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On September 18, local time, the Federal Reserve Board of United States announced that it would cut the target range for the federal funds rate by 50 basis points to a level between 4.75% and 5.00%. This is also the first time that the Fed has cut interest rates since 2020, marking the Fed's shift from a monetary policy tightening cycle to an easing cycle.
So, why did the Fed cut interest rates? What signal is being released? Where will the world's major asset classes go? How will China's A-share market be affected?
Fed rate cut signals 'significant easing' of inflation
The Federal Reserve concluded its two-day monetary policy meeting on September 18. The Federal Open Market Committee, the Federal Reserve's policy-making body, said in a statement after the meeting on the 18th that the committee has "greater confidence" that inflation can continue to move towards the 2% target, and believes that the risks of achieving the two goals of full employment and price stability are roughly balanced.
At a press conference after the meeting, Fed Chair Jerome Powell called the 50 basis point rate cut a "strong move" and noted that the personal consumption expenditures price index had fallen from a high of around 7% to 2.2% in August, suggesting that inflation had "eased significantly."
The decline in inflation comes at a time when the United States job market is showing some signs of weakness. Powell said the average monthly job growth over the past three months was 116,000, which was significantly lower than earlier this year. At the same time, the unemployment rate rose to 4.2%. According to the latest economic outlook, Fed officials' median forecast for the unemployment rate at the end of the year was 4.4%, up from 4.0% in June, suggesting that labor market conditions are less than previously expected.
Powell hinted that there is no need for the Fed to cut interest rates aggressively in the future
Historically, the Fed has rarely cut rates by a large 50 basis points when it embarks on a new cycle of rate cuts, except in the event of a major economic crisis. The Fed cut interest rates more than institutions expected this time, or to achieve a "soft landing" for the economy, hedging the risk of "stalling" economic activities. However, Fed Chair Jerome Powell's relatively "hawkish" comments at the subsequent press conference made markets cautious about the prospect of rapid monetary easing by the Fed. As U.S. Treasury yields rebounded, the three major United States stock indexes collectively closed lower on the day. At the close, the Dow fell 0.25%, the S&P 500 fell 0.29%, and the NASDAQ fell 0.31%. Most of the 11 sectors in the S&P closed in the red.
Message plane
● China's A-shares soared
In terms of A-shares, the three major indexes opened lower on September 19 and then soared, during which the Shanghai Composite Index briefly fell below 2,700 points. As of the close, the Shanghai Composite Index rose 0.69%, the Shenzhen Component Index rose 1.19%, the ChiNext Index rose 0.85%, the Beijing Stock Exchange 50 Index rose 1.24%, and the turnover of the Shanghai, Shenzhen and Beijing markets was 629.4 billion yuan, an increase of 147.7 billion yuan from the previous day. Nearly 4,800 stocks rose in the two cities. On the theme of the plate, pan-consumption sectors such as liquor, dairy, and food processing and manufacturing were among the top gainers, while China Shipbuilding and insurance sectors were among the top decliners.
● The Hong Kong Monetary Authority cut interest rates by 50 basis points
On 19 September, the Hong Kong Monetary Authority (HKMA) announced that the Hong Kong Monetary Authority (HKMA) had cut its benchmark interest rate by 50 basis points to 5.25%, from 5.75% previously. Overnight, the Fed announced a 50 basis point rate cut. Under Hong Kong's Linked Exchange Rate System, the Hong Kong Monetary Authority (HKMA) lowered its benchmark interest rate to 5.25% in response to a 50 basis point interest rate cut by United States.
● It once rose above $2,600! The international gold price hit an intraday record high
On September 18, local time, the Federal Reserve announced a 50 basis point interest rate cut. In precious metals, the Federal Reserve announced an interest rate cut that was positive for gold prices. On Wednesday, after the announcement of the interest rate cut decision, the international gold price once soared to $2,627.2 per ounce, hitting a record intraday high. Later, affected by Powell's "hawkish" remarks, U.S. bond yields rebounded, and international gold prices narrowed. At the close, gold futures for December delivery on the New York Mercantile Exchange closed at $2,598.6 an ounce, up 0.24%.
● The RMB exchange rate against the US dollar rose sharply, rising above 7.07
On the afternoon of September 19, the RMB exchange rate rose against the US dollar. According to the data, as of 14:50, the onshore yuan was trading at 7.0610 yuan against the US dollar, up 283 basis points from the previous closing price, and the highest intraday price was 7.0606 yuan, a new high since July 2023. The offshore yuan traded at 7.0619 yuan against the dollar, up 333 basis points from the previous closing price, and reached an intraday high of 7.0606 yuan, also hitting a new high since July 2023.
Interpretation of the chief of the brokerage
Qianhai Open Source Yang Delong: It is a great benefit to the weak A-share market
Yang Delong, chief economist of Qianhai Open Source Fund, said that the rate cut is not an isolated event, but the beginning of an interest rate cut cycle that may last for more than a year.
