Super central bank week is coming, will the Fed's interest rate hike cycle be completely over?

Super central bank week is here.

This week (October 30-November 5), the Federal Reserve, the Bank of England and the Bank of Japan will all hold policy meetings. A number of blockbuster economic data, such as the U.S. non-farm payrolls data for October, China's PMI for October, and the Eurozone CPI for October, will also be released.

Global investors are highly focused on the Federal Reserve's interest rate decision on Thursday, November 2. The Fed is widely expected to stand still. However, will Fed Chair Jerome Powell's attitude towards continuing to raise interest rates and shrink his balance sheet change? It is still the focus of the market.

CICC believes that the need for further tightening by the Fed has decreased, but it will remain vigilant about inflation risks. The Fed will balance the risks of "not doing enough" and "doing too much", emphasizing that the fight against inflation is not over, but also signaling that it is not in a hurry to raise interest rates again.

(Photo courtesy of Hero)

Inflation slows but is above target //

On 2 November, the Fed will announce its interest rate decision, followed by a press conference by Fed Chair Jerome Powell, who is widely expected to keep rates unchanged in November.

According to CME's "Fed Watch", there is a 97.5% probability that the Fed will keep interest rates unchanged in the range of 5.25%-5.50% in November, and a 2.5% probability of a 25 basis point rate hike to a range of 5.50%-5.75%. The probability of keeping interest rates unchanged by December is 76.0%, the probability of a cumulative rate hike of 25 basis points is 23.4%, and the probability of a cumulative rate hike of 50 basis points is 0.5%.

Some analysts believe that the downward rate of inflation in September slowed down, and the potential price increase accelerated, but it was not enough to prompt the Fed to raise interest rates next week.

The last inflation data before the Fed's interest rate meeting this week showed that the core PCE price index rose 0.3% month-on-month in September, in line with market expectations and ahead of the previous level; It rose 3.7% year-on-year, down from 3.8% in August but still above the Fed's 2% inflation target.

The PCE price index in the United States rose 0.4% month-on-month in September, the same growth rate as in August; The core PCE price index rose 0.3% month-on-month in September, up from 0.1% in August.

Prices have picked up, but personal spending has continued to grow, rising by 0.7 percent, better than expectations of 0.5 percent. Personal income rose 0.3%, 0.1 percentage points below expectations.

In addition, the U.S. economy remains resilient. Among them, the US GDP grew by 4.9% annualized quarter-on-quarter in the third quarter, the fastest growth rate in the past two years.

Will the rate hike cycle come to a definite end? //

There is a high probability of a pause, but will this be the definitive end of the rate hike cycle? Analysts believe that this will depend on labor and inflation data in the coming months.

Market participants believe that for now, the October non-farm payrolls is still an important indicator to influence the Fed's decision-making, after all, the performance of the labor market has a significant impact on the future inflation path.

Non-farm payrolls will slow to around 168,000 in October, well below the 336,000 in September, largely due to a slowdown in casual hiring in the leisure and hospitality sectors, as well as a strike among U.S. auto workers, according to a number of agencies.

The unemployment rate is likely to remain at 3.8%, and the month-on-month wage growth rate may fall to 0.2%, reflecting a cooling in corporate recruitment demand.

Wells Fargo economists Tim Quinlan and Sharon Cirry recently said: "The Fed has anticipated the performance of the Q3 GDP data due to the strong monthly data released earlier, and there are few surprises." We continue to expect the economy to show more pronounced signs of slowing later this year and early next year as tighter financial conditions become more pronounced and begin to influence spending and investment decisions. ”

Fed Chair Jerome Powell said in New York last week that the current rise in bond yields is prompting tighter financial conditions, and that the surge in borrowing costs may be a substitute for further rate hikes by the Fed. But he also said that additional evidence of economic growth could further increase inflation risks and therefore lead to further interest rate hikes.

Powell may release a neutral attitude //

CICC Xiao Jiewen and Zhang Wenlang said in a recent research report that the Federal Reserve will not raise interest rates this week, and Powell may release a neutral attitude, which not only emphasizes that the fight against inflation is not over, but also hints that there is no rush to raise interest rates again.

History shows that the fourth quarter is often a period of high financial risks: in the fourth quarter of last year, when market financial conditions were tightened due to the gilt turmoil, the Fed lowered the pace of interest rate hikes from 50 bp to 25 bp; In the fourth quarter of 2019, there was a liquidity turmoil in the U.S. Treasury market, and the Federal Reserve stopped QE and re-expanded its balance sheet. In the fourth quarter of 2018, the Fed's insistence on raising interest rates caused a panic in the market, and the US stock market plummeted, and then Powell released a dovish signal that policy can be pivoted at any time, and market sentiment eased.

In retrospect, the last rate hike in December of that year was unnecessary, and the Fed made the mistake of overtightening. CICC believes that in the current context of still high inflation, intensifying geopolitical conflicts and tightening financial conditions, the Fed may choose to balance the risks of all parties and emphasize patience to avoid repeating the mistake of excessive tightening in 2018.

On the other hand, if inflationary pressures return and the Fed does not respond in a timely manner, then the market will worry that monetary tightening will not be strong enough, triggering the risk of secondary inflation. An important lesson from the "Great Stagflation" of the '70s is that the Fed cannot prematurely declare victory in the fight against inflation until the risk of inflation is resolved.

Therefore, CICC believes that the Fed will also leave room for subsequent interest rate hikes at this week's meeting, and Powell may continue to emphasize that interest rates will be high for longer, so as to imply that there may still be a long way to go before the conditions for interest rate cuts are reached. All in all, balancing risks and remaining patient is the Fed's best option right now, maintaining its current tightening and leaving the task of eradicating inflation to time.

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