when will the turning point appear after the interest rate cut?
2024-09-27
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(the author of this article is cicc research department)
why did the fed cut interest rates by 50bp?
the september fomc meeting cut interest rates by 50bp. the new scatter chart shows that the interest rate will be cut by 100bp this year, 100bp next year, and 50bp the year after that. this round of interest rate reduction cycle will total 250bp. this is consistent with our long-standing prediction: the fed does not cut interest rates shallowly and later. , but it will cut interest rates deeply and quickly, with the rate of interest rate cuts ranging from 200-300bp.
although the fed denied that it was behind the curve, the first 50bp cut in interest rates actually admitted in disguise that this round of interest rate cuts had started too late. we repeatedly reminded at the beginning of the year that u.s. growth and inflation will decline simultaneously, and the federal reserve should start cutting interest rates in q1. however, there were systematic deviations in us q1 growth and inflation data, which we believe may have misled the federal reserve's judgment, leading to the postponement of the starting point of interest rate cuts to september. in order to avoid further expansion of the risk of recession, the federal reserve chose to cut interest rates by 50bp for the first time to catch up with the progress of interest rate cuts.
after cutting interest rates by 50bp, major assets such as stocks, bonds, merchants and gold first rose and then fell, which may have been suppressed by the hawkish signal released by powell at the press conference: powell said that 50bp cannot be regarded as a fixed rhythm for future interest rate cuts[1]. the situation slows down interest rate cuts, or even suspends interest rate cuts; the neutral interest rate may rise significantly and will not return to the era of low interest rates or even negative interest rates. correspondingly, we note that the long-term neutral interest rate in the scatter plot has been revised upward to 2.9%.
the employment and inflation data in september were not very bad, but the fed still chose to cut interest rates by 50bp, indicating that the threshold for interest rate cuts is very low. if necessary, the fed can further accelerate interest rate cuts on the current path, so the interest rate cut transaction is still relatively certain. investment direction. in the report released in 2023, we calculated that the medium- and long-term center of the ten-year u.s. bond interest rate is 3.5%. the interest rate is now close to 3.8%. when the cycle goes down, asset prices can completely move below the center, so interest rates still have sufficient room to fall. our panoramic economic model shows that the u.s. cycle is declining, sectors are fragmented, and the economic outlook is uncertain. therefore, we temporarily maintain a standard allocation to global stocks and a low allocation to commodities such as copper and oil.
when will the economic turning point be seen after interest rate cuts?
it takes time for interest rate changes to be transmitted to the economy. the federal reserve will start raising interest rates in 2022, and the u.s. economy will gradually show downward pressure in 2024. similarly, an economic turning point may not appear immediately after a rate cut. we have reviewed the 13 fed interest rate cut cycles since 1950 to provide a reference for predicting this economic turning point. in the past 13 interest rate cutting cycles,the u.s. economy ended up in recession 10 times, and it avoided recession only in three interest rate cutting cycles: 1995, 1984, and 1966.the historical winning rate of soft landing is actually not high.
since in some interest rate cutting cycles, there is a long gap between the time when the fed cuts interest rates and the time of recession, the economic and market environment in the early stages of these interest rate cutting cycles is actually similar to a soft landing scenario, and this period corresponds to the future we are most concerned about right now 1-2 the trend of economic assets in each quarter, so in the analysis below, we regard "no recession within one year after the fed cuts interest rates" as a soft landing scenario, which includes1989 and 2019these two interest rate cut cycles. so under the new definition, we get 8 hard landings and 5 soft landings.
during the hard landing period, pmi, gdp growth and the median unemployment rate show that it usually takes nine months for the economy to gradually stabilize, while the unemployment rate continues to rise. during the soft landing period, pmi and gdp growth will continue to decline for about 6 months before they bottom out and rebound, while the unemployment rate remains stable.
the above review has verified our judgment. regardless of whether there is a recession in the end,the economic downward trend may remain for 2-3 quarters after interest rate cuts.even for interest rate-sensitive sectors, historical review shows that the upward turning point will not appear soon: during the hard landing period, u.s. credit and house price growth will not bottom out until about a year after the federal reserve starts cutting interest rates. during the soft landing period, u.s. credit growth also faced downward pressure for about 10 months, and house price growth only remained stable and did not pick up soon after the interest rate cut.
when will the market turn after the rate cut?
