Last night and this morning, the Federal Reserve announced that interest rates would remain unchanged, and there were also bank stocks experiencing a flash crash!
At 3am Beijing time this morning, on January 31st local time, the Federal Reserve of the United States announced the interest rate decision for its January meeting, keeping the federal funds rate target range unchanged at 5.25% to 5.5%, in line with market expectations.
The Federal Reserve's monetary policy decision statement removed language suggesting further interest rate hikes in the future, opened the door to rate cuts, but hinted at not taking action soon, stating that it is not appropriate to cut rates until there is more confidence in inflation falling to the target. Nick Timiraos, a journalist known as the "New Federal Reserve News Agency," posted that the Federal Reserve has removed the guidelines that have been retaining the possibility of interest rate hikes for six months. The new guidelines are flexible, but suggest that changing the guidelines does not mean that interest rate cuts are imminent.
Federal Reserve Chairman Powell stated at a subsequent press conference that FOMC interest rates may be at the peak of this cycle, but more evidence is needed to prove that inflation has been contained, and most members anticipate multiple rate cuts this year. Powell said, "Based on today's meeting, I believe it is unlikely to cut interest rates in March and plan to start in-depth discussions on balance sheet issues in March."
After the announcement of the Federal Reserve's interest rate decision, according to CME's "Federal Reserve Observation", the probability of the Federal Reserve maintaining interest rates in the 5.25% -5.50% range in March is 64.5%, and the probability of a 25 basis point rate cut is 35.5%. The probability of maintaining interest rates unchanged by May is 5.4%, the probability of a cumulative 25 basis point rate cut is 62.1%, and the probability of a cumulative 50 basis point rate cut is 32.5%.
After the announcement of the interest rate resolution, the decline in US stocks expanded, US bond yields rebounded to some extent, the US dollar rose, and gold fell. As of the close of this morning, the Nasdaq closed down 2.23%, marking the largest decline since February 21, 2023. The S&P closed down 1.61%, breaking the closing low since January 19th. The Dow Jones Industrial Average closed down 0.82%, the largest decline since December 20th. In terms of commodities, the US Department of Energy announced last week that the US crude oil inventory exceeded expectations by more than 1.2 million barrels, and the US oil production reached a historic high in November last year, combined with the intraday rise of the US dollar, jointly contributed to the decline in oil prices. As of the close of this morning, international oil prices have fallen by over 2%.
It is worth noting that last night when the US stock market opened, New York Community Bank (NYCB. N) opened 44% lower, setting a record for the largest decline before being suspended from trading. As of closing, the stock price of New York Community Bank plummeted by over 37% on Wednesday. Affected by this, the banking stock index has all fallen, with regional banks experiencing particularly severe declines. The KBW Bank Index fell by 1.5% at the beginning of the trading session; The regional banking index closed down 6%, marking the largest decline since March 2023.
On the news front, New York Community Bank announced that it benefited from the fourth quarter of last year, with a fourth quarter revenue of $886 million and a quarterly dividend cut from $17c to $5c. In 2023, the banking crisis in the United States broke out, and the New York Community Bank acquired most of the assets of a failed signature bank, increasing its asset size to over $100 billion, becoming a so-called "fourth category bank" that needs to comply with new capital and liquidity requirements.
Attention drawn to the timing of the Federal Reserve's interest rate cut
Wu Zijie, a precious metal researcher at Jinrui Futures, believes that the biggest divergence in the current market is the specific time when the Federal Reserve will cut interest rates. It can be seen that the stronger than expected US economic data in the fourth quarter has increased the possibility of an economic "soft landing" and reduced the need for the Federal Reserve to cut interest rates in the short term.
Therefore, he stated that the focus of this meeting is whether the Federal Reserve will maintain the dovish policy tone of the December interest rate meeting, such as the market's expectation of starting interest rate cuts in March or May; Or will the Federal Reserve shift towards a more neutral stance, making the specific timing of rate cuts more ambiguous and continuing to emphasize the possibility of future rate hikes.
Overall, he believes that the Federal Reserve will strive to maintain consistency in policy expectations in its expectation management, as significant fluctuations in expectations in the short term are not conducive to market stability. Meanwhile, considering that inflation is currently smoothly falling and the constraints of the Federal Reserve's interest rate cuts are also decreasing simultaneously, it is expected that the Federal Reserve may still adopt a more dovish stance.
In the view of Zhong Junxuan, a precious metal researcher at Minmetals Futures, the main divergence in the current market is that the stronger US economic data has reduced the urgency of the Federal Reserve's interest rate cut, but the decline in US inflation data has provided conditions for the Federal Reserve's monetary policy to shift towards substantial easing.
It can be seen that at the December 2023 interest rate meeting, the Chairman of the US Federal Reserve, Powell, expressed a dovish stance, and the market increased its bets on the Federal Reserve's monetary policy shift in 2024. According to data from the CME interest rate observer, the market's expectation for a 25 basis point rate cut at the Federal Reserve's March meeting has increased from 39.68% on December 12, 2023 to 76.9% on January 12, 2024.
However, since January 2024, the overall economic data released by the United States has been relatively strong. The annualized quarter on quarter actual GDP of the United States in the fourth quarter was 3.3%, exceeding the expected 2%. In terms of the labor market, the change in non farm employment in the United States in December was 216000 people, higher than the expected 175000 people and the previous value of 173000 people; The US unemployment rate in December was 3.7%, lower than the expected 3.8%. The December employment data shows that the US job market still has resilience. Subsequently, the market's expectations for the Federal Reserve's monetary policy tightened, and the market's expectation for a 25 basis point rate cut at the March interest rate meeting decreased from 76.9% on January 12 to 46.17% on January 29.
