On August 10, local time, the July inflation data released by the United States showed that its synchronous growth rate rebounded slightly month-on-month but was lower than market expectations, and the core CPI remained resilient. For the follow-up pace of interest rate hikes, many institutions in the market are currently inclined to the Fed or "skip" interest rate hikes again, and the current round of interest rate hikes since March 2022 is expected to come to an end. This week, the Fed will release the minutes of its August monetary policy meeting, and market expectations remain divided on whether the Fed will continue to raise interest rates in the future.
Fed Chairman Jerome Powell: No interest rate cuts are considered this year
GF Futures Ye Qianning Chen Shangyu
The pace of the Fed's historical rate hike cycle
Since 1982, there have been 6 interest rate hike cycles and 5 interest rate reduction cycles in the history of the United States, corresponding to several market bubbles and recessions in the United States, showing a countercyclical adjustment law in time: GDP growth in the process of interest rate hikes is often in an upward stage; The GDP growth rate at the time of the interest rate cut is in a downward stage, and each interest rate adjustment will be separated from the recovery or cooling of the economic growth rate by 1-2 years. Before and after each monetary policy turn, U.S. stocks, precious metals, U.S. bonds, oil and other large assets will price in advance the expectation of changes in the direction of interest rates, which has certain reference significance.
From the background of the Fed's six interest rate hike cycles, the reasons for the rate hike include high inflation caused by supply pressure, compression of asset bubbles, and the adjustment process of normalizing interest rate policy. We divide these rate hikes into two phases: before 2000, the Fed's three rate hikes were to suppress high inflation under the oil supply shock of 1983-1984; From 1987 to 1989, the Federal Reserve introduced the Taylor rule, and the link between inflation and interest rate hikes was further established; In 1994-1995, the stock market overheated and the Fed tightened early to avoid expected inflation. These rate hikes are basically 200-300 basis points in 1-2 years, the pace is fast, and they are all at a higher interest rate level. In particular, in 1994, the Fed shifted the intermediary target of monetary policy from the money supply to the federal funds rate. After 2000, after the end of the Asian financial crisis in 1999-2000, the Fed decided to gradually withdraw its loose monetary policy and start raising interest rates; Fears of a housing bubble in 2004-2006 led the Fed to start a two-year process of raising interest rates; From 2015 to 2018, the Fed raised interest rates slowly and then quickly in order to adjust the almost zero interest rate quantitative easing policy that had been too loose for a long time and return to the normal range.
The latest round of interest rate hikes from March last year to the present is similar to the situation in 2015, and during the three-year epidemic that began in 2020, the Fed also chose to boost the economy under the impact of the epidemic with quantitative easing and low interest rates, and started raising interest rates after the epidemic to resist the sequelae of previous loose liquidity - high inflation. In June 2022, the CPI reached a nearly 20-year high of 9.1% year-on-year, a far cry from the Fed's goal of maintaining inflation around 2%. As of June this year, 10 rate hikes have cumulatively increased the federal funds target rate by 500 basis points, from 0.25% to 5.25%, and in the latest speech of Fed Chairman Powell, he still insists that 1-2 interest rate hikes are needed in 2023 and does not consider cutting interest rates during the year.
The performance of large asset classes during rate hikes
Looking at the stage performance of large types of assets under the six interest rate hike cycles in the history of the Fed, it can be found that US stocks, US bonds, oil, US dollars, commodities, gold and other assets have responded significantly to the opening and end of interest rate hikes, and have shown a certain forward-looking in returns. We represent the above broad categories of assets with the monthly trend changes of the S&P 500 Index, NASDAQ 100 Index, 10-year U.S. Treasuries, ICE Brent Crude Oil, US Dollar Index, CRB Spot Index, COMEX Gold and other indicators, which have different monthly gains and decreases in the month before the start and termination of the historical 6 interest rate hikes.
From the short-term performance point of view, in the month before the start of the interest rate hike, commodity assets performed better, and the yield of oil and CRB spot index ranked first, which also reflected that when the economy was overheated, commodity prices rose significantly; The worse performer was gold, which fell first a month before three rounds of rate hikes began. In the month before the end of the rate hike, the better performance was the early trading of the end of the rate hike U.S. stocks, especially the blue chips represented by the S&P 500 index rose first, while the Nasdaq 100 index, which is more concentrated in innovative technology stocks, is more unstable, and it is mixed at the end of the 6 rounds of interest rate hikes.
Lengthening the entire interest rate hike cycle to analyze, we find that commodities and U.S. stocks rose as a whole, while U.S. bond prices and the U.S. dollar index fell as a whole, and the performance of the main A-share indexes was relatively independent of the interest rate hike cycle, with mixed ups and downs. Compared with the previous monthly short-term performance, the performance of commodities and stock markets in the long-term cycle was affected by the suppression of tightening policies, which was not as obvious as the suppression of market expectations of tightening in the short-term cycle. In general, before the start and end of interest rate hikes, the impact of sentiment on the short-term performance of assets is dominated by the sentiment expected to shift in monetary policy, but the trend of the full cycle actually tends to the upside.
