Original title: Zhong Zhengsheng: The Fed’s March interest rate hike is sure to be 2.3%, which will be the ceiling of the US bond interest rate this year
On January 26, 2022, US time, the Federal Reserve announced the statement of the January FOMC meeting, and Fed Chairman Powell was interviewed. After the statement was released, the market reaction was temporarily positive: U.S. stocks rose, and the yield on the 10-year U.S. Treasury bond rose to 1.80%. After Powell’s speech, the market panic intensified: the Dow fell, the Nasdaq’s gains narrowed, the 10-year U.S. bond yield rose above 1.88%, and the US dollar index rose above 96.5.
The Fed’s first meeting on interest rates in 2022 has fully set the tone for the start of this round of tightening cycles. The guests of this episode believe that the Fed’s past trade-offs on employment and “care” for the adjustment of U.S. stocks may no longer be available. At a time when the Fed’s path to raising interest rates and shrinking its balance sheet remains unclear, it is necessary to remain vigilant against the volatility of the U.S. financial market and its spillover effects on global markets.
Is the Fed’s March rate hike a certainty? What does Powell mean by “the conditions are right”? Is the Fed past its optimal time for adjustment? Where are the current highs of U.S. bond interest rates? How will the rise in the long-term interest rate of US bonds affect the global financial market? U.S. stocks enter a technical bear market? CBN “Chief Countermeasures” interviewed Zhong Zhengsheng, chief economist of Ping An Securities.
Zhong Zhengsheng’s main points:
Employment is no longer a constraint to control inflation, becoming the Fed’s number one problem
The Fed accelerates policy adjustment to save the reputation of misjudgment
The acceleration of the shrinking of the balance sheet is intended to push up the long-term bond interest rate
2.3% will be the ceiling for U.S. bond interest rates this year
Rapidly rising U.S. bond rates may hit emerging markets
The Chinese market has remained stable after multiple rounds of stress tests
U.S. stocks will continue to fall under pressure due to multiple factors
Future policies will be more balanced and coordinated
Employment is no longer a constraint to control inflation, becoming the Fed’s number one problem
Yicai: One of the topics that we see this week in the global market is the first interest rate meeting of the Federal Reserve in 2022. Powell said at a press conference after the meeting that most members intend to raise interest rates in March. The premise is that the conditions are right, does it mean that March is a time when the boots land?
Zhong Zhengsheng: My answer is very succinct. The signal released by the Fed has been very clear. It is a sure thing for the Fed to start raising interest rates in March.
Yicai: This premise is that the conditions are suitable, how do you understand the conditions are suitable?
Zhong Zhengsheng: I think if the conditions are right, there is actually a very big change. After the annual interest rate meeting in December last year, the Fed has a dual mission, one focusing on employment and the other focusing on inflation. Then it should be said that the balance of attention has shifted from employment to inflation. In December 2021, the latest unemployment rate in the United States is 3.9%, which is already a very low level. In addition, the willingness to participate in the labor force in the United States still has room for further increase, so employment is not a constraint at all for the Fed, and it is not a problem at all.
But inflation we can also see that a series of factors leading to inflation have been on the rise since last year.There are several inflation variables worth paying attention to recently. One is rent. U.S. rents account for 30% of the U.S. CPI, and U.S. rents have actually started a new wave of increases recently. A lagging transmission to rents has been going on; the second inflation variable worthy of attention is oil prices. In fact, before this interest rate meeting, it jumped to nearly $88/barrel unexpectedly, which is a big change , because everyone is rightcrudeThe price expectations are that the central direction of the high probability is lower this year.
The biggest headache for the Fed is that a spiral of wages and prices may have formed now. The growth rate of wages in the United States is very strong, and it has formed a relatively vicious cycle, so this cycle is not easy to dismantle. So I think that the Fed is now focusing or putting all its main weight on inflation, and it needs to demonstrate its determination and ability to manage inflation.
The Fed accelerates policy adjustment to save the reputation of misjudgment
Yicai: You just mentioned the current inflation situation, including a vicious circle that is difficult to solve. Does this mean that the Fed has missed a better policy decision time?
Zhong Zhengsheng: I think a Chinese saying can be used to describe the current state of the Federal Reserve. It should be said that the first aspect of the Fed’s current move is to restore a reputation that it has lost. The misjudgment of inflation last year should be said to be one of the biggest policy mistakes of the Federal Reserve. Therefore, according to the latest IMF forecast, the CPI inflation in the United States in 2022 will be 5.9%. In the face of such a high inflation, it is completely unreasonable for you to remain indifferent.
