The Federal Reserve will officially release the minutes of its monetary policy meeting at 2 a.m. Beijing time on August 22. The market is looking forward to it, hoping to capture the direction of future monetary policy from it. Since March 2022, in order to curb high inflation, the Federal Reserve has adopted an aggressive interest rate hike strategy, pushing the benchmark interest rate from near zero to a range of 5.25% to 5.50%. However, since the last interest rate hike of 25 basis points in July 2023, the Federal Reserve has entered a "silent period" and has not made any further interest rate hikes.
The current mainstream market view is that the Fed is likely to raise interest rates again in September. However, given that the recent economic data released by the United States presents a complex situation, with both positive and worrying aspects, investors have serious differences on whether the US economy will fall into recession, which has indirectly affected the market's view on the Fed's expectations of rate cuts.
Specifically, the employment data in July was significantly lower than expected, with only 114,000 new non-farm jobs added, and the data in May and June were revised downward, with a total decrease of 29,000. At the same time, the unemployment rate climbed to 4.3% in July, reaching the highest point in nearly three years. This series of data reflected the sharp deterioration of the U.S. job market, triggering the "Sam Rule" and exacerbating market concerns about economic recession. In addition, economic data such as CPI and PPI in July were also lower than market expectations, indicating that inflation is gradually slowing down, providing room for possible future interest rate cuts by the Federal Reserve.
However, the retail sales and initial jobless claims data released on August 15 brought positive signals. Retail sales in July increased by 1% month-on-month, hitting a new high since February 2023, far exceeding market expectations; at the same time, the number of initial jobless claims was also lower than expected, indicating that consumer confidence and job market conditions have improved. These positive data boosted market sentiment, and the three major U.S. stock indexes all recorded a sharp rise on the same day, and basically recovered the losses since early August.
As expectations of a "soft landing" for the U.S. economy resurface, the market generally believes that the urgency for the Federal Reserve to immediately cut interest rates has decreased. According to the Chicago Mercantile Exchange's FedWatch tool, the market currently expects a 70.5% chance of a 25 basis point rate cut in September, while the probability of a 50 basis point cut is 29.5%. Compared with a week ago, the market's expectations for the extent of the rate cut have changed significantly, when the probability of a 25 basis point and 50 basis point cut was 49% and 51%, respectively.