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[Financial Analysis] The market is starting to price in the Fed's pause in rate cuts in December. How much further room is there for rate cuts in the future?
Xinhua Finance 2024-11-08 16:04
新华财经上海11月8日电(葛佳明)美联储在2024年11月议息会议上如期将联邦fundIntrerest Rate目标区间下调25个基点至4.5-4.75%,但美联储副主席鲍威尔在会后发言已变得较为"鹰派",与9月重申still 将从数据出发不同,鲍威尔这次明确表示,需要考虑12月暂停降息的可能性,且对后续降息路径将更为谨慎。

Analysts generally believe that Powell's remarks this time are obviously not as relaxed as in September. The relative importance of inflation and unemployment rate in the eyes of the Federal Reserve may reverse again. Although the benchmark scenario is to gradually adjust the interest rate to a neutral level, the rate cut may be lower than the guidance of 100 basis points on the Fed's dot plot in September.

Adjustment of Federal Reserve policy and communication

Since the unexpected 50 basis point rate cut by the Fed in September, the United States has experienced an inflation that is beyond expectations, two non-farm payroll data that are both above and below expectations, and Trump's victory. Market expectations have also experienced another "swing" from pessimism to optimism: from worrying about the US falling into recession before the rate cut in September, to whether it can achieve a "soft landing," and then to the possibility of accelerated second inflation risk after Trump's victory.

From the wording of this meeting declaration, the Federal Reserve has modified its language on employment and inflation, such as changing the description of the job market from "slowing down" to "overall easing", no longer emphasizing "inflation continuing to decline", and deleting the language of the committee having greater confidence in inflation returning to 2%.

CICC Securities' chief overseas analyst Cui Rong said that in September, US core inflation was slightly higher than expected, which prompted Powell to significantly increase his remarks on inflation. If the unemployment rate no longer significantly increases, the relative importance of inflation and the unemployment rate in the eyes of the Fed may reverse again. Cui Rong also believes that the impact of Trump's market inflation expectations may become a hidden concern that the Fed cannot ignore.

First, three of the changes in the wording of the FOMC statement indicate the Federal Reserve's hidden concerns about inflation. Second, when Powell spoke, he mentioned that the labor market is not a source of inflation pressure. The rental part of inflation lags behind the real-time rental market, indicating that core service inflation is not his main concern. Therefore, the increase in tariffs and fiscal expansion brought by Trump may be his concerns that cannot be ignored.

The market's expectations for the future interest rate cut path have fluctuated significantly.

Liu Gang, Chief Overseas Strategy Analyst and Managing Director of the Research Department of CICC, believes that the market's current expectations for the future interest rate reduction path are experiencing a process of swinging from one extreme to the other due to the recent economic data, especially the impact of post-election expectations.

According to the CME FedWatch Tool, the market expects a 28.7% probability of the Fed pausing rate hikes in December, up from 23.8% a week ago. Looking at the final value of the Interest Rate, the Interest Rate futures market expects the Fed to cut rates only 3 more times, with a target range of 3.75-4%.

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Liu Gang stated that the market's expectations for interest rate cuts may be overly pessimistic. A rate cut of around 3.5% corresponds to a further cut of 100 basis points or an appropriate level.

CITIC Securities maintains its previous judgment in the report, believing that inflation is not yet a hindrance to the Fed's rate cut within this year. It is expected that the Fed will cut interest rates by 25 basis points in December, and rate cuts may still be the general direction next year, but the magnitude of the rate cuts may be lower than the Fed's September dot plot guidance of 100 basis points, which may be reflected in the December dot plot.

Johnny Yu, Vice President of Wellington Investment, told Xinhua Finance that the various policy uncertainties after the U.S. election will bring a considerable degree of disturbance and compress the space for future interest rate cuts by the Federal Reserve. Therefore, it can be expected that the Federal Reserve may maintain a cautious and flexible policy stance in the next stage to deal with the risks of economic activity and inflation exceeding expectations.

What changes will there be in the future market?

Analysts generally believe that the Fed's rate cut, along with the decline in the US dollar and US bond yields from four-month highs, while the S&P 500 and Nasdaq indexes are hitting new highs, indicating that there may be a change in the market's subsequent trading logic.

Yu Jiayan said that the market pricing logic based on gradual inflation slowdown and accelerated liquidity relaxation in the past period may reverse, and the performance of major asset classes will show more differentiation and volatility as a result, requiring investors to pay close attention.

Liu Gang believes that US Treasury bonds are likely to be under pressure, and technology and cyclical stocks are the main focus in the US stock market. The US dollar index is relatively strong, but it is necessary to pay attention to intervention policies, with a range of 102-106.

Gregory Peters, Co-Chief Investment Officer of PGIM Fixed Income, also believes that the future trend of US Treasury bonds will face greater pressure. It is expected that the yield of US Treasury bonds will rise and the yield curve will steepen.

As for the trend of the US stock market, Peters believes that in the short term, policy factors may bring about Favourable Information, and there is a certain room for stock price increase. However, the current valuation is already high. Therefore, due to the high starting point of the stock market, this optimistic sentiment may be difficult to sustain in the long term, which is different from the situation at the end of the previous year and after the election.

Jing Shun Asia Pacific (excluding Japan) global market strategist Zhao Yaoting believes that Asian assets still have strong appeal, especially in the long term. Asian economies have resilience and face less inflationary pressure, and it is expected that their growth rate in the next year will surpass that of developed markets.

"Asian stock markets are also more attractive in terms of valuation, and many Asian economies are benefiting from investment themes in artificial intelligence," said Zhao Yaoting. Central Banks in various Asian countries have begun to relax monetary policies, and investors will pay more attention to valuation and growth differentials.