The chart shows the rise and fall of major types of assets from June to July 2023
Since the Federal Reserve announced in June this year to keep the benchmark interest rate unchanged until mid-July, from the perspective of the rise and fall of large types of assets, the S&P 500 and Nasdaq 100 corresponding to the US stocks performed the best, commodity and crude oil prices also recovered, while the A-share market is still in the oscillation range. From the cumulative situation since the interest rate hike in March last year, this round of commodities has fallen significantly, and the dollar index and U.S. stocks have risen.
The chart shows the rise and fall of major types of assets from March 2022 to July 2023
The impact of interest rate hikes on the U.S. economy
The chart shows the year-on-year trend of 6 rounds of interest rate hikes in the United States CPI and PPI
Since the Fed has long closely linked inflation indicators with interest rate decisions, observing the trend changes of CPI and PPI in the historical interest rate hike and interest rate reduction cycle can also help to judge the relative process of this round of interest rate hikes, and predict whether the US economy can achieve a soft landing after this rate hike, or fall into a period of decline after this rate hike. Based on the year-on-year and month-on-month trends of CPI and PPI, the year-on-year growth rate of CPI and PPI rose first and then fell during the interest rate hike, and there was still a downward inertia within half a year after the last interest rate hike, and the month-on-month inflection point appeared before the year-on-year. Looking at the year-on-year GDP growth rate before and after the rate hike, the rate hike will not necessarily cause the US economy to decline. Specifically, in the 6 interest rate hike cycles from 1982 to the present, the year-on-year growth rate of GDP constant price is in most cases even higher than the growth rate at the beginning of the rate hike, only from 2004 to 2006, the economic growth rate is gradually slowing down, and by the end of the cycle, GDP has fallen from 4.23% to 2.98% year-on-year, and this round of interest rate hikes is second only to the current pace of interest rate hikes, in 2 years, the federal funds rate has increased from 1.0% to 5.25%, a cumulative increase of 425 basis points. Correspondingly, inflation in this cycle is extremely resilient, and the CPI and core CPI have remained above 3% and 2% year-on-year respectively in 2 years, during which there is no obvious cooling trend.
In comparison, the effect of 11 interest rate hikes since the end of last year is actually very significant. The interest rate hike began in March 2022, and the year-on-year growth rate of the two CPIs began to decline in May, falling to 3% and 4.8% respectively in June this year. In the previous interest rate hike cycle, the CPI peaked year-on-year and began to decline in only 4 months, which was the shortest in history, and the average monthly decline of 0.51% was also the highest in history. Although the 2% inflation target has not yet been reached, according to historical data, within half a year after the end of the interest rate hike, the inertia of the price index will continue to fall, and the GDP growth rate will also decline one to two quarters after the end of the interest rate hike, and the Fed will most likely terminate the interest rate hike process when the core CPI falls back to 3%-4% year-on-year, so as to avoid causing a subsequent recession. In the first quarter of this year, the constant price of U.S. GDP grew by 1.80% year-on-year, and a soft landing is more likely.
The figure shows the year-on-year change in the year-on-year growth rate of US GDP after 6 rounds of interest rate hikes
Market outlook at the end of this round of rate hikes
From June after the Fed announced its decision to keep interest rates unchanged, by July, the dollar index fell continuously and has fallen back below 100, indicating that the market expects that this round of interest rate hikes is in the final stage. Correspondingly, precious metals showed an upward trend in July, which also reflected expectations that the rate hike was nearing its end. However, the end of the rate hike is not necessarily positive news for the A-share and U.S. stock markets. At the end of tightening, the probability of a recession is likely to be the greatest, and historical GDP growth data suggest that economic growth will continue to slow for another 1 to 2 quarters after the rate hike ends. During this transition period, demand suppression in a high-interest rate environment may hit corporate earnings more pronouncedly, and valuation highs caused by accumulated gains during interest rate hikes are likely to pull downward, making the U.S. equity market weaker. At present, the A-share market is still mainly trading changes in the domestic economic recovery environment, and the impact of the Fed's interest rate hike is mainly reflected in the recovery trend of the RMB exchange rate under the weakness of the US dollar, which is conducive to the inflow of foreign capital.
In addition, a soft landing for the US economy after the end of the interest rate hike will help support external demand and mainland exports. According to the U.S. Department of Labor's unemployment rate and labor market data, the U.S. economy at the end of the interest rate hike has no signs of recession now, but in terms of credit, consumer loans have continued to shrink in a high-interest rate environment, CPI, PPI and other growth rates are likely to continue to cool, if business investment also declines, it may make the economic growth rate fall more than expected in the second half of this year. Gold, oil and other assets that are more closely related to the strength of the US dollar may start to rebound from the stage low before the end of the interest rate hike to the start of the interest rate cut, and the allocation value is higher.
