Author: Zheng Houcheng, source: Zheng Houcheng Macro Research, the original title of "2022 Jackson Hole Annual Meeting Review: The Fed's "agreed" interest rate hike path may face a "triple impact", and the probability of interest rate cuts will fall in 2023"
【Main points】:
Second, do not rule out the possibility of a 75 basis point rate hike by the Fed in September, and the median federal funds rate at the end of 2023 is slightly below 4%;
Third, the Fed's "agreed" interest rate hike path may face a "triple shock";
Fourth, in the first half of 2023, the US CPI for the month was or ranked at -2.10% to 5.30%, with an average of about 2.10%;
Fifth, in the first half of 2023, WTI crude oil futures prices are likely to record negative growth year-on-year;
Six, 4 dimensions backtrack the Fed's five rounds of typical interest rate cut cycle of the interest rate cut point;
Seventh, the Fed interest rate cut timing is likely to fall in the second half of 2023, the probability of the third quarter is greater than the fourth quarter;
Eighth, the "interest rate cut" effect benefits many types of assets, but the US macroeconomic downturn continues to pressure international oil prices.
【Text】:
Event: Fed Chairman Jerome Powell speaks at the annual meeting of global central banks in Jackson Hole on August 26.
Comments:
First, Powell's speech was more "hawkish", emphasizing that "persistence is victory" on the issue of interest rate hikes.
At the 2022 Jackson Hole Annual Meeting of Global Central Banks, Fed Chairman Jerome Powell elaborated on the Fed's "hawkish" stance in a "shorter, more focused, and more direct" manner than in previous years, embodied in the following five points.
First, against the backdrop of a record high of 8.50% year-over-year in the US CPI in July, Powell noted that "the foMC's current top priority is to reduce inflation to its 2% target." As can be seen from the term "top priority," the "goal of reducing inflation to 2 percent" is at the top of the Fed's target system. In response, Powell pointed out that "price stability is the responsibility of the Federal Reserve and the cornerstone of our economy." Objectively speaking, effective inflation control is one of the important objectives of the monetary policy of central banks around the world. This is corroborated by the fact that a considerable number of countries, including New Zealand, Canada, and the United Kingdom, implement "inflation targeting", that is, the central bank clearly takes price stability as the primary goal.
Second, Powell argues that "the current high inflation in the United States is indeed a product of strong demand and supply constraints." In this context, given that "the Fed's instruments function primarily against aggregate demand," "our tools need to be used vigorously to better balance demand and supply," "we are taking strong and swift steps to regulate demand so that it is more in line with supply," and "we clearly have work to do to regulate demand so that it is more in line with supply." The implication of these statements is that "strong" aggregate demand must be curbed through tight monetary policy, including "strong" interest rate hikes, after all, it is difficult to increase supply in the short term. Third, Powell noted that "lowering inflation may require the economy to remain below trend growth for a period of time," and that "labor market conditions are likely to weaken somewhat," arguing that "these are unfortunate costs of lower inflation." That is to say, in order to reduce the rate of inflation, even if the economic growth rate is down and continues to be depressed, and the unemployment rate is high, it is worth it. Supporting Powell's view is the "pain index" proposed by the American economist Oken in the 1970s. Okun believes that the pain index is the sum of the inflation rate and the unemployment rate, and the higher the number, the higher the degree of pain. If a small increase in unemployment is exchanged for a sharp drop in inflation, it is worth it from the perspective of the pain index.
Fourth, the current federal funds target rate is between 2.25% and 2.50%. This range is also the range in which the Summary of Economic Projections (SEP) estimates the long-term level of the federal funds rate. However, Powell noted at the annual meeting that "even after reaching the expected level of long-term neutral interest rates, it is still not the time to give up or pause" because of the current "inflation levels well above 2% and an extremely tight job market".
Fifth, looking back at the trend of US inflation since the 1970s, Powell draws three lessons. The first lesson is that "central banks can and should take responsibility for achieving low and stable inflation," that is, the current Fed must not only bring down high inflation, but also keep it low. As for how low, Powell believes that "inflation will be reduced to low and stable levels" and "such a 'normal' has continued until last spring", while the US CPI in March-May 2021 was 2.60%, 4.20% and 5.0% year-on-year, respectively. That said, Powell believes that inflation below 4.20%, or even below 5.0%, is the "norm." The third lesson is that "we must keep raising interest rates until we are done." This sentence expresses the Determination and Confidence of the Fed to "persevere is victory" on inflation.