Since the Fed's 11th aggressive rate hike in July last year, the United States benchmark interest rate has reached a high of 5.25% to 5.5% and has remained unchanged for eight consecutive times. The Fed's choice to cut interest rates by 50 basis points instead of 25 basis points shows that its monetary policy goals are changing. Fed Chairman Jerome Powell mentioned in his statement after the meeting that the Fed's monetary policy goal is to stabilize prices and ensure full employment, so he paid attention to the CPI data and the unemployment rate.
After the meeting, gold prices continued to rise, while U.S. stocks rose and retreated, and some investors were worried that the Fed's 50 basis point rate cut could mean poor United States economic data, and the possibility of a future economic downturn was greater.
Yang Delong believes that from the perspective of global capital market valuation, U.S. stocks have the highest valuation, while A-shares and Hong Kong stocks are in the depression of the global valuation market. The expectation of RMB appreciation may trigger foreign capital inflows into RMB assets, leading to a recovery in valuations. The People's Bank of China (PBOC) may lower long-term lending rates and cut the reserve requirement ratio to support economic recovery, which is conducive to the stabilization and recovery of the A-share market.
Luo Zhiheng of Guangdong Kai Securities: Support China's exports to continue to be resilient
Luo Zhiheng, chief economist of Guangdong Kai Securities, said that according to the purpose of interest rate cuts, the Fed can be divided into two categories: one is preventive interest rate cuts, which cut interest rates to prevent the risk of recession when the economy shows signs of slowdown; The other type is a bail-out interest rate cut, which provides emergency relief when the economy falls into a recession or encounters a major crisis.
Looking back at the previous six rounds of the Fed's interest rate cut cycle, the pace of precautionary rate cuts was slower, the rate reduction was smaller, and the duration was shorter, while the bailout rate cut was faster, the rate of decline was larger, and the duration was longer.
So, what is the impact of the Fed's interest rate cut on the mainland economy and major types of assets?
The Fed's start of the interest rate cut cycle is conducive to hedging the downside risks of the global economy and supporting the resilience of China's exports. The Fed's interest rate cut is positive for the domestic stock market, bond market and RMB exchange rate. The easing of global liquidity will help provide incremental funds for China's stock market, the increase in the mainland's monetary policy space will drive bond yields down, and the pressure on the US dollar will help stabilize the RMB exchange rate.
Xun Yugen of Haitong Securities: The adjustment of the economic and monetary policy cycle between China and the United States is misaligned this time
Xun Yugen, chief economist of Haitong Securities, said that the economic and monetary policy cycles of China and the United States were more consistent when the Fed cut interest rates in the past, but this time there was a dislocation. Historically, China's economy was usually weak before the Fed cut interest rates, and the PBOC tended to follow suit after the rate cuts landed. The domestic economy was also weak before the Fed cut interest rates, but the difference is that this time the mainland central bank started to cut interest rates before the Fed.
Xun Yugen believes that the Fed's preventive interest rate cut may help improve the liquidity of A-shares, and pay attention to the verification of fundamental repair in the medium and long term.
From the perspective of liquidity, the Fed's interest rate cut may improve the macro and micro liquidity of A-shares in the short and medium term, helping A-shares to rise. From a fundamental point of view, the medium- and long-term trend of A-shares is related to the fundamentals, and the boost of interest rate cuts to the fundamentals of A-shares still needs to be observed.
From the perspective of the industry, Xun Yugen believes that in the short term, the financial industry, which directly benefits from the improvement of macro liquidity, is the first to outperform, while the consumer industries such as food and beverage, beauty care and other consumer industries preferred by foreign investors have always risen highly; In the medium term, the social service and power equipment industries are gradually outperforming, and the interest rate-sensitive electronics, computer and other technology industries are gradually dominating. Looking ahead, China's advantageous manufacturing, which has better fundamentals, is expected to become the medium-term main line of A-shares.
Zhai Kun of Debang Securities: The Federal Reserve cut interest rates to open up a new space for gold
Zhai Kun, chief analyst of non-ferrous metals at Debang Securities, said that the 50bp interest rate cut exceeded market expectations, and future expectations expanded. In terms of expectations for future rate cuts, Fed policymakers expect the federal funds rate to end 2024 at 4.4%, compared to 5.1% in June; The federal funds rate is expected to be 3.4% at the end of 2025, compared to 4.1% in June; The federal funds rate is expected to be 2.9% at the end of 2026 and 2027, after being projected at 3.1% and 2.8% in June, respectively.
In response to the trend of gold prices, Zhai Kun said that the Fed's interest rate cut is the beginning of the change in United States' monetary policy, and with the landing of the Fed's interest rate cut, gold prices may converge to $2,600. But on the other hand, from the perspective of market performance, the London gold price fell quickly after hitting $2,600, and as of the 19th, it was about $2,560 per ounce, and the unexpected rate cut brought some selling pressure.
From the perspective of holdings, as of September 10, 2024, the COMEX gold net long position was about 24,231, close to the level before the Fed cut interest rates in 2022. Judging from the historical performance of gold prices, gold prices tend to show an upward trend during interest rate cut cycles.
Sources: Straight Flush, CCTV Finance, Finance Associated Press
Written by: Nandu reporter Wang Yufeng, Wu Hongsen, Liu Changyuan, Shi Li