SMM News: following the weaker-than-expected ISM manufacturing index in May, US non-agricultural data also froze again, and Federal Reserve Chairman Powell subsequently released a "hint" of interest rate cuts, raising expectations of a rate cut by the Federal Reserve this year. But most experts told the Shanghai Stock Exchange that the direction of the Fed's interest rate policy depends on economic development and that the Fed still needs to look at economic data. And once the Fed cuts interest rates, it will have a knock-on effect on stocks, currencies and commodity markets.
Economic situation determines the trend of Fed interest rate Policy
With the exception of higher-than-expected GDP data of 3.1 per cent in the first quarter, a number of US economic data have since fallen below expectations: ISM manufacturing data fell to 52.1 in May, the lowest level since October 2016, while non-farm payrolls data were less than half of market expectations.
"as a result of the weakening of tax cuts and global trade disputes, US economic growth has slowed. But a single economic data does not mean the Fed will cut interest rates, and the Fed needs time to look at other economic data. " Xu Mingqi, a special researcher at the Shanghai Institute of International Finance and Economic Research and a researcher at the Shanghai Academy of Social Sciences, told the Shanghai Stock Exchange that under pressure from US President Trump, the Fed will not rule out interest rate cuts at its June meeting. But he expects the probability of a rate cut in June to remain between falling and not falling.
Interest rate markets now expect the Fed to cut interest rates at least once in June and 78.9 per cent in July, according to data from the Federal Reserve Watch tool of the Chicago Mercantile Exchange (CME) on the 11th.
Wu Jingjing, head of investment strategy at Citibank's personal Financial Bank's Wealth Management Department, told the Shanghai Stock Exchange that even if the US economic data weakens, the Fed may not take action until July at the earliest. Given the current performance of the US economy, the agency still maintains expectations that the Fed may remain motionless this year.
Experts generally believe that what kind of interest rate policy the Fed will adopt in the future still depends on the performance of the US economy. Xu Mingqi believes that if the US GDP falls below 2.5 or even 2 per cent, the Fed will cut interest rates to ensure economic development.
"although the data show that the US economy grew by 3.1 per cent in the first quarter, excluding temporary factors, the real growth rate is less than 2 per cent, indicating that the economic situation is still not optimistic." Bai Ming, deputy director of the Institute of International Markets at the Research Institute of Commerce, told the Shanghai Stock Exchange that the Fed will not cut interest rates any time soon, and whether it will cut interest rates next year still needs to be watched for economic performance.
Interest rate cut will affect stocks and foreign exchange commodities
Capital markets are the most sensitive to the Fed's interest rate policy. On the day Powell hinted at the rate cut, a large area of "floating red" appeared in the once-weak global stock market. Once the "boots" do fall to the ground, what kind of spray will they stir up?
"from the inherent law of economic development, if the Fed cuts interest rates, US stocks are expected to usher in a wave of gains, the dollar will come under pressure, and some commodity prices will strengthen." Xu Mingqi analyzed that for the world economy, the easing of the money supply by the Federal Reserve will enhance the investment motivation of investors and have a spillover effect on the global economy. For the Chinese market, loosening liquidity in the United States will also be good for the Chinese stock market.
However, Xu Mingqi also said that investors will not rule out the Federal Reserve to further stimulate the economy as an accumulation of economic risks, if investors become more risk-averse, it will not be conducive to the development of global markets.
Some institutions have questioned the stimulus effect of the Fed's rate cut.
Lisa Shalit, chief investment officer of Morgan Stanley Wealth Management, said in a note to clients that while a loose interest rate policy could boost market liquidity and valuations in the short term, interest rate cuts would not fundamentally solve the economic woes.
"the Fed's high probability of cutting interest rates is a response to a number of market bearish factors, such as a slowing economy and weaker financial markets, and monetary policy hedges may support the market. but if global trade disputes eventually drag the global economy into recession, Fed policy may also be difficult to fully hedge against negative pressure." Wu Jingjing said so.
Global central banks may follow interest rate cuts
At present, in order to deal with the external uncertainty of economic development, a number of central banks have begun to act.
The ECB this month decided to leave three key interest rates unchanged and unexpectedly announced that current interest rates would continue until at least the first half of 2020. In March, the central bank was expected to keep interest rates unchanged until at least 2019. At the same time, the Reserve Bank of India announced its third interest rate cut this year, and the Reserve Bank of Australia cut interest rates for the first time since 2016.
If the US cuts interest rates "boots" on the ground, will other central banks around the world follow suit?
"globally, inflation remains low in most countries and there is still room for interest rate cuts. If the Fed cuts interest rates, other central banks may follow suit. " Xu Mingqi expects the European Central Bank, the Bank of Japan will maintain the current negative interest rate policy, the Bank of India and the Bank of Australia are likely to continue to cut interest rates. In addition, he believes that the Fed rate cut will reduce the pressure on emerging market currencies, the market will have more room for monetary policy adjustment.
Wu Jingjing said that each country is affected by the external environment differently, and countries with more pressure on economic growth and weaker inflation may be more inclined to adopt easing policies.