SMM News: the Federal Reserve cut interest rates by 25BP in July and ended its contraction table early on August 1, making it more dovish.
At the July meeting, the target range of the federal funds rate was cut by 25BP to 2% to 2.25%. The committee approved the decision by a vote of 8:2 and will end the schedule on August 1. The interest rate cut is in line with market expectations, and the early end of the contraction table slightly exceeded the market expectations, the action is more dovish. We had previously made it clear in our June comments that the earliest Fed rate cut could be in July, with a high probability of early end of the schedule in July. The market was disappointed by Powell's hawkish comments that "this is not the beginning of a long interest rate cut, but it is likely to cut interest rates again", with the S & P falling 1.1 per cent below the 3000 mark to close at 2980.38, the biggest one-day drop since the end of May. The VIX index rose more than 15 per cent to 16.12. The dollar index extended its intraday gain to 0.6 per cent to around 98.6.
Powell's hawkish remarks disappointed the market, and the market's expectations for a cut in interest rates in the second half of the year were readjusted.
Asked if he was in the early stages of a long interest rate cut, Mr Powell said he did not think so, a move designed to guard against downside risks rather than hinting at the start of a easing cycle since then. But Powell later said he did not say it was just a rate cut, not the beginning of the easing cycle, but could cut interest rates again. At the same time, Powell stressed that we should not think that we will never raise interest rates again and will boldly use all the tools if necessary. Powell's hawkish comments clearly disappointed the market, which also adjusted its expectations for a rate cut in the second half of the year. The implied probability of rate cut in federal funds rate futures on July 31 shows that the probability of 25BP rate cut in September is 60%, and the probability of rate cut 50BP is reduced to 0. The probability of a total of two rate cuts by the end of 2019 rose to 40.6 per cent from 34.6 per cent before the meeting, and the probability of three rate cuts fell to 36 per cent from 38 per cent.
Prevention is the key to preventive interest rate cuts. A total of 2 to 3 interest rate cuts are expected this year.
The Fed is now more dovish and more hawkish. Which is more useful for judging the future trend of interest rates, behavior or speech? We believe that the focus should be on the dovish behaviour of the Fed. The rate cut will most likely open the window for the Fed to cut interest rates in a row. It is expected that there may be a total of two or three preventive rate cuts this year, and the pace of rate cuts next year will continue. When the US economy is in a weak state, by cutting interest rates to repair the momentum of the economy, we can hedge against certain negative effects and reduce the pressure on meter expansion in the future. "there have been several interest rate cuts not because we think it is likely to be necessary, but because of the consequences of a possible event," Greenspan said in an interview on July 24. If it does happen, the consequences will be very great. " The same is true of the rate cut, not because of a clear downturn in the economy, but as a precaution.
In the medium term, we need to pay attention to the switch from "preventive" interest rate cut to "declining" interest rate cut.
The downward growth rate of GDP in the second quarter further confirmed the characteristics of the peak decline of the US economy, but also showed a certain degree of resilience. We believe that the US economy may slow down in the second half of the year, and with the opening of the interest rate cut window, there is a good chance that the real estate decline will stabilize, and the post-cycle consumption of real estate such as furniture and household appliances, as well as the consumption of cars, which are more sensitive to interest rates, will support the economy. In the medium to long term, the reasons behind the rate cut cycle may switch over time, and we need to focus on whether this is a preventive rate cut in case of trouble, or whether it is in response to a recession. This is crucial to thinking about the possibility of a recession and even judging the future of US stocks. The rebound in US stocks driven by loose expectations is unsustainable, and the market will eventually reflect downward expectations in the economy.
The dollar is on the verge of a weak, long-term inflection point, but the process is bound to be volatile
We believe that the dollar is about to usher in a weak long period of inflection point, but this switching process is bound to be volatile. There are two main reasons: first, the world's major central banks have quietly started competitive easing, the Fed's monetary policy is not ahead of other economies. Second, at the end of the economic cycle, the Fed is more discretionary in monetary policy, depending on evolving data and changing risks. This determines that the Fed's position is flexible and open, and now there will be the phrase "interest rates can rise or fall in the future". We believe that this volatility process will be more prominent in the third quarter, but as the downward pressure on the US economy increases in the fourth quarter, the Federal Reserve further confirms the pigeon, the dollar index is likely to have a small downward trend.
Risk tip: Fed monetary policy easing less than expected, trade frictions escalate or repeatedly impact market risk appetite.
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