Last night, the Federal Reserve held a meeting to decide on the interest rate hike in June, and ultimately kept the benchmark interest rate unchanged between 5% and 5.25%. Before the interest rate decision meeting, the swap market showed that the probability of no interest rate hike in June was as high as 94%, so no interest rate hike this time was the general expectation of the market.
I have not made any predictions or analyses on the previous CPI (generally referring to the Consumer Price Index) data or yesterday's interest rate decision. I don't think it makes much sense to predict the data, and I won't do data market analysis. When it comes to data market analysis, the counterparty may be a millisecond-level transaction, or it may be an insider, etc. In this case, I don't think I can beat them, so it's better not to do it. The risks that may arise after the shoe drops and the possible economic behavior in the future are what I focus on.
1. Interpretation of Powell’s Speech
First, let's look at the content of Powell's speech last night. "Resolutely committed to the 2% inflation target" is a commonplace phrase, and it is also a phrase that Powell always says in every interest rate decision. It is worth noting that Powell said at the beginning of the interest rate hike that the interest rate hike may not take too much care of the economic activities of ordinary people, and the main purpose is to control inflation. The Federal Reserve also does this. The more sluggish the job market is, the more friendly it is to inflation in the United States. So Powell finally said that reducing the wage growth rate this year is very important for inflation.
Next, we hope to see a decline in the core PCE (personal consumption expenditure) data. The core PCE is one of the important indicators for investors and the Federal Reserve to judge US inflation. Why does Powell care so much about the decline in the PCE index? In fact, the 2% inflation target mentioned by Powell refers to the extent that the PCE index reaches 2%. For the Federal Reserve, the PCE index is more in line with the market. The CPI data tends to record the price changes of a basket of goods, while the PCE data tends to calculate the consumer's expenditure price.
The CPI data in the United States has fallen for 11 consecutive months, indicating that overall prices are gradually becoming more friendly.
However, according to PCE data, inflation in the United States is still stubborn, and consumer price spending is still high. There is still a long way to go to reach the 2% inflation target, and it is currently around 4.5%.
Judging from the PCE data, it is almost unrealistic for the United States to cut interest rates in a short period of time. Previously, many people expected that the Federal Reserve might cut interest rates in the second half of this year. In fact, it was not due to the judgment of inflation data, but from the financial risks that the United States might face in the future, such as the crisis in the banking industry and insufficient market liquidity.
If the Fed tells everyone that it may cut interest rates in the second half of the year, it means that the domestic economic situation in the United States is really severe and there is a possibility of a major crisis. So if you hear that the Fed is going to cut interest rates in the second half of the year, it is likely because the Fed is going to rescue the market.
Last night, not only did Powell speak, but the Fed's dot plot was also released. The dot plot expresses the positions of Fed officials on the final value of interest rate hikes. The previously released dot plot showed that the expected final value of the interest rate was 5.1%, while the data released last night was 5.6%. Such data strengthened the market's expectations for hawks. Although Powell did not explicitly say that interest rates will continue to rise this year, the results of the dot plot largely reflect the possible interest rate hike policy of the Fed in the future.
After interpreting the speeches and data from last night, we can find that the Fed's suspension of interest rate hikes does not mean that there will be no pressure to raise interest rates in the second half of the year. The Fed still needs to pay attention to the next data before making further decisions. But overall, the US inflation has indeed eased compared to before. Another factor is that the US has suspended the debt ceiling. If interest rates are raised again, it may bring great pressure to the sale of US debt. Since the inflation data has eased and there is no problem in the market, then not raising interest rates has become the best choice.
2. Possible Crisis in the United States
In addition to the Fed's suspension of interest rate hikes, we can also see that the US stock market has been rising recently, with the Nasdaq leading the way. After repeated thinking, I think the rise in US stocks is actually digesting the expectation of a pause in interest rate hikes.
A few days ago, the United States passed a debt ceiling bill, suspending the debt ceiling for a year and a half. By the end of June, the U.S. Treasury Account (TGA) will be expanded to about $55 billion, which means that the TGA account will have to pump about $50 billion from the market. In theory, such a liquidity withdrawal is equivalent to a disguised interest rate hike, but the U.S. stock market not only did not fall, but rose instead. That is naturally not because of the increase in the debt ceiling, but the result of the Fed's market easing, because raising the debt ceiling to ventilate the market requires the Fed to cooperate with the quantitative easing policy, but there has been no news of any easing policy from the Fed so far. Therefore, the rise of the U.S. stock market is more reliable to digest the expectation of suspending interest rate hikes.
The sharp rise of the US stock market also made me think about the market squeeze. Around April this year, the number of people shorting US stocks hit a new high. Many investors had certain expectations of a crisis in the United States, so they began to establish short positions. The more short positions you have, the easier it is to be targeted. Even if there is a crisis in the United States, you have to hunt down this group of funds before considering shorting. After this kind of squeeze, the market's reverse fluctuations are generally not too small.
I think it is not that US stocks cannot be shorted, but it may just be that the time for shorting has not come yet. This thinking is based on the consideration that the Federal Reserve has suspended the debt ceiling and will not conduct quantitative easing. In the coming period, the United States will continue to sell treasury bonds, at least more than one trillion in six months, which means that more than one trillion liquidity may be withdrawn from the market. From the statement of FOM last night, we can also find that maintaining the current interest rate level will facilitate the continued sale of treasury bonds and MBS bonds.
This month, TGA accounts are still being drained. According to the CTFP tool (a tool temporarily launched by the United States to help banks survive the banking crisis some time ago), banks' temporary loans reached $10 billion, a record high. The withdrawal of TGA accounts is converted from bank savings, and bank savings are gradually becoming funds in TGA accounts. So from the perspective of the CTFP tool alone, American banks have not completely survived the crisis, and bank funds are still tight. Although American politicians have been saying that banks have sufficient funds, the facts do not seem to be the case.
From the above two points, we can find that the United States may face two major crises in the future. The first is a liquidity crisis caused by the continuous withdrawal of U.S. debt, and the second is a savings crisis that may occur in U.S. banks.
Regarding the liquidity crisis, it is important to note that if my speculation is correct and the US stock market is still in a rising trend to digest the suspension of interest rate hikes, then the shoe dropping may become a turning point, and the market may buy expectations and sell facts. The liquidity problem that will arise next will be a good opportunity to short US stocks.
As for the savings crisis, we still need to wait. After all, the CTFP tool launched by the United States is not for nothing. As long as it can continue to provide funds to banks, banks may not encounter too many problems in the short term. However, under high interest rates, the more American banks borrow, the higher the interest will be in the future. This trick is a bit like drinking poison to quench thirst. When the crisis comes, it should be difficult for the banking industry to withstand it.