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How does the FED Announce A 25 Basis Point Rate Cut Affect the Global Market?

Source:Iris Liang Time:2019-9-20 9:10:13

At 2:00 am today (September 18), the Federal Reserve announced a 25 basis point rate cut and lowered the federal funds rate target range to 1.75%-2.00%.

Powell said that the Fed has gradually turned to a lower federal funds rate path, and if the economy weakens, it is expected that further interest rate cuts may be needed.

What impact will the Fed have on the market? The Chinese central bank is not following? No matter how the external macro environment changes, we have no control. SEKO Machinery firmly believes that only by doing a good job of product quality and providing quality services to our customers, no matter how the outside world changes, we can gain a place in the market. Our high-speed precision stainless steel welded pipe production line has been widely used in stainless steel pipe leading enterprises in China and other countries. This situation has fully demonstrated that our insistence is correct.




At 2:00 am Beijing time on Thursday (September 18), the Federal Reserve announced a 25 basis point rate cut and lowered the federal funds rate target range to 1.75%-2.00%. The excess reserve rate (IOER) is lowered by 30 basis points.


This is the second time the Federal Reserve has cut interest rates during the year. It is less than two months since the last interest rate cut.

After the Federal Reserve announced the interest rate decision, the three major US stock indexes dipped in short-term.

Powell said that the Fed has gradually turned to a lower federal funds rate path, and if the economy weakens, it is expected that further interest rate cuts may be needed. Industry insiders expect that the Fed will still cut interest rates once this year.

Subsequently, the UAE central bank cut interest rates by 25 basis points, following the loose pace of the Fed.

This week, the international market is full of drama.

Due to the attack of Saudi Arabia, the price of oil has appeared on the "roller coaster" market.

The “funding shortage” in the currency market on Monday and Tuesday caused the Fed’s repurchase operations to return to the rivers and lakes.

This series of incidents has caused the Agilent Reserve, which has suffered "internal and external attacks", to suffer. Whether or not to cut interest rates and reduce the number of base points has become the focus of market attention.

Earlier, Diane Swonk, chief economist at Grant Thornton, said, “The Fed will disappoint everyone, not give everyone hope.”

At the last Fed meeting, Powell’s remarks had an impact on the market. Powell said that the rate cut is only a "mid-term adjustment", not the beginning of a rate cut cycle.

Swonk said: "Powell will not promise anything more. He puts all his thoughts in his heart and will evade everything,"

On the other hand, it is also worth noting the subtle relationship between the Fed and Trump.

According to "Baron" Randall Forsyth, although Fed Chairman Powell received Trump's approval, Trump raised his criticism of the Fed to an unprecedented level.

Will the Fed’s resolution disappoint US President Trump? Trump earlier this week called Powell "stupid" and thought the Fed should take zero or negative interest rates.

Global loose trend

Today, the Bank of England, the Bank of Japan, the Bank of Indonesia, the Central Bank of Brazil and the Swiss National Bank will also announce interest rate decisions.

On the other hand, last week the European Central Bank announced changes in interest rate policy guidelines, restarted QE, lowered the deposit-facilitating interest rate from -0.4% to -0.5%, maintained the refinancing rate, the marginal lending rate unchanged, and started from November 1st. Buying 20 billion euros of bonds in a month, investment in maturing bonds will last 2-3 years, and began to direct long-term refinancing operations to maintain a good lending environment for banks.

In addition, the market expects the Bank of England and the Bank of Japan to maintain the current interest rate level on Thursday, and emerging market countries are expected to adopt a loose monetary policy.

It can be seen that the global central bank is showing expectations of continued easing, behind which the downward pressure on the global economy continues to increase, and the risks of economic recession and geopolitical conflict are overcast.

In the face of the global tide of interest rate cuts, the domestic market is also discussing: What measures will the Chinese central bank take?

On September 17, the People's Bank of China announced the implementation of 200 billion yuan of MLF operations, with a winning interest rate of 3.30%, and interest rates remained unchanged. On that day, there were 80 billion yuan reverse repurchase and 265 billion yuan MLF expired.

At this time of concern, the People's Bank of China chose to reduce the operation of MLF, but still maintain the 3.3% interest rate unchanged, and some unexpectedly.

However, there are also many financial analysts interviewed by 21st Century Business Herald. Although the LPR=MLF interest rate + plus point, the MLF interest rate is not lowered is not equal to the LPR offer is not lowered, but also to consider the bank plus point, the focus is still to pay attention 20th LPR quote.

A financial analyst for a brokerage in Beijing:

Reducing MLF interest rates during the year is still a high probability event

A financial analyst at a brokerage in Beijing said: "The hedging method adopted by the central bank for reducing the price on the 17th is somewhat unexpected, but overall, the current 1-year LPR is 4.25%, and the 1-year MLF rate. The spread between the two companies reached 95 basis points, and from the semi-annual report of the bank in the first half of the year, the bank's profit growth rate is upward, and there is also room for lowering the quotation. After the RRR cut, the bank cost is expected to fall 5BP-10BP, so the 20-day LPR interest rate quote Still worth the market expectation."

"Even if the LPR rate is not lowered on the 20th of this month, in the long run, if the macroeconomic pressures increase, it is still a high probability that the MLF rate will be lowered during the year."

