I've been waiting for a long time for the Fed to cut interest rates. It's just that they cut it by 50 basis points, a reduction typically seen only in times of crisis. What happened to the resilient economy?

Global assets overnight have been volatile, going up and down like a roller coaster.

After the news of the Fed's 50 basis point rate cut, the US stock market and gold prices surged in the short term, US government bond yields plummeted, and the US dollar weakened. However, after just a few minutes, the US stock market gave back all its gains, and the drop in bond yields narrowed.

During Fed Chairman Powell's press conference, the aforementioned major assets experienced various reversals. In the end, the three major US stock indexes all closed with losses, spot gold rose briefly and then fell, US government bonds saw a V-shaped reversal, and long-term Treasury yields rose the most.

This just goes to show that even the market was caught off guard by the 50 basis point rate cut. Why did the Fed surprise everyone with such a large reduction?

1

The Fed cut interest rates by 50 basis points.

To be honest, the first reaction when I woke up in the morning and saw the news of the Fed's 50 basis point rate cut was that the Fed's determination to protect the economy is really strong. It's not surprising to think that hot money will naturally flow out of the dollar assets.

Before Nick, the mouthpiece of the Fed, published the article '25 basis points or 50 basis points rate cut? Fed faces a difficult choice' last Thursday, the market had already widely accepted the expectation of the first rate cut of 25 basis points. Once this article was released, the market's expectation for a 50 basis point rate cut increased sharply.

Nevertheless, at that time the editor was still indifferent to the 50 basis point rate cut. It should be noted that historically, the first rate cut of 50 basis points is generally used during economic recessions or crises, such as in 2001, 2007, and March 2020.

Since the surface economic data all prove the resilience of the U.S. economy, the Fed's first rate cut of 25 basis points indicates economic control, no risk of recession, and reduces the probability of secondary inflation. At least in the short term, this is the least likely wrong move.

Once you choose a 50 basis point rate cut, the market will wonder if you see any risks that everyone else has overlooked. In the short term, there will be panic in the market, but extending the time horizon will increase the probability of an economic soft landing.

So in a calm situation, choosing a 50 basis point rate cut for the first time is truly a huge challenge.

On September 17th (the day before the Fed interest rate meeting), Nick once again tweeted to further explain what 25 and 50 basis point rate cuts each mean.

The rationale for the 50 basis point rate cut can be attributed to the risk management mentioned by Fed officials, but it could also be seen as minimizing regrets. Former Dallas Fed President Robert Kaplan said, 'If you cut rates by 50 basis points here, and you think the Fed will need to cut rates again after this, even if the economy progresses smoothly from now until the next meeting, you are unlikely to regret this rate cut. But if you cut by 25 basis points and things worsen in the following weeks, you would have bigger regrets because you would be behind the curve.'

The reasons for the 25 basis point reduction can be summarized as follows: 1) Procedural issues: (i.e. a 50 basis point reduction would send a more urgent signal: an upcoming election; the communication about the 50 basis point before this meeting was not clear enough), 2) The view that the economic situation is good and will continue to take more gradual reduction measures, and 3) Due to loose financial conditions: stimulating risk assets may make it more difficult to complete the struggle against inflation.

Now we all know the result, the Fed chose to cut interest rates by 50 basis points for the first time.

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Why reduce interest rates by 50 basis points?

Powell's reason is risk management. He believes that this rate cut is more for risk management considerations, it is a readjustment of the policy stance of the Fed, i.e. the focus of the Fed policy has shifted from controlling inflation to preventing risks, and there is a need to prevent substantial weakening of employment risks.

At the same time, Powell emphasized at the press conference that the 50bp should not be seen as a new rhythm for subsequent rate cuts by the Fed, there is no pre-set policy path, decisions will continue to be made based on economic data in successive meetings, and future rate cuts could be fast, slow or even paused. His personal view is that the neutral interest rate will not return to the previous low levels.

It is worth mentioning that Nick's two tweets today both mentioned Powell's views on the neutral interest rate: "In my view, the neutral interest rate may be much higher than before (the pandemic)."

The simplest way to understand the increase in neutral interest rates is to maintain a high level of interest rates for a long period of time to ensure that the economy does not overheat and to avoid repeated inflation. On the other hand, it also indicates that the Fed believes that the current US economy is relatively strong, indeed proving that the short-term economy will not decline.

