Goldman Sachs expects the U.S. interest rate cut to be delayed from March to May!

Although the Fed's next step is bound to move towards a rate cut, the market is still divided on the timing. Indeed, the Fed interest rate meeting in the early morning gave the market a small surprise - although the Fed held its seat for four consecutive meetings, Fed Chairman Jerome Powell sent a strong signal that a rate cut in March may not be possible. Earlier, the bet on a rate cut in March was more than 7%.

Goldman Sachs released a report in the early hours of the morning saying that it had postponed its forecast for the first rate cut from March to May in light of the comment, as well as the agency's expectations of strong growth in the first quarter and a temporary rise in inflation in January. However, Goldman Sachs still expects five rate cuts in 2024, four in a row at the May, June, July and September meetings, then slowing to a quarterly cadence and another rate cut in December and three more in 2025, as Goldman Sachs expects core PCE inflation to be at least 0.2 percentage points lower than the FOMC's median forecast of 2.4% this year and fall further in 2025.

Some traders said Wall Street reacted strongly to the "revelation", with the S&P 500 experiencing its worst day since September, with the Nasdaq 100 falling about 1.8%. Gold gave up all of its earlier gains, while the dollar rose above 103 and US Treasury yields rose on the short end and fell on the long end, with the two-year Treasury rate closing at 4.27% and the 10-year Treasury rate closing at 3.99%. As a result, Asia-Pacific stock markets were generally under pressure, and the RMB weakened against the US dollar again at the opening on February 1 and approached the 7.2 mark.

The Fed has denied cutting interest rates in March

The FOMC kept interest rates in the range of 5.25% to 5.50% and did not make any changes to its balance sheet plan, which was in line with expectations. But the monetary policy statement was more hawkish than expected, and Powell underscored the message by noting that a rate cut in March was "unlikely".

Powell said more data needs to be seen, but not necessarily better, as future employment and inflation data become more important. Matt Weller, global head of research at FOREX, told reporters that the FOMC made several substantive updates to its monetary policy statement for the first time. Among the most significant changes were the removal of the reference to the resilience of the banking system, noting that the risks of achieving the employment and inflation targets were "moving towards a better balance", the removal of comments on "further policy tightening", and the removal of comments on "further policy tightening" and the notion that interest rate cuts are not expected until "it is satisfied that inflation is continuing to move towards the 2% target".

"Overall, these fine-tunings suggest that Powell and his team are considering when to pivot to rate cuts, but for markets that have been expecting rate cuts to begin at the March Fed meeting, these fine-tuning have been more hawkish than expected, suggesting that the rate cut cycle may be later than many traders expected," he said. "This also led to a 30-50 point increase in the dollar against most non-US currencies during the meeting, and a sharp decline in major stock indices.

But it is clear that inflation and employment data will be especially important in the coming months, as this determines the exact timeline for the start of the Fed's easing cycle. In fact, the Fed's comments were not entirely surprising, as some of the recent economic data has been quite strong.

For example, US GDP grew by 3.3% in the fourth quarter of 2023, far exceeding market expectations of 2%, and the Fed's favorite core PCE price index fell to 2.9% from 3.2% in December, lower than expectations of 3%. Since last week, the weakening of inflationary pressures and solid economic growth have hovered around 50% for the Fed to cut interest rates in the first half of the year, helping the dollar index to rise for four consecutive weeks, while retail sales data has been particularly strong. According to the data, the US retail sales data in December 2023 increased by 0.6% month-on-month, double the previous value of 0.3%, exceeding market expectations of 0.4%, the largest increase in three months. "U.S. consumer spending remains very strong, which could add to inflationary pressures. I think what's happening in the Middle East is also going to raise some concerns, and if supply chains are affected, it will increase inflationary pressures, and that concern will continue. Weller said.

In addition, the US non-farm payrolls data, which will be released on Friday, will also be crucial. The market expects 173,000 new jobs in January, compared with 216,000 in the previous month, the unemployment rate rose slightly from 3.7% to 3.8%, and the year-on-year growth rate of hourly earnings remained unchanged at 4.1%. Overall, manageable inflation (close to the Fed's target) and a stable job market (below 4% for an extended period of time) make rate cuts less urgent and magnitude.

Attention has also been paid to the process of balance sheet reduction. Powell also noted that the FOMC will begin an in-depth discussion on balance sheet issues at its March meeting. Jan Hatzius, chief U.S. economist at Goldman Sachs, said: "We think this could mean making a statement about slowing the pace of balance sheet reduction in March, and then a decision may be made to officially slow down in May, which will be implemented soon thereafter." ”

Asia-Pacific stock markets are under pressure and the renminbi is volatile

JPMorgan Asset Management told reporters that after the meeting, the market reaction was differentiated, and the yield of US Treasury bonds fell, but the stock market sold off. Bond markets may be buoyed by the prospect of a reconfirmation of rate cuts this year, but risk assets are uneasy by the delay in the timing of rate cuts.

"Overall, maintaining the judgment that the Fed is expected to cut interest rates by 25bp in June, September and December this year remains unchanged, and the backward shift of the time point of interest rate cuts may once again usher in the investment window period for U.S. bond assets, and secondly, it also shows that investors should take a more balanced and more medium- and long-term perspective on the investment of U.S. stocks. ”

As of 11:10 on February 1, the Shanghai Composite Index rose 0.29% to 2,796.99, while the Nikkei fell more than 1%. Although the Fed's rate cut is a definite event, the yuan has been weakly consolidating recently, with USD/CNY at 7.1781 and USD/CNH at 7.1871.

Zhou Yun, fund manager of Schroder Fund Management (China), told reporters that at the macro level, the endogenous momentum of China's economy is still weak, and the credit demand of residents and enterprises is still relatively sluggish, or there is a greater risk of downward inflation;

In her view, the current valuation level of equities is in the historical extreme range from multiple dimensions, "but low valuations themselves may not be able to catalyze the rise of the stock market." We have shifted to neutral on equities and are waiting for signs of marginal improvement. Sector-wise, we downgrade the technology sector to neutral, mainly due to the short-term weakness of high-frequency data such as mobile phone sales and GPT visits, as well as high valuations and congestion. In terms of bonds, the 10-year Treasury bond broke through the key point, and the yield is currently at a record low, and the further downside may be limited, but the weak macro environment is still good for interest rate bonds. ”

At present, the institution's forecast for the RMB exchange rate in 2024 is in the range of 7.0~7.2, but the probability of approaching 7.2 seems to be climbing.

In the short term, traders believe the renminbi may come under pressure. On the one hand, the U.S. economic data is still strong, making it difficult for the U.S. dollar index to weaken, and on the other hand, the market has taken profits after some stimulus policies have been implemented, and macro adjustments and earnings pressures persist.

"We expect USD/CNY to consolidate between 7.1 and 7.2. A series of positive developments have contributed to the RMB's recent one-off rally, but a strong US dollar could make it difficult for the RMB to rise above 7.1. Zhang Meng, a macro and foreign exchange strategist at Barclays, told reporters that although the central bank has been committed to maintaining exchange rate stability, "we have not detected that the intention to maintain the exchange rate below 7.1 is not strong." ”