Who Wins Big After Fed's Massive Rate Cut?
Starting from 2022, after a frenzied 11 interest rate hikes, the Federal Reserve has maintained interest rates at a high level of 5.25%-5.5% for a year and a month, forming an abnormal high-pressure line.
From the bankruptcy of Sri Lanka in 2022, to the food crisis of millions of people in Egypt, from the surge in U.S. tech stocks triggered by ChatGPT in 2023, to the run on Silicon Valley Bank and its subsequent bankruptcy, from the Japanese stock market reaching an all-time high in 2024 to China's cautious path of interest rate cuts.
Over these three years, whether it's the ups and downs of the global economy or the livelihood of an ordinary family, it's more or less related.
On the afternoon of September 18th local time, this abnormal era came to an end, and the door to a new cycle was opened.
The Federal Reserve announced a 50 basis point cut in interest rates, bringing them down to 4.75%-5%, a larger-than-expected move, temporarily returning to the level of April 2023.
Various speculations suggest that there will be another 50 basis point cut before the end of this year.
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Previously, Bloomberg surveyed 114 economists from institutions, with over 90% believing the cut would be 25 basis points; whereas market traders, or financial sharks, generally bet on a 50 basis point cut.
The probability distribution of market forecasts for the cut before the meeting In the end, Wall Street got it right and became the first big winner of the new cycle.
People in different time zones held their breath and witnessed the process of the high-pressure line being torn open, with mixed reactions.
The U.S. stock market, which is closest to the front line, first rose and then fell.
Given Wall Street's adage "buy on rumors, sell on facts," the market has been speculating on a 50 basis point cut for a week, and those who bet correctly began to take profits.
Six or seven hours later, when the Asian stock markets opened for business, at first, both the Japanese and South Korean stock markets rose, but then Japan stood out, with the highest increase reaching 2.78%, and eventually closed up 2.04%.
The Hong Kong stock market also performed well.
According to financial commentator Liu Xiaobo's analysis, some of the funds that came out of the U.S. stock market might flow directly into the Japanese stock market to avoid risks, coupled with the previous deep adjustment of the Japanese stock market, it is still attractive to hot money from the U.S., thus becoming the winner in the Asian stock markets of the day.
As for the always independent A-shares, they first fell sharply at the opening, but in the end, it turned out to be a "fake fall," and at the close, all the indexes ended up with a slight increase - but this may not be related to the Federal Reserve's interest rate cut, after all, looking back and forth, the so-called "interest rate cut trade" seems not to have caused too many waves here.
Then there's the European stock market.
As of the evening when Xiaoba was writing the manuscript, it also rebounded, approaching historical highs.
Xue Qinghe, the president of the Intelligent Capital Society, believes that as long as there is no economic recession, the Federal Reserve's interest rate cut is likely to drive the U.S. stock market up, and at the same time, it will drive the European stock market, Hong Kong stock market, and other major global stocks to rise.
If we look at the increase, gold and digital currencies are the real big winners of the day.
Bitcoin rose more than 6.4% after the Federal Reserve announced the interest rate cut, setting a record for the largest increase in a month, and some digital currencies with smaller market values are even more frightening, with the highest increase reaching 16 times; gold fell back after hitting a new high of $2600 per ounce after the news was announced, and continued to rise the next day, continuing to head towards a new record.
This is a stone that has caused a thousand ripples, let alone a huge stone.
After the stone fell, some people were happy and some were worried, but more people were concerned not about the interest rate cut itself, but about how ordinary people should act after the interest rate cut?
Even if you can't be the so-called winner, you have to "inquire from all sides," which is better than being a loser who knows nothing.
To this end, we try to extract a few parts related to ordinary people from the waves caused by the huge stone.
Speaking of ordinary people, it does not mean that these changes will be reflected in everyone's wallets or lives immediately, but it is a discussion of multiple possibilities in the future.
In simple terms, this is a process of taking one's own seat.
The United States has started a new round of interest rate cuts, which is a good thing for China, meaning that it will break the ceiling of China's monetary policy and give us more room for interest rate cuts.
In the past few years, there has been a rare inversion of interest rates between China and the United States, with the yield on China's 10-year government bonds being 200 basis points lower than that of the United States.
In order to reduce the outflow of funds from China, China's interest rate cuts were small and limited.
We first need to pay attention to whether China's LPR (loan benchmark interest rate) will be reduced on the morning of September 20th.
China has at least one opportunity to cut interest rates and reserve requirements before the end of the year.
After the LPR is adjusted down, the interest rate on housing provident fund loans may also decrease, which is good for China's real estate market and is also conducive to promoting the reduction of existing housing loans - according to the past tradition, there may be a new round of real estate policy announcements around September 30th, and this year is likely to be the same.
As the monetary financial economic cycles of China and the United States gradually fall out of sync, the impact of the Federal Reserve's interest rate cut on us is not as direct as we thought before.
In theory, the Federal Reserve's interest rate cut narrows the interest rate difference between China and the United States, which is actually conducive to our further monetary policy operations, such as interest rate cuts and reserve requirement cuts, and the necessity for China to adopt interest rate cuts and reserve requirement cuts is indeed increasing.
This is a conclusion drawn from experience.
However, at present, the main logic of the capital markets of China and the United States has undergone significant changes.