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Analysts: The United States has entered the most difficult period in the second half of controlling inflation
Reporter Wu Mengwen
The United States released a number of economic data last week, indicating that the United States has entered the most difficult period in the second half of the period of controlling inflation, among which the CPI rose by 3.2% year-on-year in July, slightly higher than the 3% increase in June; The July PPI rose 0.8% year-on-year, beating market expectations.
Specifically, the US July CPI released on August 10 rose 3.2% year-on-year, slightly lower than market expectations, but the core CPI was in line with expectations. In the year-on-year contribution structure of the US CPI, the energy sub-item increased by 0.4 percentage points from June, and the contribution of durable goods and core non-durable goods fell by 0.1 percentage points from the previous month, but the contribution of core services remained unchanged in June. Zhongzhou Futures Jin Guoqiang said that the US inflation data in July did not exceed expectations, and the core CPI continued to decline slightly, both indicating that US inflation is slowly declining, which at least proves that additional tightening is not necessary.
"Judging from the CPI released by the United States in July, the momentum of inflation decline has slowed down, but the target task of inflation falling back to the average of 2% in the future is still very arduous. U.S. CPI rose to 3.2% year-on-year in July accelerated to 3.2% from 3% in June, the first acceleration since June 2022, while excluding more volatile food and energy, the July core CPI rose 4.7% year-on-year, slightly down from 4.8% in June. Notably, the core services inflation measure, closely watched by Fed officials, accelerated again in July, rising 4.1% year-on-year and 4% in June, when it hit an 18-month low. On a month-on-month basis, housing was the largest contributor to overall CPI growth, accounting for more than 90% of growth, with motor vehicle insurance prices also contributing. Therefore, unless the US housing market continues to cool sharply, inflation will be slow to fall. Cheng Xiaoyong, deputy general manager of Guangzhou Financial Futures Research Institute, said.
In addition, jobless claims rose by 21,000 to 248,000 in early July, higher than market expectations of 230,000. Jin Guoqiang said that the new non-farm resilience has slowed down, the gap between employment supply and demand has narrowed, and the decline in the employment cost index reflects that the US labor market is in the process of gradually cooling. However, the unemployment rate data remained low and the July wage growth rate picked up month-on-month, which showed that the labor market was still resilient, which supported real income, consumer spending and inflation, and also corresponded to the need for the Fed's high interest rate to continue for some time.
"History shows that inflation is stubborn, such as the period of stagflation in the 70s of the 20th century, when high inflation lasted for more than 10 years. Therefore, once inflation rises, it may last longer than expected, so don't expect the Fed to announce 'mission accomplished' very early. Cheng Xiaoyong said that after the release of the US July CPI data on August 10, the market's expectations for the Fed's interest rate hike heated up slightly, and the 2-year US Treasury yield, which is sensitive to the Fed's policy, rose to 4.89% on August 11, and the indicator fell to 4.74% on August 8.
In Jin Guoqiang's view, for some time after the release of last week's US inflation data, market trends showed that although inflation picked up slightly, it was lower than expected and core CPI fell, so the market expected the Fed's interest rate hike path to diverge this year.
"From the current Fed rate hike cycle, it is very clear that it is 'data-dependent' to raise interest rates. From the perspective of recent inflation and non-farm payrolls, the probability of additional tightening of monetary policy is small. At present, the United States is a situation of 'slow decline in inflation + strong economy', which corresponds to the fact that the end point of interest rate hikes may not be so high, but it will definitely be high for longer interest rate hikes. JUDGING FROM THE LATEST CCE FEDWATCH TOOL, THE INTEREST RATE HIKE IN SEPTEMBER IS LIKELY TO STOP, BUT THERE IS STILL SOME ROOM FOR GAMING, AND WE EXPECT THE FOURTH QUARTER TO ENTER THE END OF THE INTEREST RATE HIKE, AND THE RATE CUT WILL BE CUT AT THE EARLIEST UNTIL THE END OF THE FIRST QUARTER OF 2024 AND THE BEGINNING OF THE SECOND QUARTER. After the market enters the terminal stage of interest rate hikes, it is clear that the room for expectations is getting smaller and smaller, and the impact of Fed officials' speeches on market expectations and prices is getting smaller and smaller. There is still one CPI/PCE, non-farm payrolls report, and revised GDP for the second quarter during the meeting until September, which will also provide more guidance to the Fed and the market. Jin Guoqiang said.
"Overall, the market does not expect the Fed to raise interest rates, but it will not cut interest rates anytime soon, because inflation is still falling slowly, and the trigger for the rate cut is a significant deterioration in the labor market, and the current Fed's high interest rates will remain for a long time." Cheng Xiaoyong said.
This article is from Futures Daily