Although the Fed's next step is definitely to cut interest rates, the market is still divided on the timing. Sure enough, the Federal Reserve's interest rate meeting in the early morning gave the market another small surprise - although the Federal Reserve remained unchanged for four consecutive meetings, Federal Reserve Chairman Powell sent a strong signal that a March interest rate cut may be unlikely to occur. Earlier, bets on interest rate cuts in March once exceeded 70%.

　　Goldman Sachs issued a report early in the morning saying that in light of this comment, as well as the institution's expectations for strong growth in the first quarter and a temporary rise in inflation in January, it has postponed its forecast for the first interest rate cut from March to May. However, Goldman Sachs still expects to cut interest rates five times in 2024, that is, four consecutive rate cuts at the meetings in May, June, July and September, then slow down to a quarterly rhythm, and cut interest rates again in December this year. Three more cuts in 2025, as Goldman Sachs expects core PCE inflation to be at least 0.2 percentage points lower this year than the FOMC's median forecast of 2.4% and to fall further in 2025.

　　Some traders said Wall Street reacted strongly to this "revelation", with the S&P 500 experiencing its worst day since September and the Nasdaq 100 falling about 1.8%. Gold gave up all its earlier gains, while the U.S. dollar stood at 103. U.S. bond yields rose in the short term and fell in the long term. The two-year Treasury bond interest rate closed at 4.27%, and the ten-year Treasury bond interest rate closed at 3.99%. . Affected by this, Asia-Pacific stock markets were generally under pressure, and the RMB weakened again against the US dollar at the opening on February 1 and approached the 7.2 mark.

Fed denies March rate cut

　　This time, the FOMC kept interest rates within a range of 5.25% to 5.50% and did not make any changes to its balance sheet plan, in line with expectations. But the monetary policy statement was more hawkish than expected, with Powell underlining the message by stating that a rate cut in March was "unlikely."

　　Powell said there was a need to see more data, but not necessarily better data, as employment and inflation data become more important going forward. Matt Weller, global head of research at Gain Capital Group, told reporters that the FOMC has made multiple substantive updates to its monetary policy statement for the first time. Among the most important changes: removing a reference to the banking system's resilience, noting that risks to achieving employment and inflation targets "are moving towards a better balance"; removing a comment about "further policy tightening"; stating It does not expect a rate cut until it is "convinced that inflation is continuing to move towards its 2% target."

　　He said: "Overall, these tweaks indicate that Powell and his team are considering when to switch to rate cuts, but for markets that have been expecting rate cuts to begin at the March Fed meeting, these tweaks are more hawkish than expected, suggesting that The rate cut cycle may come later than many traders expect." This also caused the US dollar to rise 30-50 points against most non-US currencies during the meeting, and major stock indexes fell sharply.

　　But clearly, inflation and employment data will be particularly important in the coming months as they determine the exact timeline for when the Fed's easing cycle begins. In fact, the Fed's remarks this time are not entirely surprising, because some recent economic data have been quite strong.

　　For example, the U.S. GDP grew by 3.3% quarter-on-quarter in the fourth quarter of 2023, far exceeding market expectations of 2%; the Fed's most favored core PCE price index fell from 3.2% to 2.9% in December last year, lower than the 3% expected. Since last week, the weakening of inflationary pressure and the solid economic growth have made the probability of the Federal Reserve cutting interest rates in the first half of the year hovering around 50%, thus helping the U.S. dollar index rise for four consecutive weeks; at the same time, retail sales data have been particularly strong. Data show that U.S. retail sales in December 2023 increased by 0.6% month-on-month, twice the previous value of 0.3%, exceeding market expectations of 0.4%, marking the largest increase in three months. "U.S. consumer spending remains very strong, and that could add to inflationary pressures. I think what's happening in the Middle East is also causing some concern that if supply chains are affected, that will add to inflationary pressures, and that concern will continue." Weller say.