The second consideration is essentially self-confidence in the US economic fans, which is relatively self-confidence. Because I just mentioned that the unemployment rate data in the United States is actually very low, the recovery of the US economy should be said to be relatively stable. And we also see an indicator, the growth of total factor productivity in the United States, which you can understand as a degree of high-quality development in the United States. In fact, in the past two years, the growth of total factor productivity in the United States has also accelerated.
The third consideration, I think the Fed still has a lot of hands behind it, that is to say, it has a special topic on the maximum employment level or full employment. This time, there is a special topic on this issue. It is actually very special. The point mentioned is that there may be some non-monetary factors that affect the structure of the labor market in determining the maximum employment level. In fact, it leaves the right of interpretation in its own hands, which also leaves itself a room for flexible adjustment. So I think the Fed is mainly concerned about three aspects now, one is to restore a reputation that it has lost, the reputation that has been damaged, the second is still relatively confident in the US economy itself, and the third is actually reserved for itself. Some discretionary space.
The acceleration of the shrinking of the balance sheet is intended to push up the long-term bond interest rate
Yicai: The Federal Reserve has also issued a rule for shrinking its balance sheet. While raising interest rates, the speed and rhythm of shrinking the balance sheet has been very fast?
Zhong Zhengsheng: Why rush to shrink the watch? Because now we see that every time the Fed raises interest rates half a year before the Fed raises interest rates until the whole process of raising interest rates, we will see a flattening of the U.S. bond yield curve. People often measure the difference between the yields of 10-year and two-year government bonds as an interest rate differential. If the yield curve is too flat, once the Fed’s interest rate hike expectations become stronger, the short-term government bond interest rates will rise quickly, but The slowdown in the interest rate of long-term government bonds has led to a flattening process. The flattening process is very troublesome for financial institutions. We all know that financial institutions are often a short-term loan to a long-term financial institution, so it often brings a new round of financial risks.
Therefore, the Fed is particularly concerned about the flattening of U.S. bond yields. Since the Fed’s interest rate hike trend is on the rise, my short-term interest rate is fast, how can I make the long-term interest rate faster? We all know that the Federal Reserve has purchased a large amount of U.S. Treasury bonds, and the United States has purchased a large amount of one MBS. Only by shrinking the balance sheet and selling it can the long-end law be pushed up faster, making its yield curve more stable. The shape is not too flat, so one of the purposes of shrinking the table is very clear. If it was said that in the previous loose state, the expansion of its balance sheet was mainly to suppress the interest rate of long-term bonds, then this time the reduction of the balance sheet is mainly to push up the interest rate of long-term bonds. The purpose is very clear.
2.3% will be the ceiling for U.S. bond interest rates this year
Yicai: We see that the 10-year U.S. bond yield has risen above 1.88%. Will long-term interest rates rise rapidly in the future?
Zhong Zhengsheng: Many institutional investors predict that 2% of US bond yields this year may be a top. In less than a month, U.S. bond yields have stood at 1.9%, so now everyone will readjust. There may be four rate hikes this year. Of course, some people are more aggressive, saying that it may be increased five times. If you want to increase the interest rate 4 times, the US federal funds rate is its policy rate of about 1% to 1.25%. We looked at the last time the U.S. policy rate was in this position, in the second half of 2017, when the yield on the two-year U.S. Treasury bond was 1.45%, and the yield on the 10-year U.S. Treasury bond was 2.3%. At that time, the spread remained at around 80bp. I can tell you that the interest rate difference between the 10-year and 2-year U.S. Treasury bonds is about 80bp, so the current shape of the yield curve is what you may want to see every year. But if the interest rate is added 4 times in the future, it may go straight to 2.3%, which is similar to the second half of 2017, so about 2.3% should be a ceiling that US bonds may break through this year.
Rapidly rising U.S. bond rates may hit emerging markets
The Chinese market has remained stable after multiple rounds of stress tests
Yicai: Will the rise in US bond interest rates trigger a volatility in the global financial market?
Zhong Zhengsheng: Because the US bond interest rate is basically an anchor for the pricing of global financial assets, if the US bond interest rate accelerates, it will immediately cause a risky asset like the United States to be under pressure, and the volatility of a global capital market will increase. Then, like China, we are a member of emerging markets. In fact, what we are most worried about every time is that once the Fed tightens, will emerging market countries suffer a large-scale shock, a shock of large-scale capital flight? But what we are actually most concerned about here is that China cannot be alone.
