CITIC Securities: The probability of the last interest rate hike in July is high. US stocks may turn downward after the increase in recession expectations.

According to the Zhongtong Finance APP, CITIC Securities has released a research report stating that the Federal Reserve raised interest rates by 25 basis points at its July monetary policy meeting, which is in line with market expectations. The overall changes in the meeting statement were not significant, and Powell's speech retained flexibility in future policies despite contradictions. It is highly probable that July will be the last interest rate hike in this round. If the month-on-month inflation growth rate remains above 0.4% before the September monetary policy meeting, there may be additional rate hikes. Pay attention to the ECI data this Friday and Powell's remarks on combating inflation at the August Jackson Hole meeting. The earliest rate cut is expected to occur in the first quarter of next year. Short-term expectations for US bond rates and the US dollar index remain volatile, and US stocks may turn downward after the expectation of a recession intensifies. Pay close attention to the recent financial reports of US stocks.

Key points of the July 2023 Federal Reserve monetary policy meeting statement:

1. Regarding interest rate tools, the committee decided to raise the target range for the federal funds rate to 5.25%-5.5%, which is in line with market expectations and the highest level since 2001.

2. Regarding the balance sheet, the committee will continue to reduce holdings of US Treasury bonds, agency debt, and MBS according to the previously announced plan.

3. Regarding the economic outlook, recent economic activities continue to expand moderately, with strong job growth and a low unemployment rate. Inflation remains high. The US banking system is sound and resilient. Tightening credit conditions for households and businesses may put pressure on economic activities, hiring, and inflation. The committee is firmly committed to restoring the inflation rate to the target of 2%.

The main changes in the July 2023 Federal Reserve monetary policy meeting statement compared to the previous meeting are:

1. The decision to maintain the interest rate level unchanged in terms of interest rate policy has changed to raising interest rates.

2. Slight changes in the description of future information, from "maintaining the target range unchanged to allow the committee to assess more information and its impact on monetary policy" in June to "the committee will continue to assess more information and its impact on monetary policy," with no significant overall changes.

Powell's speech retained flexibility in future policies amid contradictions. Powell's speech after this meeting was somewhat contradictory while still maintaining flexibility in future policies.

Firstly, regarding monetary policy, on the one hand, Powell stated that the current interest rate level is already restrictive, and the marginal changes that occur when approaching the restrictive level have not been fully reflected. However, on the other hand, Powell stated that if necessary, there may be another rate hike in September, and there should be no rate cut within the year.

Secondly, regarding inflation, on the one hand, Powell believes that the downward trend in inflation is pleasing, and inflation has been alleviated to some extent. However, on the other hand, he emphasized that single inflation data should not be overinterpreted, once again highlighting the stickiness of inflation. It is still necessary to continue to combat inflation, while indicating that core inflation can indicate future overall inflation trends.

Furthermore, regarding the job market, on the one hand, Powell stated that labor supply and demand continue to trend towards balance, and nominal wage growth has slowed down. However, on the other hand, he reiterated that the job market is still tight, and job growth remains strong. Overall, Powell's speech after this meeting did not convey a very clear policy stance.

It is expected that there is a higher probability of the last rate hike in July for this round. If the month-on-month inflation rate continues to be higher than 0.4% before the September interest rate meeting, there may be additional rate hikes. Pay attention to this Friday's ECI data and Powell's remarks at the August Jackson Hole meeting on combating inflation. The earliest rate cut may occur in the first quarter of next year.

Firstly, after this rate hike, the federal funds rate of 5.5% is already close to the rate level calculated by the Taylor rule. Secondly, after this rate hike, the federal funds rate of 5.5% is significantly higher than the current short-term inflation expectations in the United States (3.4%), CPI YoY (3%), core CPI YoY (4.8%), PCE price index YoY (3.85%), core PCE price index YoY (4.62%), and non-farm hourly wage growth rate YoY (4.4%). It is also higher than the current neutral interest rate level in the United States (2.5%). The restraining effect of rate hikes on economic growth will be significant, therefore, there is an increased probability that July will be the last rate hike in this round. However, according to calculations, if the month-on-month inflation rate in the United States continues to be higher than 0.4% before September, it will lead to a significant rebound in inflation, and there may be additional rate hikes.

As for the follow-up policies, in addition to monthly inflation and employment data, attention needs to be paid to the ECI data for the second quarter to be released this Friday, which may have an impact on the Fed's stance. In addition, the market may find more clues about the Fed's attitude towards combating inflation at the August Jackson Hole meeting this year. As for rate cuts, it is still believed that the earliest possibility will be in the first quarter of next year.

It is expected that the short-term US bond yields and the US dollar index will remain volatile, and US stocks may turn downward after the increase in recession expectations. Pay close attention to the recent earnings reports of US stocks.

Firstly, the current US economic data is still mixed, with overall inflation and core inflation still diverging. The Fed's rate hikes are coming to an end, but rate cuts are still far away. Therefore, in the short term, it is expected that US bond yields and the US dollar index will continue to fluctuate.

Secondly, the improvement in liquidity expectations after the end of rate hikes is still a positive factor for US stocks, and the performance of large technology companies that have already released earnings reports remains strong. It is expected that US stocks will continue to show a volatile and strong trend as long as the US economic data does not weaken continuously. However, when economic data weakens continuously and recession expectations increase, US stocks may turn downward.

Risk factors:

US inflation continues to fall slower than expected; fragility of the US financial system exceeds expectations; the timing of the US economy entering a recession is faster than expected.