if the Fed raises interest rates once, 50bp
- February 7 to February 13, 2022
summary
After the CPI rose higher than expected in January, the market has traded the expectation of a 50bp interest rate increase in March. At present, this possibility is gradually increasing.
I. where is the expectation of raising interest rates? How much is expected to be included in the asset price? 3 monthly interest rate increase 50bp 6 ~ 7 annual interest rate increase
At present, the implied 50bp probability of interest rate increase in March of CME interest rate futures is 94%, 6.3 times in the whole year. From the perspective of asset prices, the current annual interest rate increases included in US stocks, US bonds and gold are 4.8, 4.8 and 6.8 respectively, there is still a partial gap between and the expectation of interest rate futures.
II. Next major events and observation points? FOMC minutes and Powell hearing
1) FOMC minutes of January on February 17; 2) Powell semi annual congressional hearing, late February. 3) February non farm payrolls in early March and February inflation in mid March.
III. what happened to the last interest rate increase 50bp ? 1994 years of continuous interest rate increase 50bp experience
Since 1990, there have been five cases with amplitude exceeding 25bp: May 1994, August 1994, November 1994 (75bp), January 1995 and May 2000.
Basically, at the beginning of the interest rate hike in 1994, inflation was not high or even fell slightly. Until May 1994, the oil price rose sharply, which also corresponded to the acceleration of interest rate hike. In terms of asset performance, 1 ) stock market : emerging markets closed down as a whole, while developed countries resisted the decline; U.S. stocks fell little, with the largest retreat of 9%; 2 ) interest rate : after the 10-year US bond interest rate hike started, it surged upward after accelerating the 50bp interest rate hike in May, but the kinetic energy slowed down. The two-year action on US debt can be stronger, especially after accelerating the interest rate hike, resulting in the narrowing of term interest rate spread. 3 ) gold and US dollar : gold was basically flat and the US dollar continued to weaken; 4 ) bulk commodities : industrial metals strengthened, crude oil rose sharply at the initial stage, Shenzhen Agricultural Products Group Co.Ltd(000061) was basically flat.
Fourth, enlightenment to the follow-up market? Even in the stage of accelerating interest rate hike, the fundamentals are still dominant; But the problem now is that there is not enough space left for {10 year U.S. debt {2 year
in the short term, the fluctuation has yet to subside . The subsequent turnaround should see that after the inflection point of inflation appears and forms a trend in the future, from the base effect, it is probably at the end of the first quarter and the second quarter. There are some positive changes in the short term, such as the rapid decline of the epidemic, inventory replenishment, but these "slow variables" can not solve the "near thirst" of high inflation and tight interest rate hike.
so we also need to start considering the accident that the severity of the policy may still be increased. In terms of impact, 2 year interest rate will bear the brunt. this time, it has raised 150bp "in advance", which is more similar to the cycle in 1994. If the interest rate is increased by 150bp this year and assuming that the difference in 1994 can be referred to, 2 year interest rate does not rule out reaching 2 ~ 2.25% . The problem of {123567} is that {123567} is not enough for {123567} 123567 {123567} 123567 {123567} 4567 {123567} 4567 {123567} 456} 123567. In order to prevent 2s10s " " recession expectation " after {2s1s upside down, it may mean that either the pace and range of the Fed's interest rate hike are not so large, or the long-term interest rate is pushed up through quantitative tightening. In this case, the annual US debt of 10 does not rule out reaching a high of 2.3 ~ 2.4% .
The rise of two-year Treasury bonds by 50 ~ 75bp corresponds to the correction of US stock valuation by 6% ~ 9%. During the interest rate increase cycle in 1994, US stocks were basically flat, with a profit contribution of 13.7% and a valuation drop of 14%, it is not difficult to see that profit is still the key to the market trend.
Focus this week: what will be the impact if the Fed raises interest rates by 50bp once in March? What experience can be used for reference in history?
Since February, the Fed's expectation of raising interest rates has been further strengthened. Especially after the CPI data in January rose higher than expected, the market has begun to trade the expectation that FOMC will raise interest rates by 50bp in March. at present, this possibility is gradually increasing .
