In March, the risk of the Fed raising interest rates by 50bp was relieved, and the risk point in the future mainly lies in the rhythm and range of the Fed raising interest rates. We believe that there are four points worth paying attention to in this interest conference:
First of all, the 25bp interest rate increase is a high probability event, and QT may be announced at the interest rate meeting in May. Although the core inflation has risen to the great inflation period of 1970s, considering the external risks and the impact of interest rate hike on the economy, we expect that the step of interest rate hike will still be 25bp. According to Powell’s statement at the hearing, it is less likely to announce the scale reduction this month, and QT may be announced in May and implemented in June.
Second, Powell may hint at raising interest rates by 50bp in May. The inflation rate will probably exceed 8% in March, and the contradiction between supply and demand in the US job market is still prominent. If inflation pressure continues to accumulate in the future, the possibility of a one-time interest rate increase of 50bp in May cannot be ruled out.
Third, the Fed may raise its inflation forecast for 2022. The conflict between Russia and Ukraine has had a great impact on the global energy, metals and Shenzhen Agricultural Products Group Co.Ltd(000061) supply, which has further pushed up the already high inflation expectation, and the inflation risk in the United States has been greater than that in the late 1960s and early 1970s. We expect us core inflation to remain above 4% this year.
Fourth, if the median dot matrix shows that interest rates were raised five times or more during the year, it shows that the Fed is more hawkish. At present, inflation is the primary problem to be solved by the Federal Reserve, which is even more important than the downward pressure on economic growth and the insufficient labor participation rate. As of March 16, the market expects that the probability of raising interest rates 7-8 times in 2022 is about 58%. We think it is more likely that the median dot matrix will rise from 3 times to 5 times.
After the expected 50bp interest rate increase and 25bp interest rate increase, the effect of interest rate increase is similar to that of interest rate reduction. Since March, the voting committees of the Federal Reserve have expressed more views on the range of this interest rate increase, and more expressed their support for the 25bp interest rate increase. After the expectation of raising interest rates by 50bp failed, the actual yield of US bonds fell, and the yield to maturity of tips began to decline since early March. The average value of the past week is nearly 25bp lower than that at the end of February, which shows that the actual effect is similar to the interest rate cut.
The market interest rate in March 2022 indicates that the probability of US economic recession will rise significantly in 2023, but it is still difficult to hinder the pace of interest rate increase. 10Y – 3M US bond yield spread has a certain lead, and the upside down curve indicates that the possibility of the economy falling into recession increases. At present, the interest rate spread is about 170bp, suggesting that the risk of economic recession in the United States will rise significantly after raising interest rates six times. However, combined with Powell’s speech and the Fed’s inflation forecast, in order to prevent inflation from rising too fast and affecting consumer confidence, the Fed will continue to raise interest rates until inflation returns to the target range.
If the subsequent inflation continues to be high, the market’s expectation of the Fed raising interest rates by 50bp at a time will rise sharply. However, considering many uncertainties, the Fed may still end up raising interest rates by 25bp at a time. Since the interest rate meeting in January, the positions of the voting committees of the Federal Reserve first strengthened the expectation of a one-time interest rate increase of 50bp, and then finally landed with an interest rate increase of 25bp. We expect that the Fed will guide market expectations through this model in the future, so as to reduce the impact on the financial market.
How will the interest conference in March affect asset prices? Combined with the performance of commodities in previous interest rate increase cycles and the impact of the conflict between Russia and Ukraine, we are still optimistic about commodities. However, Powell’s speech may have a certain impact on asset prices in the medium and short term:
In scenario 1, the Fed is more dovish. Powell mentioned the uncertainty caused by the conflict between Russia and Ukraine, and the possibility of a one-time interest rate increase of 50bp in the future is low: the rising momentum of the US dollar index will weaken, the prices of commodities such as gold will continue to strengthen, and the gold price is expected to exceed US $2300 / ounce within the year.
Scenario 2: the Fed is more hawkish. The dot matrix shows that raising interest rates five times or more during the year is a high probability event. There is a possibility of raising interest rates by 50bp at one time in May: the US dollar index will continue to rise, demand will be restrained by raising interest rates, and the prices of crude oil, copper and other commodities will be affected.
Risk tip: the epidemic spread exceeded expectations, the geopolitical crisis exceeded expectations, and China’s foreign policies exceeded expectations
