On March 16 local time, the Federal Reserve announced an interest rate increase of 25bp instead of 50bp, basically in line with market expectations. According to the dot matrix, 75% of officials expect to raise interest rates six more times this year, and the Federal Reserve may begin to shrink its table in May. After the boots landed, the risk aversion of the market was released, but we still need to be vigilant against the risk of further accelerating tightening in the future. If the interest rate difference between China and the United States is upside down, it may narrow the space for policy force.
The 25bp interest rate increase was in line with expectations. The market's response to the FOMC meeting is mainly reflected in two points. First, the risk appetite has returned. The first interest rate increase of 25bp instead of 50bp alleviated the market's concern about the tail risk of too fast interest rate increase. Therefore, although the stock index fell significantly when announcing the interest rate increase, after the boots landed, the US stocks rebounded sharply, the risk appetite has returned, and the NASDAQ index rebounded by more than 3.3%; Second, the market also reflects the fear of recession to a certain extent. The US dollar index and ten-year US bond interest rates rose first and then fell. With the Federal Reserve starting tightening, the US bond term spread is facing further narrowing. If the United States enters the early stage of stagflation, gold prices are expected to remain high in the short term.
There are still risks of inflation exploding, employment reaching the standard and further accelerating austerity. According to the economic forecast of the Federal Reserve, the year-on-year GDP of the United States in 2022 is expected to decline from 4.0% to 2.8%, but the PCE is increased from 2.6% to 4.3%. Powell acknowledged that high inflation would last longer than previously expected and stressed the need for the fed to remain flexible. From the perspective of terminal demand, retail sales of U.S. residents are still very strong, and the Federal Reserve still has strong confidence in the short-term economy. Therefore, although demand is facing a decline, rapid interest rate hike may not lead to demand collapse. If inflation continues to exceed expectations, the Fed may further accelerate the pace of tightening.
The interest rate gap between China and the United States contracted rapidly, and we should be vigilant against the risk of interest rate inversion. On the whole, the main contradictions at home and abroad are different. Overseas inflation and China stagnation. Due to the sustained high inflation and accelerated tightening in the United States, the current interest rate gap between China and the United States has converged to about 80bp. According to the current market expectation, the benchmark interest rate of the United States will rise to about 2% at the end of the year, while the inflation expectation will remain high. If the U.S. economy does not weaken significantly, the 10-year U.S. bond yield may rise further. In China, although the economic target of 5.5% is relatively high, the real estate is still a significant drag on economic growth, the currency will continue to be loose in the short term, and the interest rate of Chinese bonds faces the risk of upside down with US bonds, which may restrict the space for policy development.
In the short term, various uncertainties have increased significantly. It is suggested to stay on the sidelines and grasp the opportunity of stock market oversold rebound in due time. The undervalued value is still relatively dominant, but the structural differentiation may enter the middle and late stage. The Treasury bond yield center may remain low in the current range, and it may take some time for the market to repair economic expectations.
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