On May 3, local time, the U.S. Federal Reserve concluded its two-day monetary policy meeting and announced an increase in the federal funds rate target range by 25 basis points to a range of 5% to 5.25%, in line with market expectations.
This is the third rate increase this year by the Federal Reserve and the tenth rate increase since the current round of interest rate increases was launched last year. After this interest rate hike, the Federal Reserve has raised interest rates by a cumulative 500 basis points this round, and the federal funds rate target range has risen to 5%-5.25%, the highest level since March 2001.
Picture/China Securities News
The three major U.S. stock indexes collectively ended lower, with the Dow Jones Industrial Average falling 0.8%, the Nasdaq Composite Index falling 0.46%, and the S&P 500 Index falling 0.7%.
The performance of large technology stocks was divided. Apple fell 0.65%, Amazon rose 0.02%, Netflix rose 0.55%, Google rose 0.09%, Facebook fell 0.92%, and Microsoft fell 0.33%.
Major financial stocks fell collectively, with JPMorgan Chase falling 2.07%, Goldman Sachs falling 1.39%, Citigroup falling 0.70%, Morgan Stanley falling 1.75%, Bank of America falling 1.03%, and Wells Fargo falling 0.46%.
Well-known energy stocks generally fell, with Exxon Mobil falling 1.97%, Chevron falling 2.00%, ConocoPhillips falling 2.67%, Schlumberger falling 1.99%, and Occidental Petroleum falling 1.77%.
Popular Chinese concept stocks were mixed. Among China New Energy Automobile stocks, NIO rose 2.68%, Xpeng Motors fell 0.77%, and Li Auto fell 0.74%.
International oil prices fell sharply. As of the close of the day, the price of light crude oil futures for June delivery on the New York Mercantile Exchange fell by US$3.06 to close at US$68.60 per barrel, a decrease of 4.27%; the price of London Brent crude oil futures for July delivery fell by US$2.99, It closed at US$72.33 per barrel, a decrease of 3.97%.
The U.S. dollar index also fell significantly. The U.S. dollar index, which measures the U.S. dollar against six major currencies, fell 0.58% on the day and closed at 101.3551 in late foreign exchange trading.
New York gold and silver futures prices both rose. Gold futures for June delivery on the New York Mercantile Exchange rose $13.7 to close at $2,037 an ounce, an increase of 0.68%. Silver futures for July delivery rose 6.2 cents to close at $25.681 an ounce, an increase of 0.24%.
Fed statement gives key hints
On May 3, local time, Federal Reserve Chairman Powell spoke at a press conference on the day’s decision to raise interest rates, saying that the Federal Reserve has not yet made a clear decision on whether to stop raising interest rates.
Powell said that the current U.S. inflation rate is still well above the 2% target, and the Federal Reserve will continue to formulate monetary policy “relying on data” and may continue to raise interest rates in the future. He believes more data is needed to determine whether the federal funds rate is tightening enough.
When Powell mentioned JPMorgan Chase’s acquisition of First Republic Bank that day, he said that it is not a good policy for large banks to make large-scale acquisitions, but the acquisition of the failed bank is a good result for the banking system. There are banks of different sizes in the system to achieve Different goals are valuable.
Highlights from Powell’s speech:
In principle, there is no need to raise interest rates that high. The credit crunch complicates assessments and increases uncertainty, making it difficult to predict the extent to which the credit crunch will displace the need for further interest rate increases;
Decisions on interest rates will be made on a data-by-meeting basis, and the Fed is prepared to take more action if necessary. The FOMC did discuss suspending interest rate hikes, but not at this meeting. It feels like we are getting closer to the end, and maybe we can suspend interest rate hikes;
If inflation remains high, the Fed will not cut interest rates; the FOMC’s outlook on inflation does not support interest rate cuts;
Inflation is well above the target, but it has eased. Inflation pressure continues to be high. There is still a long way to go to reduce inflation. We are firmly committed to reducing the inflation rate back to 2%;
The labor market remains “very tight” and there are some signs that supply and demand in the labor market are returning to balance;
The United States may avoid a recession or may face a mild recession;
U.S. banking conditions have generally improved, and the banking system is sound and resilient.
The Federal Reserve’s policy statement deleted language that had previously suggested that interest rates would be raised in the future, saying that the extent to which monetary policy becomes tighter depends on economic conditions; the Federal Reserve’s policy statement showed that economic activity grew moderately in the first quarter and employment growth has been strong in recent months, reiterating that The banking system is sound and resilient.