The possibility of a 75 basis point rate hike by the Fed in September is not ruled out, and the median federal funds rate at the end of 2023 is just under 4%
We try to roughly infer the Fed's "agreed" path to rate hikes from Powell's speech. Looking at the starting point first, we think there is a high probability that the Fed will raise interest rates by 75 basis points in September. The main basis for this judgment is twofold.
First, Powell noted at the annual meeting that "I said at the time [the July interest rate meeting] that it might be appropriate to have another unusually large rate hike at the next meeting." This partly hints at a 75 basis point hike in September.
Second, the 8.50% year-on-year reading of the US CPI in July, although down 0.60 percentage points from June, is still at an all-time high. More critically, the Fed raised interest rates by 75 basis points on June 15 when the U.S. CPI was 8.60% year-on-year in May, and 75 basis points on July 27 when the U.S. CPI was 9.10% year-on-year in June. If the U.S. CPI remains at around 8.50% year-on-year in August, the Fed will most likely raise interest rates by 75 basis points. It is worth pointing out that we believe that the US CPI in August is highly likely to decline on the basis of July, and the probability is around 8.0%. If this judgment is true, it will send two signals to the market: First, in the context of the two-month downturn, the downward trend of the US CPI in the current month is basically established; The second is to reduce the likelihood that the Fed will raise interest rates by 75 basis points in September.
Looking at the end point, the Fed believes that the median federal funds rate at the end of 2023 is slightly below 4%. This judgment is based on Powell's note at the annual meeting that "the committee's latest personal projections for The June SEP show that the median federal funds rate will be just under 4% by the end of 2023." That said, Fed members believe that the target interest rate for U.S. federal funds at the end of 2023 is in the range of 3.75% to 4.0%. The current target rate range for federal funds is 2.25%-2.50%. From the current 2.50% movement to the 4.0% by the end of 2023, there are three paths:
The first path is for the federal funds target rate to rise rapidly, over 4.0%, and then fall back to 4.0%;
The second path is for the federal funds target rate to go all the way up, reaching 4.0% by the end of 2023; the third path is for the federal funds target rate to quickly reach 4.0% in the short term and then remain unchanged at 4.0% until the end of 2023. We believe that the second and third paths are more likely to be realized.
Looking at the process again, we look at the pace of the federal funds target rate along the way to 4.0% by the end of 2023. On the assumption that rates will rise by 75 basis points to 3.25% in September and rise to 4.0% by the end of 2023, the federal funds target rate has only 75 basis points of upside. Until the end of 2023, the Fed can choose to raise rates directly by 75 basis points to 4.0% in one go, 50 basis points and 25 basis points respectively, and 25 basis points each in three times. We believe that the probability of the first scenario is low, while the second and third scenarios depend on the US inflation situation: if the US inflation is still relatively high at that time, the probability of the second scenario is higher; If U.S. inflation is at a relatively low level by then, the third scenario is more likely to occur. But whatever happens, it is in line with Powell's statement that "to some extent, as the stance of monetary policy tightens further, it may become appropriate to slow down the pace of interest rate hikes."
Finally, looking at the outlook, after the target federal funds rate reaches the high point of the current cycle, that is, 4.0% at the end of 2023, the Fed will not cut interest rates quickly, and it is likely to remain at this high level for a period of time. This judgment is based on Powell's point out that "restoring price stability may require maintaining restrictive policy positions for some time." The historical record raises strong warnings about premature easing of policy". This indicates that rate cuts don't come too soon. If the above assumptions hold true, the fed's "agreed" interest rate cut is most likely after Q1 2024.
Third, the Fed's "agreed" interest rate hike path may face a "triple shock"
Based on Powell's speech at the annual meeting of the Jackson Hole Global Central Bank, we have carved out the end point of the Fed's interest rate hike and the path to the end point, and looked forward to the timing of the rate cut. It is worth pointing out that the above is only the "ideal interest rate policy path" in the Fed's mind. In real economic life, there are three situations in which the Fed's intended goals are "broken" and the ideal path to achieve them.
