Under the influence of the FOMC minutes and Bullard's hawkish remarks, the market's concerns about the Fed's tightening policy have intensified. Treasury yields across cycles continued their surge on Thursday (January 6), with the benchmark 10-year Treasury yield once hitting its highest since March 2021.
The yield on the indicator 10-year bond rose to 1.7530% at one point during the session on Thursday, the highest level since March 2021, and the late-day gains narrowed slightly, eventually closing slightly higher by 1.46 basis points throughout the day at 1.725%.
CITIC Securities clearly said that the minutes of the latest meeting of the Federal Reserve show the necessity of raising interest rates early and the possibility of early balance sheet reduction in the context of a steady recovery in economic fundamentals, sustained high inflation and limited epidemic disturbances. It indicates that the acceleration of Fed tightening may push US Treasury interest rates up rapidly, causing the stock market to face a correction.
The Fed's voting committee makes heavy hawkish remarks!
The minutes of last December's interest rate meeting released by the Fed on Wednesday showed Fed officials considering raising rates at an earlier point in time to start raising rates more sharply.
Moreover, almost all monetary policymakers agree that balance sheets will begin shortly after the first rate hike, and that they may shrink faster than they did in the last round of 2017.
The Fed minutes have already made the market tremble, and the Fed's speech on Thursday added to the fire.
In terms of interest rate policy, Bullard said the FOMC may start raising policy rates in March.
Brad also said bluntly that I myself was one of those who predicted three rate hikes in 2022 at last December's meeting.
Bullard also pointed out that if inflation eases, the pace of interest rate hikes can be slowed in the second half of the year.
Brad also mentioned the reduction of the balance sheet, saying that shrinking the balance sheet is the next possible policy step, and we may shrink the balance sheet shortly after the policy rate hike.
On inflation, Bullard said the Fed was "very surprised" by the level of inflation and that it would be "incumbent" to act to maintain credibility. The Fed is in a good position to do more on inflation. Bullard expects inflation to ease naturally to some extent, but not back down sharply, and will remain above 3% by the end of the year.
On the issue of employment, Brad said that the current labor force participation rate is lower than before the epidemic is well reasoned.
What is the expected impact of tightening monetary policy on the economy and financial markets?
Will the economy fall into recession as the Fed tightens accelerate and interest rate hikes advance? CITIC Securities clearly said that the current economic activity and employment indicators continue to improve, the economy is in a recovery trend and there is a certain resilience, the inflation level is at a high level, the overall monetary environment is very loose, so the possibility of interest rate hikes leading to recession is low. And the Fed's interest rate hike process is generally a gradual rate hike, and the current interest rate level is close to zero boundaries, so it is expected that the pressure on the economy will be limited in the early stage of this round of interest rate hikes. At the same time, it is also necessary to pay attention to the fact that if the Fed's expectation management is not sufficient, communication with the market is insufficient, interest rate hikes or balance sheet reductions are too fast, or it poses certain downside risks to the economy.
What is the impact of the strong expectation of early interest rate hikes superimposed on the expectation of early balance sheet reduction on US Treasury interest rates? At present, the Fed's monetary policy tightening speed exceeds market expectations, interest rate hike expectations heat up, and the market inflation high operation will continue in the short term, it is expected that the US Treasury interest rate will have greater upward pressure in the near future, and will rise rapidly in the near future. However, the spread of the Omicron variant may slow economic growth expectations, the superimposed supply and demand contradiction has weakened, inflation expectations have been suppressed, and the 10-year US Treasury yield is expected to rise to 1.90%.
Under the influence of the Fed's tightening monetary policy, will the US stock market fall sharply in the first quarter of this year? The expected increase in interest rate hikes, the time of balance sheet reduction or a large degree of advance, and the fact that the balance sheet reduction is faster than in the past indicate that the Fed's monetary policy tightening speed is accelerating, and the risk-free interest rate may enter a rapid upward stage, which will suppress the price of risk assets and the stock market will face adjustment. On the other hand, the future supply-side restrictions are expected to be lifted, or will promote economic recovery, which will form a certain support for the stock market.
What is the impact of the rapid rise of US Debt on the domestic market?
CITIC Securities clearly said that the expectation of interest rate hikes is getting stronger or injecting upward momentum into the US dollar index, and the RMB may strengthen two-way volatility under the combination of "strong exports + strong US dollar" in the short term. At present, the RMB remains strong under the support of strong pre-holiday foreign exchange settlement willingness, and it is expected that its support for the renminbi will weaken as the willingness to settle after the holiday eases. Although the Fed accelerated tightening or pushed the dollar index upwards, if exports in the first half of this year are not weak, the RMB exchange rate may still be able to stabilize at a certain central level, and the impact is relatively limited. If the global supply chain improves in the second half of this year, while demand returns to normal, and developing economies such as ASEAN gradually recover, then China's export substitution effect may weaken, and overseas tightening is expected to become the leading factor driving the trend of the renminbi. In this case, if the market is still in the process of price in tightening expectations, the RMB will be under pressure; if the market has completed the pricing of tightening expectations, and the gap between Europe and the United States in terms of economic fundamentals and monetary policy has converged, it will lead to a lack of motivation for the DOLLAR index to continue to rise, and may not have much impact on the RMB exchange rate.
The convergence of Sino-US interest rate differentials may form a certain disturbance to the rhythm of foreign bond purchases, but it is difficult to change the trend of increasing holdings, and the continuous narrowing of Sino-US interest rate differentials may affect the window period of domestic monetary policy easing. From a trading perspective, The current 10-year US Treasury yield rose rapidly and exceeded 1.7%, the United States is in the process of gradually tightening monetary policy; and the 10-year Chinese bond yield is low due to easing expectations, for foreign capital, China's more relaxed monetary policy and abundant liquidity environment is more favorable to Chinese bonds; from the perspective of stability, the RMB exchange rate as a whole remains stable, the fluctuation of Chinese bond yields is small and the correlation between Chinese bond assets and other global bond assets is small, which can meet the needs of foreign diversified allocation.
Therefore, even if the current Sino-US interest rate differential has narrowed to about 110bps (January 5 data), RMB bond assets are still attractive to foreign investors, and the convergence of Sino-US interest rate differentials may disturb the rhythm of foreign bond purchases, but it is difficult to change the trend of increasing holdings. However, the continued narrowing of the Sino-US interest rate differential may affect the window period of domestic monetary policy easing, and in the post-epidemic cycle, China's monetary policy has maintained a certain degree of independence, provided that China and overseas economies are misplaced in the recovery cycle, the relative stability of the Sino-US interest rate differential and the strong resilience of the RMB exchange rate. As the tightening of the US monetary policy is expected to accelerate, the Sino-US interest rate differential narrows rapidly, and the FUTURE RMB exchange rate may be more under the upward pressure of the US dollar index, which will pose more challenges to the window period of China's monetary policy easing.
This article originated from the financial world
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