On July 31 local time, the Federal Reserve announced that it would maintain the target range of the federal funds interest rate between 5.25% and 5.5%, and continue to implement the scale reduction at the pace of passively reducing the treasury bond bonds of $25 billion and MBS of $35 billion per month.
Federal Reserve Chairman Powell stated at a press conference that the second quarter inflation data has increased the Fed's confidence and made "some further progress" towards achieving its 2% inflation target. If the inflation test is met, the Fed may cut interest rates as early as September. Powell hinted in response to questions that the possibility of a 50 basis point interest rate cut is unlikely.
According to CME FedWatch data, the market has already started pricing a 50BP rate cut in September, although the probability is only 10.3%, and the probability of a 25BP rate cut is 89.6%, which means at least a 25BP rate cut in September. As of the December meeting this year, the probability of a rate cut of at least 50BP is 99.9%, and the probability of a rate cut of at least 75BP is 68.4%. That is to say, there will be at least one interest rate cut in the November and December meetings, and it is also possible to cut interest rates twice, but the probability is less than 70%.
Regarding this, Caitong Securities believes that US inflation has eased, the labor market is cooling down, and the conditions for the Federal Reserve to cut interest rates are close to being met. On the one hand, inflation in the United States continues to decline, with June's CPI turning negative month on month and inflation steadily falling year-on-year. The contribution of energy items has decreased, and the pressure on core commodity and service prices has eased. On the other hand, the unemployment rate has rebounded in recent months, and the year-on-year growth rate of hourly wages has slowed down, indicating a positive marginal cooling in the labor market. At present, although the US economy still has resilience, the growth rate of consumption and investment may tend to slow down in a high restrictive interest rate environment. Given the weakening momentum of economic growth, the Federal Reserve is highly likely to cut interest rates in September.
Ping An Securities expects that the Federal Reserve will initiate its first round of interest rate cuts in September this year, with an initial decrease of 25BP. The Fed will cut interest rates 1-2 times this year, similar to the two precautionary rate cuts in 1995 and 2019. The number and magnitude of rate cuts are limited, and loose trading will end when the first rate cut is implemented.
What impact does the expectation of interest rate cuts have on the global capital market? Ping An Securities believes that due to the disturbance of financial reports and fluctuations in trading levels, the US stock market has experienced a significant pullback in the past two weeks. However, this has further intensified the urgency of the Federal Reserve's interest rate cuts. This round of interest rate cuts is more similar to a precautionary cut, and after a small cut, the economy may be repaired, which will once again stimulate demand. The US stock market still has upward momentum in the future, and is not pessimistic about the US stock market throughout the year.
In terms of Hong Kong stocks, Ping An Securities believes that although the current valuation of Hong Kong stocks has emerged from the lowest point in history, they are still in a valuation depression. Compared with A-shares, they still have a certain comparative advantage. At the same time, the opening of the overseas interest rate cut window and the continuous implementation of domestic policies will drive the motivation for funds to increase their holdings in Hong Kong stocks. Funds are expected to return to Hong Kong stocks. Coupled with the higher sensitivity of Hong Kong stocks to the shift in the US China interest rate differential, Hong Kong stocks are currently in the allocation window.
According to a study by China International Capital Corporation, before the interest rate cut, due to the slowdown in fundamentals and the significant gains accumulated earlier, risk assets naturally came under pressure and experienced a pullback, which is a normal phenomenon and the current situation. But because it is not a significant decline pressure, the magnitude of the pullback is relatively controllable. After the interest rate cut is implemented, benefiting from the increase in demand brought about by the decline in financing costs, the relative allocation value of assets that improve profitability at the molecular end increases, and a moderate correction also brings better opportunities for re intervention. Therefore, after the interest rate cut is realized, it can gradually shift towards assets that benefit from re inflation, such as leading technology stocks, post cyclical sectors of the US stock market, and bulk resource commodities such as copper and oil.