In the first case, Powell noted, "our decision at the September meeting will depend on the overall data available and the evolving outlook." That said, the Fed's interest rate decision depends on the economic data at the time, as well as their predictions about future economic data. If the performance of the current economic data and the macroeconomic trend are very different from expectations, the Fed may not follow the above "rate hike path" to raise interest rates.
The second scenario is that the occurrence of sudden and extreme events may force the Fed to react passively, and then deviate from the predetermined "interest rate hike path". On December 17, 2015, the Fed launched the process of raising interest rates, but in August, September and October 2019, it cut interest rates by 1.0 percentage points in three consecutive times. In this regard, the Fed's explanation is to carry out "preventive interest rate cuts" and "insurance rate cuts". However, with the advent of the new crown pneumonia epidemic, the target interest rate of federal funds has been "cut to the end", falsifying the so-called "preventive interest rate cut" and "insurance rate cut".
In the third scenario, the Fed may misjudge the macroeconomic situation and inflation trends, and then make the wrong interest rate decision. In mid-2021, Powell repeatedly believed that there would be no spike in inflation in the United States, but the reality is that the US inflation rate has been rising since the beginning of 2021 and recorded a record high of 9.10% in June 2022. In June 2022, Powell said at a forum hosted by the EcB that "we are well aware that we know very little about inflation". Coincidentally, U.S. Treasury Secretary Yellen also publicly stated that "unexpectedly large shocks have pushed up energy and food prices, and supply chain bottlenecks have seriously affected the U.S. economy" and "I have not fully understood this."
In our view, all three scenarios are likely to occur in the second half of 2022 and 2023, especially the first, and at the same time, we do not rule out the possibility of unexpected events and the Fed misjudging the macroeconomic situation and inflation trends again. Therefore, there is a possibility that the Fed will deviate from its "consensual interest rate hike path".
Fourth, in the first half of 2023, the US CPI for the first month of 2023 or ranked at -2.10% to 5.30%, the average value is about 2.10%.
In the context of "the current FOMC's top priority is to reduce inflation to 2% target", how the US CPI trended in the current month has become the focus of the global macro economy, and then correctly judging the year-on-year trend of the US CPI in the current month has become a crucial event in the capital market.
We believe that the US CPI year-on-year is closely related to the trend of international oil prices, or that the trend of international oil prices is the dominant factor in the year-on-year trend of the US CPI in the month. This judgment is based on three points. First, the correlation coefficient between the US CPI and the WTI crude oil futures price for the month was 0.54, between 0.30 and 0.80, which is moderately correlated.
Second, objectively speaking, the correlation coefficient of 0.54 is not high and does not reach a high correlation. Does this mean that it is impossible to judge the year-on-year trend of the US CPI from the year-on-year trend of WTI crude oil futures prices? From a graphical point of view, the year-on-year high (low) of WTI crude oil futures prices may lead the year-on-year high (low) of the US CPI, or synchronize with the year-on-year high (low) of the US CPI for the month. The reason why the correlation coefficient between the two is only 0.54 is because there is a year-on-year high (low) or ahead of the U.S. CPI year-on-year high (low), which lowers the correlation coefficient between the U.S. CPI and the WTI crude oil futures price in the same month, such as the Phased High of 74.97% in October 2004, but the U.S. CPI reached a stage high of 4.70% in September 2005, with a lag of 11 months, and the july 2013 WTI crude oil futures price reached a phased high of 19.15% year-on-year However, the US CPI reached a stage high of 2.10% in June 2014, and the lag period was also 11 months.
Third, among the 12 sub-items of the US CPI, the standard deviation of the energy sub-item that is highly correlated with crude oil is 10.74, ranking first among the 12 sub-items, indicating that the energy item has the greatest volatility and is the dominant item of the US CPI.
In the context of the July WTI crude oil futures price recorded 37.46% year-on-year, compared with the high point of the current cycle, that is, 269.57% in March 2021, down 232.11 percentage points, the 9.10% probability of June is the high point of the current round of US inflation. The main argument supporting our judgment is that in the context of Powell's proposal that "reducing inflation may require the economy to maintain a period of sustained below-trend growth rates", the international oil prices in the later period are likely to be under pressure to the downside, which in turn will pull the US CPI to continue to decline year-on-year. Based on this, we adhere to the judgment that "the inflation high point of developed economies is most likely located in the 2-3 quarters" in the "Yingda Securities Macro Review: The high inflation point of developed economies is most likely to be located in the 2-3 quarters" in the "2-3 quarters of the 2-3 quarters" in the main tone of "flexible and moderate" or will run through the 1-3 quarters monetary policy implementation report (20220214).