In fact, I have been emphasizing a point of view, China is thriving in emerging markets. In March 2020, it was a stress test, it was a shortage of US dollar financing, and the global financial market was shaking. If you look at the A-share market, including the Chinese market, it is actually the most stable among emerging markets. one of. And in March 2021, Biden’s new policy U.S. bond yields are also accelerating an upward trend. At that time, China was also thriving in emerging markets. It can be said that this round of Fed tightening has begun to accelerate, and the market performance of A shares is still relatively stable. So I said that with so many stress tests, RMB assets, or people’s confidence in China’s economic growth, are still the best in emerging markets.
A shares are in the process of bottoming
Yicai: In fact, we see that the Fed is about to raise interest rates, China has already cut interest rates, and the north-south capital is in opposition. A-shares are still in the process of downgrading. Do you think it is the stage of A-shares bottoming out?
Zhong Zhengsheng: Is there anything we need to observe after a year? Basically, I think the bottom has begun to consolidate, and it has reached a bottom-building process.
U.S. stocks will continue to fall under pressure due to multiple factors
Yicai: U.S. stocks were ups and downs in January. After the Fed’s meeting on interest rates, the three major stock indexes dropped on a large scale. Under the coercion of downward waves, do you think the overall rebound of U.S. stocks in the future will be more sustainable?
Zhong Zhengsheng: It should be from the beginning of the year to today. For example, Nasdaq has fallen by more than 10%, and the cumulative decline has not exceeded 10%. The Dow Jones has fallen by almost 10%. So technically speaking, it should be said to enter a bear market correction. But why is the United States so sensitive now, or so sensitive to the Fed’s information, let me summarize that for the US stocks this year, it is actually less good news and more bad news.
The first negative news is the Fed, because we all know that the stock price is a discount to future earnings. In fact, we have observed that in this round of rising US bond interest rates, in fact, the most important factor is the real interest rate of US bonds, which has only rushed from the previous negative 1% position to negative 0.6%, so many people It is said that the future may turn positive, so once the real interest rate of US bonds rises, it is equivalent to our discount rate for the future, and it also jumps. Therefore, your reaction to the current stock price will have a direct impact on the current stock price, so this impact on the growth stocks of the US stock market is actually particularly obvious. This is the first point.
The second bad news is earnings. Everyone is still worried about the prospect of further earnings growth in US stocks, mainly in two aspects. On the one hand, it means that with the withdrawal of the large-scale fiscal stimulus and monetary stimulus in the United States, the growth rate of the US economy is indeed slowing down, so the growth rate of the earnings of your listed companies will also be affected. On the other hand, the cost-side push we just mentioned, the spiral of wages and prices, that is to say, for listed companies, the growth rate of your profits may be slowing down, but the pressure on your cost increases will increase, so the overall situation will be formed. There will be a comprehensive drag on the growth of listed companies’ earnings.
The third one I think is still more important. For US stocks, I think there is another important factor. The United States also has a natural seesaw effect with the US debt. If the U.S. debt is so high, it has historically been that you have to go up to, say, 2.3% for U.S. stocks. If it goes further up, it will have a very big impact on U.S. stocks. Three pieces of negative news, an aggressive Fed, earnings growth that is set to slow, and a valuation that remains stubbornly high will all put pressure on U.S. stocks to correct.
The trend of U.S. stocks fundamentally depends on the recovery of sector performance
Yicai: What you just said was a short-term technical bear market. In the future, will the 10-year high growth of U.S. stocks come to an end?
Zhong Zhengsheng: I think this itself needs to be judged. It does not mean that every time the Federal Reserve enters a process of raising interest rates or normalizing monetary policy, the US stock market will inevitably enter a bear market. The most critical thing depends on the United States. Let’s borrow our words to see whether the United States can achieve a sustainable high-quality development, because after all, it is the growth of listed companies’ earnings, which is the most solid foundation in the US stock market.
So we need to look at these growing sectors. Can the growing sectors deliver a good profit performance as always? It also depends on whether some of its cyclical sectors or value sectors can be adjusted in the process of policy, or, for example, our epidemic situation gradually eases, and all services gradually resume, then whether it has more changes in the process. One more fix? If there is no problem on both sides, I think the US stock market is still supported.
Future policies will be more balanced and coordinated
Yicai: We have seen that the IMF has adjusted the world economic growth from 4.9% to 4.4% in 2022. In this context, the macro policies of China and other developed economies around the world are different. How do you view China’s economic growth this year? Prospects?
Zhong Zhengsheng: It should be said that from the perspective of policy, the introduction of future policies must be more balanced, more coordinated, and more restrained. In fact, we also see that there may be a series of supporting factors this year. For example, stable growth is increasing, monetary easing is already on the way, and our fiscal tax reduction policy is still further intensified. Our affordable housing project may become a new growth point, etc. We still have confidence in high-quality development itself, which is a foundation for the future performance of our A-share market.
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Responsible editor: Tang Jing