Powell announced at the Jackson Hole Annual Meeting that "now is the time for policy adjustments." If nothing unexpected happens, the first interest rate cut will be made at the interest rate meeting on September 19. However, entering the early stage of the interest rate cut cycle does not mean an immediate surge in prices. There are still some risks that deserve everyone's attention!
Risk 1: Risk of US economic recession
A careful look at the details of the non-farm employment data shows that the number of people in the high-end manufacturing industry has been fluctuating with low volatility for a long period of time. The high-end manufacturing industry has a wealth transmission effect, and it is also regarded as a leading indicator of the overall employment situation in the United States. However, high-end manufacturing employment is currently showing signs of weakness.
Risk 2: Pace of interest rate cuts
Although the rate cut has been confirmed, the speed of the rate cut will affect the performance of the risk asset market. Historically, emergency rate cuts by the Federal Reserve are relatively rare, so the economic fluctuations between interest rate meetings require the market's own interpretation to influence price trends. The current market estimate of the September interest rate decision is that there is a nearly 75% probability of a 25-50 BP cut and a 25% probability of a 50-75 BP cut. Paying close attention to the market's judgment can also clearly judge market sentiment.
Risk 3: QT plan
After the 2008 financial crisis, the Federal Reserve first lowered the bank's deposit interest rate to the lowest level, hoping that people would spend more and save less. But this didn't work, so they started printing money to buy government bonds to increase the amount of money in the market, hoping to stimulate the economy. This is called quantitative easing (QE). But printing too much money may cause prices to rise, so they used quantitative tightening (QT) to take the money back and control the total amount of money in the market. Powell has not yet said what to do next, so we have to continue to pay attention to the Fed's actions.
Risk 4: Inflation risk
Powell is optimistic about controlling inflation. Although inflation has not yet reached the 2% target, he is confident that it will be achieved. However, inflation risks still exist. ① Supply-side problems have not been resolved, and geopolitical risks may trigger inflation. ② Interest rate cuts may stimulate the risk asset market, increase demand, and service industry inflation may rise. ③ In terms of statistical methods, the high base factor in 2023 will affect the performance of future CPI and PCE data.
Risk 5: Global central bank linkage efficiency
The risk of the Japan-US carry trade in early August left a deep impression on many people. Although the Bank of Japan quickly calmed the market, Kazuo Ueda's hawkish remarks at the congressional hearing and the volatility of the yen all indicated that Japan might need to raise interest rates. As an important source of global funds, the Bank of Japan's policy changes have a huge impact on risk markets, so it is crucial to pay close attention to its movements.
Risk 6: US election risk
As the election approaches, there will be more and more confrontations and uncertainties, so we need to always pay attention to matters related to the election.