Since the US CPI is closely related to the trend of international oil prices in the current month, what is the year-on-year trend of international oil prices when the US CPI is in the negative range of the month- The answer is that since March 1984, the US CPI has been in the negative range for the month- and only 11 monthly data, and the corresponding WTI crude oil futures prices have recorded negative year-on-year growth, with an average of -44.08%.
Let's look at it from another angle, in the case of the negative year-on-year record of international oil prices, how did the US CPI perform year-on-year in the same month? It is estimated that since March 1984, during the period when the price of WTI crude oil futures recorded negative growth year-on-year, the average value of the US CPI for the month was 2.10%, of which the maximum value was 5.30% in February 1991, and the corresponding WTI crude oil futures price was -7.10% year-on-year; the minimum value was -2.10% in July 2009, and the corresponding WTI crude oil futures price was -51.83% year-on-year.
That is to say, once the WTI crude oil futures price in the first half of 2023 recorded negative growth year-on-year, the US CPI for the month is likely to be between -2.10% and 5.30%, with an average of about 2.10%. It is worth pointing out that this level of around 2.10% is the target level of the Fed's interest rate policy regulation, because Powell pointed out that "the current foBW's top priority is to reduce inflation to the 2% target." If this judgment holds, consider Powell's point that "restoring price stability may require a restrictive policy stance for some time" and "the historical record has provided strong warnings about premature policy easing," the Fed is expected to cut interest rates in the second half of 2023.
Fifth, in the first half of 2023, WTI crude oil futures prices are likely to record negative growth year-on-year
Our above judgment is based on the negative year-on-year growth in WTI crude oil futures prices in the first half of 2023. In the first half of 2023, if the WTI crude oil futures price recorded negative growth year-on-year, the international oil price in the first half of 2023 was lower than that in the first half of 2022. We believe that in the context of the high international oil prices in 2022, the international oil prices in the first half of 2023 are likely to be lower than the first half of 2022. What strongly supports our judgment is that Powell's statement on the monetary policy of the United States Fed at the Jackson Hole annual meeting is hawkish, which means that the Fed's interest rate hike in the later period is relatively strong, which is bearish for the global economy. In particular, Powell proposed that "reducing inflation may require the economy to maintain a period of sustained below-trend growth rates", indicating that the Fed will weaken aggregate demand by raising interest rates, which means that the US macroeconomic growth rate will continue to be sluggish in the later period, which will drag down the global macroeconomy. Under the assumption that "demand determines international oil prices", international oil prices are likely to continue to be under pressure in the first half of 2023.
Of course, there are also phenomena that weaken our judgment. First, Middle Eastern oil producers prefer high oil prices, and Saudi Arabia recently issued a signal that OPEC may cut production, which has played a certain role in boosting international oil prices. Second, in the context of the "Russian-Ukrainian conflict", Europe reduced imports of Russian crude oil, resulting in a surge in European energy prices. Objectively speaking, the above two have played a role in pushing up international oil prices in the short term, but unlike the market's point of view, we believe that the "Russian-Ukrainian conflict" suppresses international oil prices in the medium and long term: first, the "Russian-Ukrainian conflict" has formed a negative impact on the global economy, and second, in the context of the financial tightness caused by the war, Russia has a high probability of increasing the export of crude oil. Both of the above are bearish for international oil prices. In addition, even if OPEC production cuts push up international oil prices in the short term, in the context of the Fed's interest rate hikes and the European Central Bank's interest rate hikes, the demand side continues to be under pressure, which is likely to drag down international oil prices.
Based on the above analysis, we believe that the price of WTI crude oil futures in the first half of 2023 has a high probability of recording a negative value year-on-year, and adhere to the judgment that the US CPI is between -2.10% and 5.30% year-on-year, with an average of about 2.10%.
