A report by CYS Global Remit Strategic Sales Management Team
Fed’s Mixed Messages | skip to SGD/CNY
A week after signaling the end of its tightening phase and hinting at a possible rate cut in 2024, the Federal Reserve (Fed) officials are now pushing back on the idea of a quick rate cut next year.
Recent comments from Fed officials suggest that some are uneasy about market perceptions of a high likelihood of a rate cut in March, and they are attempting to keep their options open.
Atlanta Fed President Raphael Bostic stated last Tuesday that there is no "urgency" for the Fed to cut interest rates given the strong economy.
Chicago Fed President Austan Goolsbee joined the chorus in dispelling market expectations of a rate cut, reinforcing that further progress in curbing inflation will be a decisive factor in the Fed's decision to cut interest rates next year.
Richmond Fed President Barkin also added that the Fed is making good progress in lowering inflation, but he needs to see more consistency in the data before considering cutting interest rates.
Barkin, with voting rights at the Federal Reserve Monetary Policy Committee (FOMC) meeting next year, emphasized that he did not support expectations of an interest rate cut in 2024.
Considering Fed speaks as a channel for communicating forward guidance, it is observed that the tradition is for Fed speaks to present one significant opinion. On this occasion, it is Powell’s Pivot. The Fed subsequently attempted to “walk it back” as some officials countered the original narrative. The overarching objective is to recalibrate expectations as the Fed does not want markets to get ahead of themselves.
The Fed would likely prefer to avoid cutting rates in the first half of next year, wanting to see more data before taking action. Additionally, it is viewed that regardless of other Fed officials’ narratives, the markets are not buying their message for three reasons.
Firstly, the next direction of yields is lower. Currently, expectations of rate cuts are fully priced, with no significant incentive for yields to push higher from the current pricing.
Secondly, the disinflationary trend is real, providing confidence for the Fed to pivot. Over the past seven weeks, markets have been pricing in much better inflation data. At the end of September, bond markets were nervous, with yields climbing close to 5%. Concerns about the Fed increasing interest rates persisted. However, with the slowing seen in the U.S. economy, employment data, and the progress made on inflation, the Fed was able to convey a more reassuring message to the markets this year.
Thirdly, and most importantly, global traders have heard from the Chairman of the Federal Reserve, and his influence outweighs everyone else. Traders understand the hierarchy of the Fed, where the Chairman sits at the top, and his instructions need to be taken seriously. Powell was more dovish than expected, setting a tone supportive of a soft-landing narrative in the U.S. economy, leading to tumbling yields and pressure on the USD.
The belief is that there will be a synchronous slowdown across the world, but a recession is unlikely to happen in the U.S. next year. The economic situation in the U.S. resembles a goldilocks regime, where debt growth, economic growth, and inflation are neither too hot nor too cold.
China Leaves Lending Rates Unchanged
Last week, China maintained its Loan Prime Rate (LPR) for the fourth consecutive month, following the asymmetric reduction in August. The one-year LPR held steady at 3.45%, while the five-year LPR remained unchanged at 4.20%. LPR has served as the benchmark for loan interest rates in China for over four years, with the last adjustment occurring in August 2023.
An LPR reduction implies a decrease in mortgage and business loan interest rates, alleviating the financial burden for residents seeking housing loans and companies requiring corporate loan replacements.
Reflecting on China's Monetary Policy Implementation Report for the Third Quarter of 2023, the report emphasized the LPR's guidance on actual loan interest rates to facilitate a steady decline in financing costs for the real economy.
Our perspective is that the current challenge in China's economy does not primarily involve lowering the benchmark for loan interest rates, especially when market interest rates are near historic lows. Instead, the concerns lie in declining resident consumption, plummeting credit, elevated youth unemployment, and persistently low business confidence. Bearish sentiments appear dominant in China, and doubts linger about whether the current policy measures are sufficient to reignite risk-on sentiments.
It's noteworthy that the current real estate market is still in an adjustment stage, and regulators might implement targeted adjustments by lowering the limit of residential mortgage interest rates.
Presently, to stimulate demand in China's real estate market, the People's Bank of China (PBoC) has promoted the reduction of existing first-home loan interest rates, dynamically adjusted first-home loan interest rate policies quarterly, implemented city-specific policies to further reduce first-home loan interest rates, and lowered the lower limit of second-home loan interest rates.
According to data from Beike Research Institute, interest rates for mainstream first- and second-home mortgages in 100 cities have fallen by 22 basis points and 48 basis points, respectively, compared to the same period last year. Notably, first- and second-home loan interest rates in first-tier cities are 4.38% and 4.88%, respectively.
In the recent Central Financial Work Conference and the Central Economic Work Conference, overlapping priorities include maintaining reasonable and sufficient liquidity and reducing financing costs.
We consistently maintain the view that improvements in economic fundamentals are crucial to reviving investors' risk-on sentiments and encouraging foreign fund flows back into the world's second-largest economy. The ongoing weaker USD, driven by the Fed's explicit pivot towards cuts in 2024, is expected to contribute to the strengthening of the RMB, with a potential further decline toward the psychological key level of 7 before year-end.
Looking ahead, as the unilateral strong trend of the USD index against non-U.S. currencies concludes, and with strong support from the steady recovery of domestic economic fundamentals, the RMB exchange rate is anticipated to gradually rise back to a reasonable price range consistent with the currency's value.