Fidelity: It is expected that the Federal Reserve will only cut interest rates by 50 basis points by the end of 2024
Fidelity expects the Federal Reserve to only cut interest rates by 50 basis points before the end of 2024, believing that the current rate cut is insufficient to reflect economic risks. Fidelity warns that the fixed income market is affected by policy changes, and bond investors need to adjust their asset allocation. Although US inflation is under control, layoffs in small and medium-sized enterprises and increased pressure on low-income consumers may slow down consumption, affecting economic growth. The market needs to pay attention to the consumption trends of middle and high-income individuals
Futu released a statement on August 15th, as reported by Zhitong Finance APP, indicating that central banks (especially the Federal Reserve) are expected to cut interest rates in the last few months of 2024, which will inevitably impact the fixed income market. Therefore, Futu International believes that bond investors seeking returns need to reassess their fixed income asset allocation to adjust their portfolios according to the evolving policy environment.
When trying to predict interest rate trends, central banks need to look ahead while also looking back. Interest rate decisions have a lag, which means that policymakers need to adjust borrowing costs 6 to 12 months before potential changes in economic conditions. Therefore, in a comprehensive assessment of interest rate trends, it is necessary to analyze leading indicators. However, Futu expects that the Fed's rate cuts by the end of 2024 will be less than 50 basis points. From the labor market and consumer data perspective, this rate cut does not reflect the risks facing economic growth.
Inflation in the United States seems to be under control at the moment, with optimistic consumer-related data in June 2024 supporting rate cut expectations. Therefore, the focus of the Federal Reserve is shifting to the labor market. However, it has been proven that the non-farm payroll data is becoming increasingly unreliable in reflecting the employment situation, mainly due to the response rate falling to the lowest level in 30 years, with the government and education sectors inflating non-farm data.
Futu believes that the non-farm data fails to reflect the situation where small and medium-sized enterprises are laying off employees on a large scale. Such trends often spread to the overall U.S. economy, and if the economy is really hit, it may prompt the Federal Reserve to act faster than expected, potentially accelerating the current expected rate cut cycle.
American consumers remain the pillar driving short to medium-term economic growth. However, at this stage, Futu believes that spending may still slow down. Low-income consumers have been under pressure for some time, with an increase in homelessness and poverty rates. In addition, the number of people working two jobs to supplement their income is also increasing.
Therefore, in trying to accurately assess the health of the U.S. economy, Futu focuses on middle to high-income individuals, who are a crucial part of discretionary spending statistics. Futu's analysis shows signs of further pressure on consumption. The latest consumer confidence survey report shows that despite overall positive growth in the U.S. economy, consumer confidence has dropped to levels corresponding to an economic recession.
Futu advises that in this environment, bond investors should seek investment opportunities while maintaining forward-looking deployment. For example, investors can invest in U.S. duration for returns and seize profit opportunities through diversified investment portfolios. The performance of the U.S. corporate bond market in 2024 has been unexpectedly strong, and according to Futu's assessment of the risks facing the U.S. economy in the next six months, government bond yields still hold value, especially in medium to long-term bonds (5 to 7 years).
Furthermore, in regions that have already started rate cuts, such as the Eurozone and Canada, investors can establish technical long-duration positions. With the U.S. presidential election approaching, it is expected that the U.S. market will become more volatile, and investors can also consider global income strategies outside the U.S. dollar bond market.
Futu stated that the European Central Bank has already started rate cuts, and Futu has discovered bond investment opportunities in Europe, which can provide substantial returns and diversify global income strategies Finally, due to interest rate changes that may affect currency valuation, and subsequently impact the attractiveness of various fixed income strategies, currency hedging strategies remain crucial