Sixth, 4 dimensions back to the Fed's five rounds of typical rate cut cycles at the time of interest rate cuts
Since 1984, the Fed has gone through five typical cycles of rate cuts: the first was launched on September 20, 1984. A 25 basis point cut to 11.25% on 9 August 1984, a 42-day interval between the last rate hike of the rate hike cycle and the first rate cut of the rate hike cycle, a second round of 25 basis points down to 9.56% on 9.81% on 17 May 1989, a 20-day interval between the last hike and the first, and a third round of 50 basis points on 3 January 2001, down 50 basis points to 6.0% on 16 May 2000 from 6.50% The interval between the last rate hike and the first rate cut is 7 months and 17 days; The fourth round was launched on September 18, 2007, with a 50 basis point cut to 4.75% on June 29, 2006, with the last rate hike and the first rate cut being 2 months and 19 days apart, and the fifth round, which started on August 1, 2019, was revised down by 25 basis points to 2.25% on 20 December 2018, and the interval between the last rate hike and the first rate cut was 7 months and 12 days. As can be seen from the five-round rate reduction cycle, the interval between the last rate hike in the rate hike cycle and the first rate cut in the rate hike cycle is as short as 20 days, and the longest is 7 months and 17 days. Below we look back at the timing of the Fed's five typical rate cut cycles from four dimensions.
From the ISM manufacturing PMI to see the timing of the Fed's interest rate cut: when the first round of interest rate cuts was launched on September 20, 1984, The U.S. ISM manufacturing PMI was 50.0 and fell to 49.90 after five months, which was below the boom-bust line; when the second round of interest rate cuts was launched on June 6, 1989, the U.S. ISM manufacturing PMI was 47.30, which had been running below the boom-bust line for 2 months; when the third round of interest rate cuts was launched on January 3, 2001, the U.S. ISM manufacturing PMI was 42.30, which had been running below the boom-bust line for 6 months; when the fourth round of interest rate cuts was launched on September 18, 2007, the U.S. ISM manufacturing PMI was 51.0 and fell to 49.0 three months later ； When the fifth round of interest rate cuts was launched on August 1, 2019, the US ISM manufacturing PMI was 49.10, breaking below the boom-bust line for the first time in 35 months. It can be seen from the five rounds of interest rate reduction cycle that at the beginning of each round of interest rate reduction cycle, that is, the first interest rate cut, the number of times the US ISM manufacturing PMI is above the boom-bust line is 2 times, the number of times it is located below the boom-bust line is 2 times, and the number of times the "stepping on the line" boom-bust line is 1. From the perspective of time distribution, the timing of the first interest rate cut is distributed in the first 5 months after the ISM manufacturing PMI fell below the boom-bust line in the United States to 6 months after it fell below the boom-bust line.
From the composite indicator of "total U.S. sales year-on-year - total U.S. inventories year-on-year", the fed cut at the time point: when the third round of interest rate cuts was launched on January 3, 2001, This composite indicator is -4.06 percentage points, which has been running in the negative range for 8 consecutive months, during which one month has recorded positive; when the fourth round of interest rate cuts was launched on September 18, 2007, this composite indicator was 2.10 percentage points, which was the first month out of the negative range, after running in the negative range for 14 months, during which one month recorded a positive value; when the fifth round of interest rate cuts was launched on August 1, 2019, this composite indicator was -5.12 percentage points, which has been running in the negative range for 10 consecutive months. The composite indicator of "total U.S. sales year-on-year - total U.S. inventory year-on-year" recorded a negative value, indicating that the sales growth rate in the United States is lower than the inventory growth rate, that is, the supply growth rate is higher than the demand growth rate, indicating that the Overall U.S. enterprises are in the passive inventory replenishment stage, that is, the recession stage in the economic cycle. In summary, the composite indicator of "total U.S. sales year-on-year - total U.S. inventories year-on-year" recorded a negative value is a prerequisite for the Fed to cut interest rates.
From the long and short end of the spread, that is, the composite indicator of "3-month US Treasury rate - 10-year US Treasury rate", the fed cut at the time point: when the first round of interest rate cuts was launched on September 20, 1984, This composite indicator is -1.72 percentage points, and the long-short-end spread is not inverted; when the second round of interest rate cuts was launched on June 6, 1989, this composite indicator was 0.15 percentage points, and the long-end spread was inverted for the first time; when the third round of interest rate cuts was launched on January 3, 2001, this composite indicator was 0.12 percentage points, which has been inverted for 7 consecutive months; when the fourth round of interest rate cuts was launched on September 18, 2007, this composite indicator was -0.53 percentage points, although it was not upside down, but it was inverted for 10 consecutive months from August 2006 to May 2007 ； When the fifth round of interest rate cuts was launched on August 1, 2019, this composite indicator was 0.36, and the long and short end spreads continued to invert for 4 months. In summary, in addition to the first round of the cycle, the remaining four cycles have a long and short end spread inversion phenomenon at the time of the rate cut or before the rate cut, and the time range is 14 months before the rate cut to the month of the rate cut.