The Fed’s policy statement also showed that the inflation rate remains high and it is highly concerned about inflation risks; the tightening of credit conditions may suppress economic activity; the pace of reduction of U.S. Treasury bonds and MBS holdings will remain unchanged.
Raising interest rates puts the brakes on the U.S. economy
The banking crisis continues
The latest data from the U.S. Department of Labor shows that the Consumer Price Index (CPI) rose 5% year-on-year in March this year, down from the previous value, but still higher than the Federal Reserve’s 2% target. While raising interest rates to curb inflation, the U.S. economy also hit the “brakes.”
Data recently released by the U.S. Department of Commerce show that U.S. real GDP grew at an annual rate in the first quarter of this year.��1.1%, significantly lower than the 2.6% in the fourth quarter of last year and lower than market expectations. At the same time, the U.S. banking crisis continues to unfold, with First Republic Bank this week becoming the third bank to fail in two months.
When will the U.S. cut interest rates?
The CICC Macro Research Report mentioned that taking into account the resilience of U.S. economic data and the reduction of liquidity risks, the Federal Reserve will continue to raise interest rates by 25 basis points in May, but this may also be the last interest rate increase by the Federal Reserve in this tightening cycle. After this, the Federal Reserve may enter a wait-and-see period, and the federal funds rate may stay at a high level above 5% for a period of time. Unless financial risks further escalate (which is not our baseline scenario), the Fed will not cut interest rates soon. The market currently expects the Fed to cut interest rates in July, which may be too early in pricing.
Kaiyuan Securities Research Report believes that the conditions for the Federal Reserve’s interest rate cut may be that the inflation level will continue to decline and the economic growth rate will decline significantly. At this time, the Federal Reserve’s balance between inflation and growth may gradually shift to economic growth. Such a combination It may occur as soon as the end of 2023, when the Federal Reserve may gradually begin to discuss the possibility of cutting interest rates, and then start the process of cutting interest rates.
Lu Zhe, chief macroeconomist of Debon Securities, said that the Federal Reserve’s balance sheet reduction continues to slow down, and bank rescue tools have rebounded by US$4.4 billion, and show the characteristics of lengthened duration, which means that although the short-term liquidity shock has come to an end, , but it may be difficult to return lost deposits. The Treasury’s cash growth level after tax filing day is weak, and there are pre-existing risks of the U.S. government shutting down and falling into a technical default on its debt. We maintain our view of stopping interest rate increases in June and not cutting interest rates throughout the year. The current market expectations of 2-3 interest rate cuts by the end of the year are still too optimistic.
How does it affect A shares?
CITIC Securities believes that U.S. bond interest rates and the U.S. dollar index are expected to fluctuate and run weakly, and gold still has room to rise. We need to be wary of the disturbances caused by revisions in interest rate cut expectations. It is expected that U.S. stocks will still rebound in stages before the recession, so we need to be wary. An early recession may bring downward pressure, and the external liquidity pressure on A-shares and Hong Kong stocks may be further alleviated.
West China Securities released a research report saying that in the short term, the long domestic holiday and the superimposed performance of listed companies have entered a period of intensive disclosure. The market sentiment is slightly cautious, and the market may fluctuate and consolidate in stages. In the second quarter, the rebound in China’s economic fundamentals is expected to further enhance the attractiveness of RMB assets, and the bottom of A-shares remains solid.
The research report mentioned that throughout the year, overseas economic growth momentum is insufficient, and European and American banking industry risks are also at risk of further spread. Compared with major overseas economies, China’s economy will be one of the few positive factors to boost global expectations this year. From the perspective of global capital allocation, the rebound in China’s economic fundamentals is expected to further enhance the attractiveness of RMB assets, and foreign capital will remain an important source of incremental funds for A-shares.
Wang Shunyao from the FOF Investment Department of Haifutong Fund said that the support for related sectors from the incremental funds coming north that may be brought by the Fed’s interest rate hike in May is worthy of attention.
Southern Fund said that May is likely to be the last time the Federal Reserve raises interest rates. As the Fed’s interest rate hike cycle comes to an end, the downward trend of the U.S. dollar index and U.S. bond yields will be strengthened. Coupled with strong exports, the RMB will be supported. Under this environment, foreign capital is expected to return to A-shares.
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