For the U.S. market, the long-term trade is actually technological progress, and the short-term trade is based on the impact of recession or interest rate cuts, so the interest rate cut itself is difficult to change the main logic of the U.S. market.
At the same time, the main logic of the Chinese market is now the demand logic, that is, how is demand stimulated, how is demand excavated?
How is demand expanded?
From this perspective, whether it is China's interest rate cut or the United States' interest rate cut, it may be difficult to change this long-term demand logic from the perspective of the capital market.
Another experience is that if the Federal Reserve cuts interest rates, it will cause a large amount of capital to continue to flow into emerging markets.
This logic, I personally think, is not established at present, at least it needs to be observed.
We cannot be rigid in our thinking, and we cannot analyze current problems according to the original experience when the monetary financial economic cycles are out of sync with each other.
For A-shares, the Federal Reserve's interest rate cut is just one of many factors affecting them.
From the perspective of capital, it is a good thing, with narrowing interest rate spreads, appreciation of the exchange rate, and helping capital inflow.
From the perspective of trade, it is a bad thing, with potential demand weakening, which may affect exports and foreign demand, and then drag down the recovery of the domestic economy.
However, overall, the impact is relatively neutral.
Because none of these factors are as important as the domestic fundamentals, especially real estate.
Only when the domestic economy is strong can A-shares be truly driven up.
If domestic demand cannot be stabilized, even if foreign demand recovers, it is useless, for example, foreign demand has actually improved this year, but it is useless.
Given that the current domestic interest rate level is already low and the interest spread of banks is narrowing, the possibility and space for a large interest rate cut in the future are not great.
The central bank may still accelerate the adjustment of the policy interest rate structure, use the changes in the interest rate corridor to widen the gap between short-term and long-term interest rates, and improve the efficiency of financial support for the real economy through structural interest rate policies, while the total amount of policy will be limited.
The development of China's economy and capital market still depends on the stability of domestic demand.
In addition, when the United States drags the world into an economic downturn, the recovery of China's internal momentum cannot be expected to be solved by the Federal Reserve's interest rate cut or further easing of domestic monetary policy.
A country's interest rate is also the price of a country's currency.
The Federal Reserve's interest rate cut is like the "price reduction" and devaluation of the dollar, which also means that the renminbi "appreciates" in value.
For Chinese exporters who mainly earn in dollars, the dollars in their hands are not attractive, and the price of exported goods has also lost some competitiveness to a certain extent.
A deeper concern is whether the Federal Reserve's choice of a "larger" interest rate cut this time means that the U.S. economy has problems?
After all, if your own customers are not doing well, how can there be business?
During the interest rate cut cycle, the dollar tends to weaken, and although the renminbi's exchange rate against the dollar has already reflected a part, it is still at the bottom of the range and is expected to appreciate in the medium term.
In addition, this interest rate cut is relatively special, as the economic recession has not yet occurred, and the data is only marginally weakening, which is a proactive preventive interest rate cut.
Moreover, the previous interest rate hike was different from the ordinary interest rate hike, not a natural interest rate hike brought about by economic strength, but a passive interest rate hike brought about by rising inflation.
Now the core reason for the interest rate cut is that inflation has subsided, so the interest rate should return to a normalized level from a super high level, and it is not a passive interest rate cut forced by a recession, so the economic risk behind it is not so great.
In the next two years, the space for the dollar to cut interest rates is greater than the space for the renminbi to cut interest rates.
This is conducive to maintaining the strength of the renminbi exchange rate, and it is also possible for the renminbi's exchange rate against the dollar to break through 7.
In addition, the official has proposed to prevent "involution" malicious competition, which means that if there are no major changes in the international situation, the renminbi exchange rate will also remain stable, and the practice of stimulating exports through devaluation will not appear in the short term.
The Federal Reserve's work is a kind of risk management, and monetary policy and expectation management must maintain a balance between inflation risk and unemployment risk, let alone this is the first time the Federal Reserve has cut interest rates in four years.
Among the committee members, only one person opposed the 50 basis point cut, that is, the 50 basis point cut has reached a basic consensus within the Federal Reserve.
A large interest rate cut at least indicates that the Federal Reserve directors are worried about the risk of intensifying unemployment and are trying to prevent a recession in the U.S. economy.
From the economic forecast released at this interest rate meeting, it can be seen that the Federal Reserve has lowered the median value of this year's U.S. GDP from the previous 2.1% to 2.0%, and the median value of the unemployment rate from the previous 4.0% to 4.4%.
This means that the rapid cooling of the job market may have alerted the Federal Reserve.Data indicates that the U.S. unemployment rate rose to 4.3% in July (4.2% in August), and the Sum Index recorded 0.49%, approaching the 0.5% warning line.
The "Sum Rule" suggests that when this index reaches the warning line, it will trigger concerns about a recession.
In American history, the Sum Rule has been confirmed in all nine U.S. economic recessions since 1960.
Although the unemployment rate between 4.2% and 4.3% is still at a relatively low level, unemployment is a lagging indicator.
When the unemployment rate rises rapidly, it indicates that economic pressure has been transmitted to deeper areas, meaning that companies are forced to lay off employees due to revenue and cost pressures.
Despite this, the U.S. economy has not entered a recession, and the 50 basis points reflect the Federal Reserve's cautious attitude towards the trend of the U.S. economy.