From the U.S. CPI year-on-year and core CPI year-on-year to see the Fed rate cut point: When the first round of interest rate cuts was launched on September 20, 1984, When the second round of interest rate cuts was launched on June 6, 1989, the US CPI and the core CPI were 5.20% and 4.50% year-on-year, respectively; when the third round of interest rate cuts was launched on January 3, 2001, the US CPI was 3.70% and 2.60% year-on-year, respectively; when the third round of interest rate cuts was launched on January 3, 2001, the US CPI was 3.70% and 2.60% year-on-year, respectively; when the fourth round of interest rate cuts was launched on September 18, 2007, the US CPI was 2.80% and 2.10% year-on-year, respectively; when the fourth round of interest rate cuts was launched on September 18, 2007, the US CPI was 2.80% and 2.10% respectively. ； When the fifth round of interest rate cuts was launched on August 1, 2019, the US CPI and the core CPI were 1.70% and 2.40% year-on-year, respectively. In summary, from the previous 5 rounds of interest rate cut cycles, the US CPI is less than 5.20% of the year-on-year and the core CPI in the same month. Judging from the past three interest rate cut cycles, the US CPI was lower than 3.70% year-on-year, while the US core CPI was less than 2.60% year-on-year, which has the conditions to start the interest rate cut.
Seventh, the fed interest rate cut timing is likely to fall in the second half of 2023, and the probability of the third quarter is greater than that in the fourth quarter
Powell noted at the annual meeting that "our decision at the September meeting will depend on the overall data available and the evolving outlook.". As we all know, macroeconomic trends are the ultimate basis for the Fed's interest rate decisions, so it is crucial to accurately judge the macroeconomic trends in the United States and make forecasts for macroeconomic data. Below we will study the trend of economic data in four dimensions and predict the timing of this round of Fed interest rate cuts.
From the perspective of the US manufacturing PMI, the US Markit manufacturing PMI recorded 51.30 in August, down 0.90 percentage points from the previous value, and the decline was 0.40 percentage points wider than that in July. According to the current trend, under the premise of the Fed's interest rate hike of 75 basis points in September, the US Markit manufacturing PMI is expected to fall below the boom-bust line in October. In July, the US ISM manufacturing PMI new orders index fell below the boom-bust line after 24 months, superimposed on Powell pointed out that "we are taking strong and rapid measures to adjust demand, so that it is more in line with supply", referring to the US Markit manufacturing PMI trend, it is expected that the US ISM manufacturing PMI will accelerate downward in the later period. We believe that the US ISM manufacturing PMI is likely to fall below the boom-bust line in Q4. Based on our conclusions in part VI of this article, the Fed is expected to cut interest rates around April 2023.
From the perspective of the US inventory cycle, the total US sales in June recorded 14.48% year-on-year, down 0.25 percentage points from the previous value, while the total US inventory in June recorded 18.48% year-on-year, 0.54 percentage points higher than the previous value; in June, the composite indicator of "total US sales year-on-year - total US inventory year-on-year" recorded -4.0 percentage points, 0.78 percentage points wider than the previous value. The composite indicator entered the negative range in March 2022, and has been in the negative range for 4 consecutive months, indicating that the US macroeconomy has shown signs of pressure, superimposed considering that the US inventory sales ratio in June recorded 1.30%, in the historical low range, which means that the current US macro economy is in the passive inventory replenishment stage. Based on our previous review, the Fed is expected to cut interest rates around May 2023.
In terms of long-term and short-end spreads, the three-month US Treasury yield on August 29 was 2.97%, while the 10-year US Treasury yield was 3.12%, a difference of 15 basis points. Whether the Fed raises interest rates by 50 basis points or 75 basis points in September, there is a high probability that the 3-month and 10-year Treasury yields will be inverted. The inversion of the long and short-end spreads means that the US macro economy has entered a recession phase. Based on our previous review, the Fed is expected to cut interest rates by November 2023.