Simply put, this Fed meeting is a combination of "super-dovish rate cut" and "hawkish stance", it's designed to confuse you.

On the one hand, from a historical perspective, unless there is a major crisis, the Fed seldom starts a rate cut cycle with a 50 basis point cut, which can be said that the 50 basis point rate cut by the Fed is a manifestation of concerns about the "slowing down" of US economic activity, the outlook for US economic growth is not so optimistic, and the September dot plot also raised the expected unemployment rate while slightly lowering the expected GDP.

One of the reasons for this 50 basis point rate cut is likely to minimize regret, as Nick mentioned.

On the other hand, the current economic data in the United States is mildly declining, not deteriorating, and a 50 basis point rate cut further demonstrates the Fed's determination to underpin the economy, increasing the probability of a soft landing for the economy. From past historical experience, the Fed's underpinning effect is evident.

Powell said directly at the press conference that the 50 basis point rate cut is not something that the Fed has seen that others haven't, but rather that they believe "the US economy is in good shape, and today's decision is aimed at maintaining this state."

As for the impact on the market, it depends on whether the market's focus is on the "signs of a US economic recession" or the "Fed's determination to prop up the economy."

For the subsequent interest rate cuts, the dot plot in September predicts another 25 basis point cut in November and December 2024, with a total reduction of 100 basis points this year.

When asked about what information or data could lead to another significant interest rate cut, Powell mentioned the Beige Book and downward revisions in non-farm payrolls as the ones he is particularly concerned about.

You know, more data. Just as usual. Don't look for anything else. We will see two labor market reports and we will also get inflation data, all of which are the data we will focus on.

Powell mentioned that the current increase in non-farm payrolls is somewhat overestimated, so the precautionary rate cut helps to prevent the risk of deteriorating job market. He also admitted that the 50 basis point rate cut this time is to some extent a compensation for not cutting rates in July, as the Fed's July meeting took place two days before the release of the July non-farm payrolls data.

Given that the Fed has completely shifted its focus from inflation to employment, this means that the two non-farm employment reports (October 4th and November 1st) are very important.

However, the CICC team mentioned that after the release of the August non-farm payrolls data, Fed officials did not explicitly signal a 50 basis point rate cut. It wasn't until the start of the "quiet period" last week that news came out that the Fed is considering a larger rate cut.

This at least suggests that one of the reasons for the 50 basis point rate cut in September may not be as Powell said: the July non-farm payrolls data has already raised enough concern among Fed officials, so compensatory rate cuts are needed in September.

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How do you view A-shares in HK?

Regardless of the reasons for the 50 basis point rate cut by the Fed, we must be clear - the Fed's initiation of a rate cut cycle will profoundly affect global investments in the coming one to two years.

For A-shares in HK, it may need to be looked at separately.

The performance of HK stocks today is more impressive, with a significant increase in market sentiment for HK stocks in the afternoon. The Hang Seng Tech Index continued to climb in the afternoon, leading with a 3.8% increase, ending with a substantial rise of 3.25% to reach a two-month high. The Hang Seng Index increased by 2% and returned to the 18,000 level.

Looking at the low opening and high performance of the HK stocks during the two trading days of the holiday, with continuous active buying, we can focus on whether a trend force can be formed.

GX China e-commerce logistics, iShares Core MSCI China Index ETF, Samsung CSI China Dragon Internet ETF, w.i.s.e. - Nasdaq Overseas China New Economy Companies Top 50 Index Tracker, and Hang Seng Tech Index ETF all rose by more than 3%.

(The content of this article is a list of objective data and information and does not constitute any investment advice)

For A-shares, Canghaiyitugou's latest article points out: 'A 50bp rate cut by the Federal Reserve will directly expand China's money supply curve, lower long-term bond rates, and boost the CSI 300 index.'

Based on yesterday's ETF fund data, the net inflow of HuaTaiBaiRui Fund CSI 300 ETF, HS300ETF Yifangda, Huaxia 300 ETF, and Jiashi Fund CSI 300 ETF totaled 3.794 billion yuan.

Although macroeconomic data still needs further observation, after a four-year tightening cycle, with most major central banks entering an interest rate cut phase over the next two years, combined with the current undervaluation, it is still possible to actively seek opportunities for A-shares with a lack of popularity.