Since the beginning of this year, the Federal Reserve has repeatedly broken market expectations for rate cuts.
Based on the June dot plot, the Federal Reserve is expected to cut interest rates only once. Nevertheless, 7 Wall Street banks expect the Fed to cut interest rates twice this year, a total of 50bps. Looking at the time of the first rate cut, more than half of institutions anticipate it will happen in September.
It is worth noting that in his speech at the ECB Sintra Annual Forum on Tuesday, Federal Reserve Chairman Powell, while still refusing to give any specific guidance on the timing of the first interest rate cut, seemed to be expressing a more "dovish" side in his words.
Powell explicitly stated that the Fed has made significant progress in bringing inflation back to its policy target.
Nick Timiraos, a well-known journalist known as the "new Fed communications agency," said,
In his latest speech, Powell expressed satisfaction with the state of US inflation, which rebounded early in the year and then resumed its downward trend. The market expects the Fed to cut interest rates at the end of the summer, but Powell refuses to explicitly support it.
Powell's remarks highlighted a cautious optimism that had waned after disappointing inflation data in April.
With the Fed's interest rate expectations repeatedly fermenting, many investors are also beginning to focus on the impact of the interest rate cycle on various global assets.
According to the report
(1) Performance of Equity Assets
Equity markets have the following characteristics in five rounds of interest rate cuts:
1. In the first two rounds of rate cuts, because the observation period was short (about one month), the market volatility during the observation period was not significant and had little inspiration for the current market. During the actual rate-cutting period, the equity market rose in all cases. The reason may be that the short observation period of rate cuts led to insufficient market expectations for rate cuts, and after the rate cuts were officially implemented, the market began to include expectations of cuts, leading to high market enthusiasm and a rise in equity markets.
2. In the next three rounds of rate cuts, the observation period ranged from six months to 13 months, longer than in the first two rounds. Due to the dot-com bubble that led to the NASDAQ crash in 2000, the market was still in decline during the observation period, with the NASDAQ index, which was dominated by small and medium-sized Internet companies, experiencing a deeper decline than the Dow Jones Industrial Average and the S&P 500 Index. The equity market rose during the observation period of the fourth and fifth rounds of rate cuts. However, during the actual rate-cut period, the equity market fell in all three rounds.
Why did equity markets show such high consistency in falling during the rate-cutting period? If only interest rates were considered as a single factor, the possible reason is that the economy in the observation period has already shown obvious downward trends, and the Fed's behavior of stopping rate hikes after the rate hikes stopped and not raising rates again one after another has led to speculation in the market about the Fed's stopping rate hikes and strong expectations for the rate cut at the next interest rate meeting, which led to the market advance inclusion of the rate cut expectations. During the rate-cut observation period, the biggest potential risks to the market had not yet occurred, and the market's extremely optimistic expectations led to the equity market's continued rise.
But during the rate-cut period, the market obviously underestimated the negative transmission impact of gray rhinoceros and black swan risks on the economy and the market, coupled with the lag of monetary policy transmission after the rate cut, leading to the equity market's downturn during the actual rate cut period.
(2) Performance of Bond Assets Observing US bonds during five rate cut cycles, the yields of 10-year and 2-year short-term bonds fell significantly, and the US bond market entered into a strong bull market.
Observing US bonds during five rate cut cycles, the yields of 10-year and 2-year short-term bonds fell significantly, and the US bond market entered into a strong bull market.
1. During the rate-cut period, the yield of US bonds fell more significantly than during the observation period. The yield of 2-year short-term bonds fell more than that of 10-year long-term bonds. Accordingly, the change in the term structure of interest rates during the rate cut period was greater than during the observation period.
In the past two interest rate reduction cycles (i.e. since the recorded TIPS actual interest rate data), the observation period for interest rate reduction was mainly characterized by a decrease in actual interest rates with little change in inflation expectations. However, after the formal interest rate cut was implemented, there was more downward pressure on inflation expectations, while the actual interest rate had limited downward space.
Therefore, during the observation period of interest rate reduction, the downward trend of actual interest rates is the main reason for the decline in the 10-year Treasury yield, while during the interest rate reduction period, the downward trend of inflation expectations is the main reason for the decline in the 10-year Treasury yield. The possible reason is that during the observation period of interest rate reduction, the market generally has a more optimistic expectation of the magnitude and frequency of interest rate cuts and will factor the interest rate cut expectation into asset trading in advance, resulting in a greater downward trend in actual interest rates; however, during the formal interest rate reduction period, economic recession or financial risk events prompt the market to move towards high-credit fixed income bond assets, and actual interest rates have been factored into the trading expectation in advance. The downward trend of inflation expectations leads to a further rise in 10-year Treasury yields.
(III) Major commodity asset performance. Looking back at the performance of major commodities during the five interest rate cuts, different types of commodities have different rises and falls and divergent performances, and there is no significant pattern. Overall, gold has performed well in the major asset categories, achieving relatively good returns during the 2000 dot-com bubble, financial crisis, and COVID-19 epidemic periods. During the interest rate reduction period, after the occurrence of risk events and economic recession, the hedging property of gold is more prominent. Copper and aluminum, industrial metals, are also significantly affected by macroeconomic and interest rate fluctuations. At the macro level, interest rate reduction generally boosts industrial metal prices, but during the interest rate reduction period, the economy tends to decline, downstream demand is weaker, and upstream industrial metals generally fall. The trend of industrial economy and the balance between supply and demand are also important factors affecting the price trend of copper and aluminum. If interest rate reduction is only used as the sole factor for judging the rise and fall of industrial metal prices, it is not objective and comprehensive enough to make judgments based solely on monetary policy. The price of crude oil is more affected by the actual supply and demand, and the supply adjustment of crude oil is more susceptible to geopolitical factors, making the price performance more unstable. We will not discuss it in great detail.
What is your opinion on when interest rates will be reduced? How will the financial market evolve in the future? Please leave your comments below~
During the five interest rate cuts, the performance of major commodities varies widely, and there is no significant pattern. Overall, gold has performed well in the major asset categories and has achieved relatively good returns during the 2000 dot-com bubble, financial crisis, and COVID-19 epidemic periods. During the interest rate reduction period, after the occurrence of risk events and economic recession, the hedging property of gold is more prominent.
Copper and aluminum, industrial metals, are also significantly affected by macroeconomic and interest rate fluctuations. At the macro level, interest rate reduction generally boosts industrial metal prices, but during the interest rate reduction period, the economy tends to decline, downstream demand is weaker, and upstream industrial metals generally fall. The trend of industrial economy and the balance between supply and demand are also important factors affecting the price trend of copper and aluminum. If interest rate reduction is only used as the sole factor for judging the rise and fall of industrial metal prices, it is not objective and comprehensive enough to make judgments based solely on monetary policy.
Looking back at the performance of major commodities during the five interest rate cuts, different types of commodities have different rises and falls and divergent performances, and there is no significant pattern.
During the five interest rate cuts, the performance of major commodities varies widely, and the price of crude oil is more affected by the actual supply and demand, and the supply adjustment of crude oil is more susceptible to geopolitical factors, making the price performance more unstable. We will not discuss it in great detail.
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How will the financial market evolve in the future?
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