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a week later, market bets on the fed's rate cut have changed. as of september 17, the fedwatch tool showed that the probability of betting on the fed's 50bp (basis point) rate cut on thursday has soared from 30% last week to around 60%. the dow jones index hit a new record high on monday.

this week is undoubtedly the "super central bank week". thursday will see the interest rate decisions of the federal reserve and the bank of england, and friday will see the interest rate decision of the bank of japan. on september 17, the a-share market was still closed for the mid-autumn festival, while the hong kong stock market, which has always been more sensitive to the external environment, took the lead in rising sharply. the hong kong hang seng index rose 237.9 points or 1.37% to 17660.02 points that day, leading the asia-pacific market, and the increase was far greater than the australian stock market. on the same day, the nikkei 225 index fell more than 1% due to the appreciation of the yen.

zhao wenli, chief hong kong stock analyst at ccb international, told the first financial reporter that the overall performance of the hong kong stock market slightly exceeded expectations. the companies whose interim reports exceeded expectations were mainly concentrated in growth stocks such as internet platforms and technology hardware. in addition, the federal reserve is about to enter a rate cut cycle, which also provides favorable liquidity conditions for the rise of hong kong stocks. as the earnings of growth stocks continue to recover, the market style will gradually change.

a 50bp rate cut?

currently, there is a sharp divergence in the forecasts of wall street investment banks and the bets in the interest rate futures market, which also makes the federal reserve’s interest rate decision in september more uncertain and means greater market volatility.

among the large us banks, except for jpmorgan chase, most expect a 25bp rate cut. the reason is simply that economic data remains resilient and there is no need to start with a 50bp rate cut for the first time, which will instead make the market worry about the possibility of an economic recession.

however, for this meeting, the flexibility of the two options of 25bp and 50bp is actually quite large, so it has become a "big gamble" for traders. for example, gary dugan, ceo of the global cio office, told reporters that we are hopeful of a 50bp rate cut, although the previous expectation of 25bp was higher. although not all economic data support a larger rate cut, considering that the current real interest rate is at a historical high (the real interest rate after deducting inflation expectations from the nominal interest rate exceeds 3%), the fed may choose a bolder move.

of course, another major focus of this meeting is the "dot plot", which will reveal the fed's internal forecast of the future interest rate path. traders believe that the forecast in june was that the median interest rate would fall to 5.1% this year and 4.1% by the end of next year. obviously, both values ​​are much higher than current market expectations, so they may be significantly lowered.

dugan expects fed officials to indicate that interest rates will fall by at least 100 basis points to 4.25% by the end of this year and close to 2.75% by the end of next year. the market expects the fed's forecast for future inflation to remain unchanged. given the recent weak data and the worrying remarks of fed chairman powell at the jackson hole conference, the unemployment rate forecast may rise.

goldman sachs recently said that the interest rate may be cut by 25bp in september instead of 50bp. the agency's basic forecast is three consecutive 25bp cuts in september, november and december, with the final interest rate being 3.25%~3.5%.

"while we believe a 50bp rate cut is a reasonable precaution against further weakness in the labor market, the fed's top brass has signaled sufficiently dovishly that rate cut expectations have been priced into the bond market, which has also lowered current borrowing rates."

generally speaking, the interest rates of car loans and mortgages in the united states are priced based on bond yields rather than the so-called official interest rate (federal funds rate). the yield on the 10-year u.s. treasury bond has dropped from 3.9% at the beginning of september to the current 3.6%.

in the future, the labor market will be the most watched indicator. goldman sachs said that the current tightness measures of the job market are slightly below pre-epidemic levels and have not yet clearly stabilized. but the agency said it is not too worried about this because layoffs remain low, job vacancies remain high, gdp is growing at a healthy pace, and there have been no major negative shocks. instead, the weakness in the labor market mainly reflects the challenges of absorbing the growth in the labor supply caused by the surge in immigration, and the current immigration growth rate is slowing sharply. even so, job growth has slowed, so it remains to be seen whether the unemployment rate can stop rising in the future.

market volatility may be large

since the outcome of the fed’s decision is difficult to predict, market volatility may rise sharply, causing traders to hold their breath.

in the foreign exchange market, the expectation of rate cuts suppressed the us treasury yields and the us dollar index, and other assets were also affected. gold hit a new high for three consecutive days, but the increase was gradually narrowing, and it rose slightly by 0.16% overnight to close at 2582. silver remained unchanged at 30.70, and palladium rose for 6 consecutive days to hit its highest level since april.

jerry chen, senior analyst at fxcm group, told reporters, "a 25bp rate cut may help the us dollar index rebound in the short term, while a 50bp rate cut will be bad for the us dollar. a 'dovish rate cut' may put pressure on the us dollar and stimulate gold to rise."

optimism has stimulated the stock market, helping the dow jones industrial average hit another record high on monday, the s&p 500 is less than 1% away from its record high, and the nasdaq fell slightly. the consensus among institutions is that the combination of interest rate cuts and a soft landing of the economy will be most beneficial to the stock market.

kees verbaas, head of global fundamental equity investment at robeco, recently told reporters that he is optimistic about the us stock market in the long term and is more rational in allocating to large technology companies such as the "big seven", but he will not ignore it. in his view, the ai ​​boom has driven the performance of technology stocks, but more investors are now beginning to pay attention to the input-output and profit realization of ai.

hong kong stocks lead the way, growth stocks return

as far as the chinese market is concerned, hong kong stocks have performed significantly better than a-shares recently, and the driving effect of the fed's interest rate cut has attracted much attention.

in august, the hang seng index bottomed out at around 16,441 points and has now rebounded to around 17,660 points. at the same time, high-dividend value sectors such as banks, communications, and resources that were popular in the previous stage began to consolidate, and growth stocks began to perform.

zhao wenli told reporters that the hong kong stock market has rebounded in the past month, with the hang seng index, the china enterprises index and the hang seng technology index rising by 1% to 4%. among the hang seng composite industry index, energy and finance performed best, rising by 6% and 5% respectively. necessary consumption and industry performed the worst, falling by 1%.

he mentioned that among the active stocks in the shanghai-shenzhen-hong kong stock connect, southbound funds have clearly shifted to growth stocks compared with last month. tencent showed an overwhelming southbound net buying, with its share price rising 7%; hsbc had the largest southbound net selling, with its share price falling 2%.

the rebound of hong kong stocks was also driven by performance. in the interim report season, the overall market performance slightly exceeded expectations, which drove the recent structural market trend. in addition, the federal reserve is about to enter a rate cut cycle, which also provides favorable liquidity conditions for the rise of hong kong stocks. the companies whose interim reports exceeded expectations this time are mainly concentrated in growth stocks such as internet platforms and technology hardware. as the earnings of growth stocks continue to recover, institutions believe that the market style will gradually shift to a balanced allocation of growth and value, which is also supported by the recent preference of southbound funds.

goldman sachs also mentioned that the net profit of all listed companies in china increased by 2% year-on-year (in rmb) in the first half of 2024. significant differentiation still exists between onshore and offshore markets. msci china's earnings in the first half of 2024 increased by 12% year-on-year, while the earnings of all a shares and csi 300 fell by 4% and remained flat year-on-year, respectively.

however, the consensus among institutions is that the modest mid-year performance can only support a structural market. the market's trend and upside in the medium term will still depend on the degree of improvement in china's economic fundamentals and policy expectations. at the same time, changes in external risk sentiment also need to be closely monitored.