market; and second, a significant change in macroeconomic expectations due to strong growth-stabilizing policies. These two major risk indicators may persist, while the market continues to move in line with fundamentals. Risk warnings: unexpected increment policies domestically, inflation trends lower than expected, overseas economic performance better than expected.