TF SECURITIES: Fed cuts rates by 50bp, how to view the domestic bond market?

According to the information from TF Securities APP, TF Securities released a research report stating that the Renminbi may still run relatively strong in the short term. However, considering that the US dollar may not significantly weaken after the Fed rate cut, and domestic fundamentals have not been boosted, the vicinity of 7.00 may be a resistance level for this round of appreciation. With the Fed rate cut landing, the market may realize some of the rate cut expectations, especially for institutions engaging in left-side trading. However, considering that fundamentals and policy decisions determine the direction of interest rates, it seems unnecessary to take profit even if the domestic rate cut lands.

Key points from TF Securities:

Why did the September interest rate meeting cut rates by 50bp?

From market pricing, Fed materials, and official statements, the key reason for the 50bp rate cut this time is the downside risks in the labor market.

We believe that the Fed's consideration may be to avoid a rapid weakening of the labor market by cutting rates by 50bp, guiding towards an economic soft landing, and managing expectations to control the risk of secondary inflation.

How do we view the Fed's future actions?

Along with the process of the US economic soft landing, we tend to believe that the Fed will cut rates twice more this year, with a total reduction of 75bp. The constraints on Fed rate cuts due to the risk of secondary inflation may be limited.

The pressure of economic and financial recession generated by a high-interest rate environment cannot be ignored. Behind the resilience of the US economy is supply-side stimulus policies, which help maintain relatively stable inflation expectations. For key areas such as housing inflation, the impact of rate cuts on housing supply and housing inflation is uncertain, and the Fed can guide the economy through managing expectations. Additionally, the Fed has not finished its balance sheet reduction.

How do we view US bonds and the US dollar? We believe that the central level of US bond yields may continue to fluctuate downward in the future. Considering the Fed's expectation guidance on interest rates to prevent inflation risks, the gradual decline in US bond yields may be a process, with the 10-year US bond range possibly between 3.2-3.7% by 2024.

As for the US dollar, based on historical rate cut cycles and the current performance of the Eurozone and Japan, the US dollar index may still operate around 100 this year.

Will China follow with rate cuts?

The state of effective demand determines that monetary policy is in an easing cycle, making rate cuts an internal necessity. However, the timing, pace, and specific methods of rate cuts need to balance multiple objectives, leading to some uncertainty.

How do we view the Renminbi exchange rate?

We believe that the Renminbi may still run relatively strong in the short term. However, considering that the US dollar may not significantly weaken after the Fed rate cut and domestic fundamentals have not been boosted, the vicinity of 7.00 may be a resistance level for this round of appreciation.

How do we view the domestic bond market?

With the Fed rate cut landing, the market may realize some of the rate cut expectations, especially for institutions engaging in left-side trading. However, considering that fundamentals and policy decisions determine the direction of interest rates, it seems unnecessary to take profit even if the domestic rate cut lands.

Key areas to watch in the future: First, further strengthening of bond market regulation; second, significant changes in macroeconomic expectations due to forceful growth-stabilizing policies. Perhaps these two major risk alerts will continue to exist, and the market will continue to move in the direction of fundamentals Risk Warning: Domestic incremental policies exceed expectations, domestic inflation trends fall short of expectations, overseas economic performance exceeds expectations