The expectation of this round of interest rate hikes has not yet peaked, and now it is more of a phased easing of the expected transaction of cargo policy tightening, which comes from the very clear signal of the near-end freight policy path and the inflation risk that is difficult to ferment in the short term.

After entering August, the Fed's tightening trade may make a comeback, especially the second strengthening of the "inflation-tightening" logic by the re-fermentation of inflation risk. Us bond interest rates are likely to end 2.7-3.0% volatility and return to the upside as a result of adjusting liquidity and inflation risk premiums, and absolute levels are expected to break through the previous high of 3.20%.

How many interest rate hikes are expected in the current market?

FFF/OIS and analysts are expected to fully price interest rate hikes for each 50bps in June and July and 25bps in November and December, with further disagreement over whether to raise 50bps at the FOMC meeting in September (50 per cent for FFF/OIS and 25 per cent for analysts). By contrast, the one-year risk-neutral interest rate of 1.85% shows that its expectations of raising interest rates over the next year are significantly undervalued.

What are the key elements that force the Fed to raise interest rates?

The biggest difference from the era of great relaxation is thatThe key to forcing the Fed to raise interest rates this time is not whether the economy itself falls into recession, but whether the risk of inflation is relieved with certainty.To sum up, Fed Put is a Bermuda option rather than an American option, and its exercise range is a stable price level.

If excessive interest rate hikes plunge the economy into recession, then a timely reversal of monetary tightening can indeed avoid a recession. But if the recession is caused by high inflation, then loose monetary policy will only fuel high inflation and accelerate the recession.

The general rhythm of overseas transactions in the future:

① is mainly expected to trade recession until the end of July, but there are still great differences, especially the high probability of the game between the immediate overheated economic environment and all kinds of risks (epidemic situation, Russia and Ukraine, etc.) that are difficult to see a clear solution will aggravate the volatility of various asset prices.

From August to October in ②, highly viscous service inflation will take over highly elastic commodity inflation, break through the restrictions brought about by the previous high base effect, and stop the current downward trend of inflation. The market will begin a new round of "inflation → tightening" expected trading, and the expectation of interest rate increase in September will gradually tilt to 50bps and finally established. Us bond interest rates are likely to end the 2.7-3.0% volatility and return to the upside due to adjusting liquidity and inflation risk premiums, and the absolute level is expected to break through the previous high of 3.20%.

Starting from ③ in November, the market can basically make clear the future path of the economy (whether recession risks are materialized due to loose withdrawal and cycles) and inflation (wage-inflation spiral, supply chain bottlenecks and other core risk points, and whether inflation risks can be fully determined to slow release). Ideally, inflation would fall faster before the recession risk becomes substantial (the bullwhip effect of commodity inflation and the seasonal effect of low Q4), the market is in tune with the Fed, Fed Put is about to emerge, and the risk of recession is lifted by the stagnation of monetary tightening.

The more likely scenario is that inflation will struggle to return to 2 per cent year-on-year growth this year, and the risk points behind it have not been convincingly released. Excessive interest rate increases trigger a contraction in aggregate demand, which in turn accelerates inflation back to the policy target range of 2 per cent through a recession.

Risk hint

The ① war between Russia and Ukraine has escalated, various geopolitical frictions around the world have intensified, and the market has once again entered the risk aversion trading mode.

② US inflation is completely out of control, the Federal Reserve is forced to tighten monetary policy more aggressively, which in turn leads to a sharp tightening of global macro liquidity, and the offshore dollar market is facing drying up.

The emergence of new variants of ③ or similar epidemic shocks lead to the upgrading of epidemic prevention policies, which in turn deepen the stagflation pattern of the global macro-economy.