　　In addition, the U.S. non-farm payrolls data to be released this Friday is also crucial. The market expects that 173,000 new jobs will be added in January, compared with the previous value of 216,000. The unemployment rate will rise slightly from 3.7% to 3.8%, and the year-on-year growth rate of hourly wages will remain unchanged at 4.1%. Overall, controllable inflation (close to the Fed's target) and a stable job market (below 4% for a long time) reduce the urgency and magnitude of interest rate cuts.

　　The process of shrinking the balance sheet has also received attention. Powell also noted that the FOMC will begin in-depth discussions on balance sheet issues at its March meeting. Jan Hatzius, chief U.S. economist at Goldman Sachs, said: "We think this may mean a statement about slowing down the pace of balance sheet reduction in March, and then may decide to officially slow down the pace in May, which will be very soon. It will be implemented soon.”

Asia-Pacific stock markets come under pressure, yuan fluctuates

　　Morgan Asset Management told reporters that the market reaction was divided after the meeting, with U.S. Treasury yields falling, but the stock market selling off. Bond markets may be buoyed by the prospect of a rate cut being reaffirmed during the year, but risk assets are uneasy as the timing of a rate cut is delayed.

　　“In general, the judgment that the Federal Reserve is expected to cut interest rates by 25BP in June, September and December this year remains unchanged, and the later shift of the timing of interest rate cuts may once again usher in a window period for investment in U.S. debt assets. Secondly, it also shows that when investing in U.S. stocks, investors should adopt a more balanced and mid- to long-term perspective.”

　　As far as the Asia-Pacific market is concerned, the Chinese stock market fell at the opening, but rebounded again during the session. As of 11:10 on February 1, the Shanghai Composite Index rose 0.29% to 2796.99; the Nikkei Index once fell by more than 1%. Although the Fed's interest rate cut is a definite event, the RMB has still been weakly consolidating recently, with USD/CNY at 7.1781 and USD/OCC at 7.1871.

　　Zhou Yun, fund manager of Schroder Asset Management (China), told reporters that at the macro level, the endogenous momentum of China's economy is still weak, the credit demand of residents and enterprises is still relatively sluggish, and there may be a greater risk of downward inflation; at the policy level, so far, The introduction of conventional countercyclical easing policies has limited improvement in aggregate demand, and it is still difficult to offset the downward pressure on the economic structure. Follow-up attention will be paid to the policy tone of the two sessions in March and the Politburo meeting in April.

　　In her view, the current valuation level of stocks is in the historical extreme range from multiple dimensions. "However, low valuation itself may not be able to catalyze the rise of the stock market. Our view on the stock market has turned neutral and we are waiting for the margin of prosperity." Signs of improvement are emerging. In terms of sectors, we downgrade the technology sector to neutral, mainly considering the short-term weakening of high-frequency data such as mobile phone sales and GPT visits, and the high valuation and congestion. In terms of bonds, 10-year treasury bonds Breaking through the key point, yields are currently at historically low levels, and further downside may be limited, but the weak macro environment is still favorable for interest rate bonds.”

　　Currently, institutions' forecasts for the RMB exchange rate in 2024 are in the range of 7.0 to 7.2, but the probability of approaching 7.2 seems to be rising.

　　In the short term, traders believe the yuan may face some pressure. On the one hand, U.S. economic data remains strong, making it difficult for the U.S. dollar index to weaken; on the other hand, after some stimulus policies were implemented, the market experienced profit-taking, and macroeconomic adjustments and profitability pressures continue to exist.

　　"We expect USD/CNY to consolidate between 7.1 and 7.2. A series of positive developments have promoted the RMB's recent one-time rebound, but a strong U.S. dollar may make it difficult for the RMB to rise above 7.1." Zhang Meng, Barclays Macroeconomics and Foreign Exchange Strategist, said The reporter said that although the central bank has been committed to maintaining exchange rate stability, "but we have noticed that the intention to maintain the exchange rate below 7.1 is not strong." (Author: Zhou Aileen)

　　Source: China Business News