Great changes in the capital market!
Federal Reserve Chairman Powell stated at the Jackson Hole annual meeting that the time for policy adjustment has arrived. Immediately, the capital market underwent a major change. The swap market expects the Federal Reserve to cut interest rates by nearly 100 basis points before the end of the year. The inverted range of the yield curve of the US two-year and 10-year treasury bond bonds narrowed. In addition, there has been a strong response from the stock market.
The size of the cash currency market has unexpectedly increased. Bank of America announced on Friday local time that investors have invested $37 billion in cash money market funds (MMFs) in the week ending on Wednesday, in preparation for the Federal Reserve's September interest rate cut. Bank of America cited data from financial data provider EPFR, stating that this means money market funds are expected to record their largest three week cumulative inflow since January, reaching $145 billion.
Why has the size of monetary funds skyrocketed at a turning point in global liquidity? Will there be more capital flowing into the stock market?
Unexpected changes
At the 2024 Jackson Hole Global Central Bank Annual Meeting, Federal Reserve Chairman Powell's speech laid the foundation for future interest rate cuts, but he refused to disclose the specific timing and magnitude of the cuts. He said that the time for policy adjustment has come. After his speech, the market showed positive changes.
However, the size of money market funds has also begun to skyrocket. Bank of America announced on Friday local time that investors have invested $37 billion in cash money market funds (MMFs) in the week ending on Wednesday, in preparation for the Federal Reserve's September interest rate cut. This means that money market funds are expected to record the largest three week cumulative inflow since January, reaching $145 billion. Bank of America stated that in its weekly global market inflow and outflow statistics report, investors invested $20.4 billion in stocks, $15.1 billion in bonds, and $1.1 billion in gold.
Many fund managers believe that interest rate cuts will lower the returns of money market funds and lead to a large influx of funds into the stock and bond markets. However, before the Federal Reserve cuts interest rates, large investors typically flock to money market funds because the short-term fixed income securities in the funds often provide higher returns than short-term Treasury bills.
Bank of America strategists led by Jared Woodward said, "A rate cut is unlikely to trigger the withdrawal of $6.2 trillion in money market funds and a shift towards buying stocks. History shows that in a soft landing, the Fed's first rate cut will bring in more cash flow, while in a hard landing, bonds may be the winner
Recent economic data indicates that the US economy will gradually slow down or achieve a "soft landing" rather than a more severe "hard landing". According to data from Bank of America and EPFR, investment grade bonds have attracted capital inflows for the 43rd consecutive week, reaching $8.1 billion. Emerging market stock markets have received $4.7 billion in inflows for the 12th consecutive week, marking the longest continuous inflow cycle since February 2024.
In addition, the US real estate market has also experienced an outbreak. Due to the decrease in mortgage interest rates stimulating demand, sales of newly built single family homes in the United States reached their highest level in over a year in July, further indicating that the real estate market is recovering. According to data from mortgage financing institution Freddie Mac, the average interest rate for 30-year fixed rate mortgages this week was 6.46%, the lowest level since May 2023 and more than half a percentage point lower than the same period last year.
Has the liquidity turning point been reached?
Recently, the US dollar index has continued to decline, while non US currencies around the world have risen significantly overall. This to some extent means that the offshore US dollar liquidity crisis since 2022 has been alleviated. Moreover, the recent appreciation of the Japanese yen has not disrupted the market as it did at the beginning of the month, and the negative impact of the reversal in carry trades seems to have passed. From the trend of SOFR, it has also been continuously declining recently. This basically means that liquidity is no longer a big issue.
Yongxing Securities believes that global liquidity is facing a turning point. The current inflation reading in the United States has significantly fallen, and marginal changes in price and employment data have created conditions for the Federal Reserve to cut interest rates. The market has raised expectations for the Fed to cut interest rates, but the specific timing of the Fed's rate cuts will still depend on future data changes.
The shift in monetary policies of major developed economies is conducive to alleviating external pressures on emerging market economies. At the macro level, capital outflows and currency exchange rate depreciation pressures tend to ease, while at the micro level, debt repayment pressures have been reduced. However, from historical experience, when global liquidity faces a turning point, changes in investor sentiment have an impact on the pricing of financial assets, and international financial markets usually experience some degree of volatility. Recently, the US dollar index has weakened, gold spot and futures prices have hit new highs, US bond yields have significantly declined, and global stock markets have experienced a pullback. Investors still need to remain vigilant about the spillover effects and potential risks of the monetary policy shift in major developed economies. At present, there is a significant difference between the economic fundamentals, policy levels, funding situation, and market sentiment in China and the redemption trend of wealth management at the end of 2022. The possibility of a significant rebound in bond market yields is relatively small, and in the long run, the cost-effectiveness of equity asset allocation will be improved.
According to Hong Kong Business Daily, Hang Seng Bank senior advisor Leung Siu kee said on a radio program on the 24th that he expects the Federal Reserve to cut interest rates twice this year, each time by 1/4 of a percentage point, and may cut interest rates by half a percentage point (50bp) by the end of the year. He believes this will be good news for Hong Kong. Liang Zhaoji pointed out that interest rate cuts have relatively reduced the credit costs of various industries, while also boosting market sentiment, hoping to increase business flow.
Galaxy Securities stated that considering that consumption in the second half of 2024 in the United States will not significantly stall under the support of wages and other income, investment will still be suppressed by high interest rates, fiscal expansion will continue to support the economy, and the overall unemployment rate will continue to rise, it is appropriate for the Federal Reserve to cut interest rates 2-3 times, with a cumulative range of 50-75 basis points. The difference in the actual impact of two or three interest rate cuts on the economy is limited. As the Federal Reserve shifts its focus to the labor market and the unemployment rate continues to rise while the economy remains resilient in the short term, the market may continue to be dominated by "interest rate cuts," and the weakening of labor and investment data may lead to periodic cycles of decline trading. The downward trend of short-term US bond yields and the US dollar index continues to receive support.
China Merchants Securities stated that there is little doubt that the Federal Reserve will cut interest rates in September, and subsequent interest rate cuts may continue to be a follower until significant downward pressure appears on the US economy. Looking ahead to next year, the election results will have a significant impact on the pace of interest rate cuts. If Harris takes office, there may be more consecutive interest rate cuts in the short term; But if Trump is elected, the Federal Reserve may have a wait-and-see attitude towards inflation under the impact of tariffs. Maintain judgment on various assets: Prior to the election, US stock market volatility intensified, bullish on US bonds, and non US currencies remained relatively strong against the US dollar. The volatility of the US stock market may intensify before the election, and it is not ruled out that there will be another rebound before the election, but the rebound may still be a window for profit taking. The yield of US Treasury bonds may still be fluctuating downwards, and increasing the long position of US Treasury bonds in short positions is still a relatively rational choice. Furthermore, non US currencies will also remain strong relative to the US dollar, and China Merchants Securities still predicts that the RMB exchange rate will fluctuate within the range of 7.0-7.3.
Federal Reserve officials seem to have reached the same conclusion: it is expected that the Fed will begin to lower its benchmark policy rate at its upcoming meeting on September 17-18, and may continue to do so in subsequent meetings. But the current market expectation is a 50 basis point interest rate cut in September. If this expectation is not met, the market may still have a period of turbulence. Powell said in his speech, "The direction of action is clear, and the timing and pace of interest rate cuts will depend on subsequent data, constantly changing prospects, and risk balance
However, analysts believe that as long as there is no problem with the direction, the rest can be left to time to solve. With the decline of the US dollar index and US bond yields, it is highly likely that global liquidity is entering a major turning point.