From the perspective of the US CPI year-on-year, we believe that the WTI crude oil futures price in the first half of 2023 has a high probability of recording a negative value year-on-year, and adhere to the judgment that "the US CPI in the first half of 2023 is between -2.10% and 5.30% year-on-year, with an average of about 2.10%". Based on our previous review, the Fed is expected to cut interest rates in the first half of 2023.
In summary, the start of this round of Fed interest rate cuts is most likely between April 2023 and November 2023. Considering that the Probability of the Fed in the second quarter is in the wait-and-see stage, we believe that the Fed will cut interest rates in the 3-4 quarter of 2023, of which the probability of the 3rd quarter is greater, and the latest is not more than the 4th quarter, otherwise the US macroeconomy will face greater pressure. From the above analysis, we believe that the Fed's "agreed" interest rate hike path mentioned in the third part of this article may not be achieved.
Eighth, the "interest rate cut" effect benefits many types of assets, but the US macroeconomic downturn continues to pressure international oil prices
In this cycle of rate hikes, rates were raised by 25 basis points in March, 50 basis points in May, and 75 basis points in June and July. It is worth pointing out that a 75 basis point hike is rare in the history of the Fed's interest rate hike, and two consecutive 75 basis point hikes are unique: since September 27, 1982, the Fed's largest rate hike was in March 1984, with a rate hike of 1.13 basis points, followed by November 1994, June 2022 and July, each with a rate increase of 75 basis points.
Above, we thought there was a good chance that the Fed would raise rates by another 75 basis points in September. Since then, a slower pace of rate hikes is expected to slower after October, based on Powell's remarks that "to some extent, as the stance of monetary policy tightens further, it may become appropriate to slow down the pace of interest rate hikes." This is different from the previous two rate hike cycles: in the rate hike cycle from June 30, 2004 to June 9, 2006, the Fed raised interest rates by 4.25 percentage points in 17 consecutive times in 25 basis points; in the rate hike cycle from December 17, 2015 to December 20, 2018, the Fed also raised interest rates by 2.50 percentage points in 25 basis points for 10 consecutive times. Unlike the previous two cycles, the current round of Fed interest rate hikes shows the characteristics of "low at both ends and high in the middle". This means that the magnitude of the interest rate hike in the later period is gradually narrowing. Once this situation occurs, the market's interpretation is that the time when the Fed's interest rate hike is the most powerful has passed. This is something that was not the case in the previous two cycles of rate hikes. Once the market interprets it this way, all kinds of assets will rebound, such as after the Fed raised interest rates by 75 basis points in July, the market believes that the Fed will "slow down the pace of interest rate hikes", so commodities, equity markets, bond markets have rebounded. It can be expected that after the 75 basis point rate hike in September, the commodity, equity market and bond market are likely to rebound again. We call this phenomenon the "rate-like" effect.
Powell noted that "committee members' latest personal forecasts for the June SEP show that by the end of 2023, the median federal funds rate will be just under 4 percent." The 4.0 percent federal funds target rate is 1.50 percentage points higher than the high of the previous cycle. After a 75 basis point hike in September, there is a total of about 75 basis points of room left. In the second half of the rate hike, although the pace of interest rate hikes slows down, it should be seen that the US federal funds rate is running at a relatively high level. Even a small rate hike of 25 basis points will further raise the cost of capital in the real economy, and its marginal inhibition of demand for the real economy is no weaker than the initial 50 basis points of the rate hike. That is to say, even if the Fed "slows down the pace of interest rate hikes" in the later period, the US macroeconomic growth rate will most likely continue to be under pressure. In this context, even if it benefits from the "quasi-interest rate hike" effect, international oil prices and commodity prices led by copper are likely to be affected by the macroeconomy, and it is difficult to rise and the probability continues to be under pressure. On the contrary, the international gold price and mainland interest rate bonds both benefit from the "interest rate cut" effect and the downward trend of the US macroeconomic growth rate, and it is expected to perform better, and the upward probability is greater than the downward probability.
【Risk Warning】:1. OPEC increases crude oil production cuts to push up international oil prices; 2. The intensification of the "Russian-Ukrainian conflict" has led to a surge in energy prices in Europe.
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