Zhong Junxuan stated that the current resilient economic data in the United States has limited impact on the Federal Reserve's monetary policy stance. It can be seen that before the December interest rate meeting last year, the United States announced that the number of non farm payroll workers in November was 199000, exceeding the expected 183000, and the November unemployment rate was 3.7%, lower than the expected 3.9%. However, Powell still expressed his desire to significantly reduce the restrictive nature of policy interest rates before achieving the 2% inflation target during the December interest rate meeting. In the later stage, he believes that the market will continue to trade the loose turn of the Federal Reserve's monetary policy.
How do you view the future of the US dollar and precious metals?
It can be seen that the recent fluctuations in precious metal prices have been fluctuating and the trend is poor. Zhang Chen, a precious metal analyst at Yide Futures, believes that the main reason is still that the market's expectations for the Federal Reserve's subsequent interest rate cuts have followed changes in geopolitical conditions, speeches from Federal Reserve officials, economic fundamentals, and other factors, sometimes approaching and sometimes moving away from the Federal Reserve's expectations. For example, after the FOMC meeting in December last year, the market's expectation for the Fed to cut interest rates remained at 6 times. Subsequently, driven by the deterioration of the geopolitical situation, the market's expectation for interest rate cuts increased to 7 times - that is, all other 7 meetings within the year except for January have lowered interest rates by 25 basis points.
However, in the past two weeks, with the improvement of US economic data and the strengthening of expectations for a "soft landing", the expectation of interest rate cuts has weakened. The latest market expectations show that the market is pricing the Federal Reserve to cut interest rates 5 times within the year, which is still a gap from the 3 times shown in the December lattice chart last year. He stated that as the upcoming session approaches, based on the background of an economic "soft landing", it is expected that market expectations may still be revised towards the Federal Reserve.
Zhong Junxuan stated that due to the strong economic data in the United States, the expectation of interest rate cuts in early market transactions has fallen, and the prices of precious metals in the external market have shown a weak and volatile trend in recent times. In the medium term, it is certain that the Federal Reserve will enter a rate cutting cycle this year, and should maintain a bullish stance on precious metals. Strategically, it is recommended to wait for the correction and stabilization of gold and silver prices, combined with subsequent US economic data and changes in the Federal Reserve's monetary policy stance, to seek long opportunities.
It should also be noted that at last week's ECB monetary policy press conference, ECB President Lagarde stated that the market's aggressive bet on rate cuts is not conducive to central bank decision-makers curbing inflation, and it is still too early to discuss rate cuts. But she expects inflation to further slow down, and the European Central Bank may cut interest rates once in the summer. Unlike the previous monetary policy stance of the Federal Reserve, the European Central Bank's stance on monetary policy is biased towards neutrality.
From the perspective of the balance sheet, it is expected that the balance of borrowing instruments on the asset side of the European Central Bank will continue to shrink in the first quarter of this year; Recently, the balance of reverse repo on the liability side of the Federal Reserve's balance sheet has continued to decline to below $1 trillion, indicating relatively abundant US dollar liquidity in the market. Therefore, Zhong Junxuan stated that from the perspectives of monetary policy expectations and balance sheets, the US dollar index will continue to show a volatile and weak trend in the near future.
In addition, from a historical perspective, Zhang Chen stated that in the context of an economic "soft landing", the Federal Reserve's interest rate cuts were mostly preventive and limited in frequency. In this scenario, the US dollar's trend was weak, but the 10-year US Treasury bond interest rate trend was not unilateral downward. The main upward trend in precious metal prices generally occurred after the first rate cut was basically confirmed to be a "real hammer". Prior to this, any pullback caused by weakened market expectations of rate cuts was a good opportunity for bullish gold and silver to enter.
Overall, Zhang Chen stated that considering the high probability of the Federal Reserve starting interest rate cuts in the second half of this year, the first "real hammer" of interest rate cuts is expected to occur in the second quarter. Therefore, gold prices in the first quarter may be mainly volatile. It is not ruled out that the sustained overly optimistic market interest rate cut expectation correction may lead to phased adjustments in precious metal prices. It is recommended that investors pay attention to the allocation opportunities after the correction of gold and silver prices.
In the future, Wu Zijie believes that there is still some support for the US dollar index in the short term. On the one hand, the US economy is still performing strongly, with a low risk of recession and a high possibility of a "soft landing", so the economy is generally supportive of the US dollar. On the other hand, the European Central Bank has shifted more clearly towards the dovish side. Based on recent comments from European Central Bank officials, Europe's interest rate cuts may be earlier than those of the United States, which means that even if the United States cuts rates, it still has a certain advantage over Europe. At the same time, the current economic fundamentals of the United States are also stronger than major non American economies such as Europe, so the US dollar will not weaken directly due to its own policy shift.
For precious metals, he expects a good upward outlook in the future, especially in the medium to long term. The cooling of the US economy, the decline in the atmosphere of the employment market, and the trend of the Federal Reserve's policy towards easing have not changed, which poses a medium to long term positive impact on precious metal prices. Meanwhile, factors such as geopolitical disturbances have also strengthened the support of safe haven sentiment for precious metal prices. Therefore, precious metal prices have a promising upward trend this year, but may face certain headwinds in the short term due to policy expectations.