we continue to recommend overweighting u.s. treasury bonds and gold and underweighting copper, oil and other commodities, and have warned of global stock market fluctuations ("asset enlightenment on the fed stopping raising interest rates", "major asset classes 2024h2 outlook", etc.). this year, gold exceeded us$2,600 and hit a record high; the ten-year u.s. bond interest rate once dropped by nearly 100bp to 3.6%. copper and oil fell by the deepest 12% and 19% respectively from their highs. the global stock market fluctuated violently in august and september, which verified our predictions.
looking ahead to the market outlook, investors’ focus turns to when will u.s. debt and gold confirm a downward inflection point, when will commodities confirm an upward inflection point, and when will stocks end their volatility? judging from historical review patterns, we find that regardless of whether there is a recession or not, the 10-year u.s. bond interest rate still has an average downside of about 70bp in the two quarters after the interest rate cut.
the risk of gold falling is limited under the background of a soft landing, and it will rise more during a hard landing. however, regardless of whether there is a recession or not, the median high point in the 2-3 quarters after the interest rate cut is in the 5%-10% range. therefore, we believe that the downward turning point for u.s. debt gold will not appear soon after the interest rate cut, and it can still remain overweight.
at the same time, since these two types of assets have experienced large increases in the past, the volatility may increase in the future, which is also consistent with the historical review pattern. we recommend taking advantage of the swing opportunities to increase positions at dips.
the trend of u.s. stocks is highly dependent on whether there is an economic recession. during a hard landing, the stock market will fall by an average of 10% in the first six months and then rebound, while a soft landing will continue to rise.
from a structural point of view, the s&p 500 and russell 2000 perform better during economic recessions, the nasdaq has greater downward pressure, and a soft landing is more conducive to the performance of the nasdaq. we are neutral on the outlook for overseas equities as we are uncertain about the economic outlook.
there is a certain downward pressure on the us dollar during a hard landing, and it gradually bottoms out in the seven-month dimension, with the deepest drop being around 5%, and then begins to rebound in the second half of the year. during a soft landing, the us dollar usually fluctuates strongly in the first three quarters, but in the fourth quarter quarterly weakness.
in terms of commodities, total economic demand was restricted after the federal reserve raised interest rates. regardless of whether there was an economic recession or not, copper, as an important industrial metal, maintained a downward trend in the first eight months after the federal reserve cut interest rates. oil prices maintained an upward momentum during a hard landing but fell during a soft landing. this may reflect the economic recession caused by historical supply shocks (oil crises) and may provide limited guidance for the current market outlook. despite the recent shift in domestic and overseas policies and optimistic expectations for economic growth, commodity prices have experienced a periodic rebound. however, considering the above-mentioned historical review rules, it will take time for the downward interest rate to be transmitted to the real economy, and the risk of a downward economic cycle still exists. we believe that the upward turning point for commodities more signal confirmation is needed.
what implications does the fed's interest rate cut have on chinese assets?
the time series of china's asset prices is short, and most assets have only experienced the last 2-4 rounds of interest rate cuts by the federal reserve. therefore, the enlightenment of historical review is relatively limited, and predicting future market trends requires more reliance on deductive analysis. the federal reserve's sharp interest rate cuts have reduced the constraints on my country's monetary policy. the people's bank of china began to cut interest rates in july. in september, the state council information office press conference proposed further reductions in reserve requirements and interest rates[2]. lowering existing mortgage interest rates will benefit the performance of my country's bond market. since my country's real interest rates are relatively high and there is still room for loose monetary policy, we still hold a positive view on the bond market in the medium to long term. in the short term, government bond interest rates have fallen sharply in the past few months, and the central bank's easing measures have boosted market expectations. at the same time, bond supply has increased, and market volatility may increase. we recommend standard allocation in the short term and additional allocations in the medium term.
for stock assets, the fed's interest rate cut is clearly positive from the denominator side. however, considering the risk of overseas recession and the uncertainty of tariffs accompanying the u.s. presidential election, we recommend maintaining the standard allocation and structurally favoring hong kong stocks and high-dividend assets. regarding the rmb exchange rate, we believe that the decline in overseas interest rates and the narrowing of internal and external interest rate differentials have created a favorable environment for the two-way fluctuations of the rmb. the recent significant appreciation of the rmb may be the starting point for a return to two-way fluctuations.
[1]https://wallstreetcn.com/articles/3728269?keyword=%E9%B2%8D%E5%A8%81%E5%B0%94
[2]https://www.gov.cn/zhengce/202409/content_6976178.htm