We also need to start discussing the impact of the Fed raising interest rates by 50bp at a time.
I. where is the expectation of raising interest rates? How much is expected to be included in the asset price? The interest rate was increased by 50bp in March and 6 ~ 7 times in the whole year
After the CPI data again exceeded expectations in January, the market reacted violently, with the 10-year US Treasury bonds breaking through 2%. The two-year Treasury bonds more directly affected by the interest rate hike surged 25bp to around 1.5%. at present, CME interest rate futures implies a 94% probability of raising interest rates by 50bp in March and 167bp in the whole year (corresponding to 6.3 times of 25bp) . After the inflation data was released last week, the rise of short-term interest rate also reflected the "compensation" for this range, while the long-term 10-year US bond interest rate rose by 9 BP (but it was Rethought on Friday due to the geopolitical situation of Russia and Ukraine), but the changes in the expectation of real interest rate and neutral interest rate were more obvious, rising by 8 BP and 14 BP respectively.
From the perspective of main asset prices, according to our model calculation, currently, the annual interest rate increases included in US stocks, US bonds and gold are 4.8, 4.8 and 6.8 respectively, has been prepared to some extent, but there is still a partial gap between and (where is the expectation of interest rate increase?).
II. Next major events and observation points? FOMC minutes and Powell hearing
at present, the possibility of directly raising interest rates by 50bp in March is increasing. looking ahead, there are several main observation time points before the FOMC meeting in March (March 15-16), which may affect market expectations: 1) the minutes of FOMC meeting in January published on February 17; 2) Federal Reserve Chairman Powell's semi annual congressional hearing is usually held in late February. 3) February non farm payrolls in early March and February inflation in mid March.
III. what happened to the last 50bp interest rate increase? Historical experience of 50bp interest rate increase in 1994
a 50bp interest rate increase is not common. At least in the past 20 years, the last time was traced back to 2000, and more concentrated in the round of interest rate increase cycle from 1994 to 1995. In the four interest rate increase cycles since 1990, there have been five interest rate increases equal to or exceeding 50bp, namely, May 1994 (3.75% to 4.25%), August 1994 (4.25% to 4.75%), November 1994 (4.75% to 5.5%), January 1995 (5.5% to 6%) and May 2000 (6% to 6.5%).
from the fundamental environment , after the recession in the early 1990s, the recovery momentum of the U.S. economy increased significantly in 1994, and the ISM manufacturing PMI rose rapidly from 49.6% in June 1993 to 57.4% in April 1994. After the winter, the new non-agricultural employment increased rapidly to 461000 and 344000 in March and April 1994 (vs. 186000 in February). However, the interest rate hike cycle started in February 1994. Until the three interest rate hikes of 25bp in April, the CPI as a whole was not high, or even fell slightly. However, with the rise of oil prices in March 1994 (from the lowest $12 to the highest $19 in August, an increase of nearly 60%), inflation and inflation expectations rose accordingly. The Federal Reserve also began to accelerate the interest rate hike in May, raising interest rates by 50bp at a time and 75bp in November, until it stopped in February 1995.
asset performance , 1) stock market: after the interest rate hike cycle started in 1994, the first three interest rate hikes by the Federal Reserve were 25bp. During this period, emerging markets fell significantly, but developed stock markets were relatively resistant. After the accelerated interest rate hike of 50bp in May, emerging stock markets rebounded rapidly, and developed stock markets ended up in shock. However, the good times did not last long. After raising interest rates again by 50bp in August, emerging markets turned to decline and continued until the end of the interest rate increase cycle in early 1995; Developed markets also made a slight correction and did not turn up until the end of the interest rate hike cycle.
2) interest rate: 10-year US bond interest rate rose rapidly after the interest rate increase cycle in 1994, rising from 5.8% before the interest rate increase cycle in February to a relatively high of 7.5% in early May. However, after the Federal Reserve started to accelerate the interest rate hike by 50bp on May 17, the 10-year US bond interest rate still fluctuated upward, but the momentum slowed down, peaked and fell about two months before the end of the interest rate hike cycle (8.0%). In contrast, the two-year US bond interest rate rose rapidly from 4.3% before the opening of the interest rate hike cycle in February to a relatively high of 6.2% in early May. After the Fed accelerated the interest rate hike, it continued to rise (7.7%) until the end of the interest rate hike.
