Guotai Junan: Market response to hawkish signals begins to weaken, short-term trend in US stocks is expected to be difficult to determine.

According to the Zhongtong Finance APP, Guotai Junan has released a research report stating that the Federal Reserve's FOMC meeting in November has paused interest rate hikes twice in a row, further slowing down the pace of rate hikes. This is mainly due to the marginal improvement in inflation control and the alternative effect of rising US bond yields. Although there are already many positive factors easing inflation in the current US economy, there is still strong stickiness and potential threats such as geopolitical risks. The rate hike cycle of the Federal Reserve is coming to an end, but it has not stopped completely, and there is still a possibility of another rate hike. The Federal Reserve continues to release forward-looking guidance with a hawkish stance to suppress inflation expectations, but the US stock and bond markets are beginning to show a muted response to this, instead pricing in more dovish factors. It is expected that the US stock and bond markets will remain volatile in the short term, with no clear trend. The pressure for RMB depreciation has decreased.

The main points of Guotai Junan are as follows:

The Federal Reserve's FOMC meeting in November has paused interest rate hikes twice in a row, further slowing down the pace of rate hikes, which is basically in line with expectations. This is mainly due to the marginal improvement in inflation control and the alternative effect of rising US bond yields. The decision to continue pausing interest rate hikes is partly due to the marginal improvement in inflation control in the United States. In September 2023, the year-on-year growth rates of PCE and core PCE reached 3.44% and 3.68% respectively, compared to 3.45% and 3.84% in August, showing marginal improvement. On the other hand, US bond yields have risen in recent times, briefly surpassing 5%, which has a substitutive effect on interest rate hikes.

From the interest rate decision of the FOMC meeting in November and Powell's speech, the bank believes that there are five marginal increments: First, compared with the previous "tightening credit conditions," the interest rate decision added "tightening financial conditions," evaluating the impact on the economy and inflation from a broader perspective; Second, the Federal Reserve still provides a hawkish forward-looking guidance, mainly to manage inflation expectations; Third, the US economy is very resilient, and the expectation of a recession has further decreased. The Federal Reserve has not discussed the issue of interest rate cuts; Fourth, inflation still has stickiness, but it shows more positive signs, which also leads to a further reduction in expectations of interest rate hikes. The Federal Reserve is acting cautiously, and its overall attitude is more dovish than before; Fifth, there are still some risk factors that may pose potential threats to the economy and inflation, such as the Middle East conflict and the risk of government shutdown.

The rate hike cycle is coming to an end, but it has not stopped completely, and there is still a possibility of another rate hike. Interest rate cuts are expected to occur at least in the second half of 2024. According to the expectations reflected in the US federal funds rate futures market, the Federal Reserve may maintain the federal funds target rate at 5.25%-5.5% in the future, which means that the Federal Reserve will no longer raise interest rates. However, if the market's expectations of interest rate hikes by the Federal Reserve decline, it may cause short-term downward fluctuations in US bond yields. After a temporary decline, it may further lead to an increase in expectations of interest rate hikes by the Federal Reserve, combined with the impact of geopolitical risks and other factors. Inflation may still fluctuate, and the bank believes that there is still a possibility of another rate hike. With the resilience of the economy and the stickiness of inflation, the Federal Reserve has not discussed the issue of interest rate cuts. In the short term, the economy still has support, but as the relative decline in economic momentum, interest rate cuts are expected to occur at least in the second half of 2024.The US stock and bond markets have shown a muted response to the "hawkish" forward guidance, pricing in factors that lean towards a more "dovish" stance. The pressure for depreciation of the RMB exchange rate has decreased. Following this interest rate meeting, US stocks have risen and bond yields have declined. The stock and bond markets have priced in factors that suggest a more dovish stance, dampening the reaction to the hawkish forward guidance. The future path of US interest rate hikes remains uncertain, and coupled with the possibility of a relative slowdown in economic momentum in a high interest rate environment, it is expected that the US stock and bond markets will continue to experience volatility, with no clear trend in the short term. The US economy and labor market are further slowing down in a high interest rate environment, while the Chinese economy is expected to stabilize weakly in the short term. At the same time, US bond yields are fluctuating at high levels, with limited room for further increases. Chinese bond yields are facing upward pressure due to tight liquidity and the backdrop of economic recovery, stabilizing the interest rate differential between the US and China, thereby reducing the pressure for further depreciation of the RMB exchange rate. In the short term, it is likely that the RMB exchange rate will continue to fluctuate within a range of around 7.3, with the window for a trend of appreciation expected to open after the second quarter of 2024.

Risk Warning: US economic downturn exceeds expectations; liquidity risk events; inflation stickiness exceeds expectations.