3) bulk commodities: after the Federal Reserve began to accelerate interest rate hike in May 1994, industrial metals continued to strengthen, crude oil rose first and then fell, Shenzhen Agricultural Products Group Co.Ltd(000061) fluctuated.
4) US dollar and gold: before and after the US Federal Reserve accelerated interest rate hike by 50bp in May, gold fluctuated widely, while the US dollar continued to weaken.
IV. possible enlightenment to the follow-up market? Even in the stage of accelerating interest rate increase, the fundamentals are still market-oriented; But the problem now is that the 10-year US debt does not leave enough space for two years
In the short term, as discussed above, the probability of raising interest rates by 50bp in March is rising, and there are still some gaps in the expectations included in the market, so the expected compensation is needed. Therefore, as we said in the monthly report on overseas asset allocation (2022-02): it still takes time for fluctuations to subside, short-term fluctuations may still have time to subside, Especially for the full anchoring of the path of interest rate increase in the future.
so when might it be a transfer? at present, after the inflection point of inflation in the future appears and forms a trend, from the perspective of expectation first, the subsequent tightening path will not continue to be revised higher than expected. From the perspective of base effect, it will probably be at the end of the first quarter and the second quarter. In the short term, there are some positive changes, such as the degree of employment shortage and supply bottleneck are stabilizing without further deterioration; The epidemic situation is falling down rapidly, and the inventory has also been replenished (the epidemic peak has passed, and Europe and the United States are gradually opening up (February 12)). however, these are "slow variables", which can not solve the current "near thirst" of high inflation and tight interest rate hike. Moreover, the Fed may also want to see more conclusive changes to prevent further "policy mistakes".
at the same time, we also need to start considering that the severity of the current policy may still be maintained for a period of time, or even there is a potential accident of raising interest rates, that is, the rate increase is more than expected , For example, if the decline of the above price pressure is slower than expected due to other factors (such as geopolitical tensions pushing up commodity prices, the resurgence of new variants, or the deterioration of wage inflation spiral, etc.), or the Federal Reserve hopes to take more "pre emptive" and stringent measures to curb inflation expectations .
as mentioned above, the interest rate increase cycle was started in February 1994. The first three interest rates were increased by 25bp each time, but the interest rate was increased by 50bp after May and even 75bp in November until February 1995. The whole interest rate hike cycle lasted one year, with seven interest rate hikes, and the benchmark interest rate rose from 3% to 6%.
On the transmission path of , the two-year Treasury bond will be the most sensitive and bear the brunt . At present, the interest rate of about 1.5% of the two-year Treasury bond is about 150bp higher than the federal funds rate. From the previous interest rate increase cycles, the point and amplitude of the two-year Treasury bond basically coincide with the rise of the federal fund interest rate, but this time it has "advanced" by 150bp, which is more similar to the interest rate increase cycle from 1994 to 1995. At that time, there was a difference of 100bp between the two before the interest rate hike, while in the stage of continuous interest rate hike of 50bp, the difference rose to about 175bp. Therefore, after deducting the existing gap before the interest rate hike, the difference was 50 ~ 75bp. therefore, if the cumulative interest rate increase this year is 150bp, and assuming that the difference in 1994 can be used as a general reference, the two-year Treasury bond will not rule out reaching around 2 ~ 2.25%.
Looking further at the long-term interest rate, during the interest rate increase cycle in 1994, the rise of 10-year Treasury bonds was slower, which also led to the continuous narrowing of the term interest rate spread. In particular, it accelerated to fall back to the end of 1994 (about 0.2%) after October 1994, and it basically corresponds to the end of the next interest rate increase cycle (February 1995). Compared with 1994 and previous interest rate increase cycles, the problem now is that the current 10-year Treasury bond interest rate (1.9 ~ 2%) does not leave enough space for the 2-year treasury bond (1.5%), and the interest rate spread is only 40 ~ 50bp. In order to prevent the "recession expectation" after 2s10s upside down, it may mean that either the pace and range of interest rate increase by the Federal Reserve in the future are not so large, or the long-term interest rate level should be pushed up more through quantitative tightening (i.e. "table contraction") to avoid too fast upside down. in this case, if we are based on the above assumptions for two-year Treasury bonds, combined with the 2s10s term spread, interest rate expectation and term premium, and real interest rate inflation expectation, the 10 long-term treasury bonds may not rule out reaching 2.3 ~ 2.4%.
so what might this mean for the stock market? according to the historical relationship, the two-year Treasury bond further increased by 50 ~ 75bp, corresponding to the correction of US stock valuation by about 6% ~ 9%. However, from the experience of 1994, a continuous interest rate increase of 50bp or even 75bp does not mean that the market has completely turned into a bear. In fact, during the whole interest rate increase cycle, US stocks were basically flat (a cumulative decline of 2%) and the maximum pullback was ~ 9%. During this period, the profit contribution was 13.7% and the valuation fell by 14%, it is not difficult to see that the profit is still the key to the market trend , which is also consistent with the view that we have always stressed that the impact of monetary policy should distinguish between the expected and actual implementation stages, and the latter impact will give way to the fundamentals.
Market dynamics: in January, CPI exceeded expectations, resulting in tightening expectations. The US bond interest rate once exceeded 2%, and the growth style was backward; Geopolitical risk warming
asset performance: bulk > stocks > bonds, interest rates rose and fell, and growth lagged behind
Near the weekend of this week, the US bond and US stock markets fluctuated greatly again, mainly due to the higher than expected CPI data in January released on Thursday, which made the market's expectations for the tightening of the Federal Reserve, especially the further increase of interest rate in March. The US bond interest rate soared. The 10-year US bond interest rate broke through 2% from ~ 10bp, a new high since July 2019, and the two-year Treasury bond jumped nearly 25bp, In this context, the US stock market ended three consecutive positive days. Near the weekend, the geopolitical concerns of Russia and Ukraine once again suppressed the market risk appetite, US stocks continued to be under pressure, and the 10-year US bond interest rate reversed the increase of the previous day.
On the whole, in the past week, under the dollar valuation, bulk stocks > stocks > bonds; VIX bulls, bitcoin and Brazil stock market led the rise, while natural gas, gem and faamng led the decline. In terms of sectors, energy, consumer services and raw materials led the rise in the S & P 500 index, while automobiles and parts, media, software and services led the decline. In terms of interest rate, after the 10-year US bond interest rate rose, it fell back to 1.94%, up about 3 basis points, of which the real interest rate fell by about 4bp and the inflation expectation rose by about 6BP.
emotional position: VIX is rising near the weekend, and the oil distribution is close to overbought; Long positions in US stocks increased by
In the past week, VIX rose rapidly near the weekend, and the bearish / bullish ratio fell rapidly. The overbought degree of US stocks fell, and the stock markets in other major markets rose; US debt and gold rose, while oil distribution fell, but it was still close to overbought. In terms of positions, speculative net long positions in US stocks increased significantly, net long positions in US dollars decreased, net short positions in US bonds decreased significantly in 10 years and net long positions in US bonds decreased in 2 years.
capital flow: the inflow of US stocks accelerated, but the outflow of high-yield bonds continued
In the past week, the inflow of equity funds accelerated, while the outflow of bond and money market funds continued. In terms of stock market, the inflow of the United States, emerging countries and Europe accelerated, while Japan turned to outflow.
Fundamentals and policies: US CPI rose more than expected in January
The CPI of the United States in January was 7.5% year-on-year, higher than the previous value (7.0%) and expectation (7.3%); 0.6% month on month, unchanged from the previous value, but also higher than expected (0.4%). In terms of sub items, food, fuel and electricity increased significantly month on month. The core CPI was unchanged from the previous month, and the prices of second-hand cars, rents and air tickets were basically flat or fell slightly. The consumer confidence index dropped sharply from the pre July and pre February values (67.67%).
Market Valuation: slightly higher than the reasonable level of growth and liquidity model
At present, the 23.0 times static P / E of the S & P 500 is slightly higher than the reasonable level that growth and liquidity can support (~ 22.6 times).