Therefore, open market operations on Thursday and Friday may become important time windows for interest rate cuts, and the possibility of lowering OMO interest rates cannot be ruled out. In the context of economic downturn + financial supply side reform, interest rate cuts may be late, but will not be absent. ”

Xie Yaxuan, chief macro analyst of China Merchants Securities: the primary goal of steady growth and stable employment

Xie Yaxuan, chief macro analyst of China Merchants Securities, also said: The decision-making level has the primary goal of steady growth and stable employment, focusing on the core CPI rather than the price trend of pork, and the policy of balancing the quantity and price policy has not changed, and the policy of increasing counter-cyclical adjustment. The direction has not changed. What has changed is only the specific way and specific rhythm of monetary policy operation.

65.73% of private equity institutions believe that the People's Bank of China will cut interest rates in the second half of the year

So, what impact will the Fed have on the market by cutting interest rates by 25 basis points? According to the First Financial Report, the market believes that the Fed's interest rate cut may continue to boost global stock market sentiment.

A share

The public fund, the Suzaku Fund, said that the Fed and other important central banks around the world are keeping monetary policy loose, which is expected to have a positive impact on A-shares.

In the context of global easing, the attractiveness of the allocation of A-shares is rising, becoming the main inflow of domestic and foreign funds.

In the context of the second rate cut by the Fed this morning, the current view of investment institutions on real estate stocks and cyclical stocks is turning significantly positive. Zhuque Fund said that “denogenous assets” such as real estate stocks and financial stocks will be expected to have structural investment opportunities as the macro and supply patterns become clearer.

Xu Junzhe, director of research at Shanghai Domain Show Capital, believes that as the Fed’s interest rate cut cycle continues, it will help increase the probability of domestic interest rate cuts and the continued improvement of the domestic liquidity atmosphere. Considering that the real economy is about to enter a new round of construction in the fourth quarter, the macro economy is expected to stabilize, and real estate stocks and cyclical stocks are expected to usher in short-term and medium-term investment sentiment.

Gold

Fiona Cincotta, senior market analyst at brokerage City Index, said: "The Fed's interest rate cut will boost the price of gold, because the cost of holding gold will be less. In this case, gold should aim at the 1550 level."

  exchange rate

Some analysts said that the US Federal Reserve will cut interest rates and the dollar will suffer.

Bank of America Merrill Lynch analysts said: "In fact, this year, the foreign exchange market spreads have been driven by the weakness of the external economy and global risk aversion, so the US Federal Reserve will cut interest rates in September, and the dollar will inevitably suffer."

As far as the renminbi is concerned, recent circles believe that the renminbi will maintain a steady and positive trend. Last week, the renminbi rose by 0.51% against the US dollar, the largest single-week increase in nearly three months.

Zhou Hao, senior economist at Commerzbank, said: "The market is currently expecting a slight downside of 5-10 bp on LPR quotes on Friday, due to the downward pressure on the economy and the global easing trend. But it is not expected to have much impact on the market. Because our focus is on financial stability and will not adopt a large-scale stimulus policy. The restrained easing policy will provide support for the RMB exchange rate in the near future."

Bond market

The bond market also recently rebounded with the US dollar selling tide. As of Wednesday's close, the 10-year government bond yield climbed to 3.131%. On Tuesday, the fall in MLF interest rates has led to an adjustment in the bond market.

According to the First Financial Report, a brokerage self-investment manager said, “In fact, it’s all sentiment, and the economic fundamentals have not changed. The bond market’s rate of return has been too fast, which has led many institutions to vacate, if the recent bond market gains The rate continues to rise, the institutions will still buy at the opportune, and the general direction of the medium- and long-term downside of the yield is still certain."

The Fed’s interest rate festival has a “money shortage”!

It is worth mentioning that on the eve of the important node of the Fed's interest rate decision, the New York Fed suddenly used the “repurchase tools” that had not been used for 10 years to urgently put tens of billions of dollars into the US financial system.

The reason is that the US currency market has recently become a "money shortage."

Overnight interest rates in the repo market once soared to 8.525%! Set a historical high.

The New York Federal Reserve’s public information shows that it will conduct an $75 billion overnight repo in the morning of the 17th.

In the end, the New York Fed and the primary dealer successfully reached about $53.2 billion in repo transactions, including $40.85 billion in US Treasury bonds, $600 million in institutional debt, and $11.7 billion in mortgage-backed securities.

The New York Federal Reserve subsequently said that it would conduct an overnight repurchase operation on the morning of the 18th of the US East, with a total amount of no more than $75 billion.

The focus is coming -

What is this operation?

This repurchase transaction, operating principle is similar to the reverse repo transactions carried out by the central bank in the open market. It is to inject liquidity into the financial system by accepting the qualified pledges provided by the primary dealers.

This operation can be described as "unusual". This is the first time in 10 years that the Fed has used the repurchase transaction on a large scale. It has used tools that have been hidden for a decade, and the operation scale is tens of billions of dollars. Obviously it is not a regular action.

So, what is the reason for this unusual operation?

The New York Fed announced that the purpose is to help maintain the federal funds rate (EFFR) within the target range of 2% to 2.25%. After the Fed cut interest rate for the first time in the end of July, the federal funds rate fell, but there has been a significant increase in the recent period. On the 16th, it has hit the upper limit of 2.25%.

What happened to the US currency market?

The answer is that there is a money shortage.

The US repo market interest rate soared and the market was chaotic.

On Tuesday morning, September 17th, the US short-term financing market was once in chaos. The overnight repo rate with US debt guarantees soared to a maximum of 8.525%, a record high, far exceeding the federal funds set by the Federal Reserve. The target range of interest rates between 2% and 2.25%.

There are already signs that funding has tightened since the beginning of the week, as the federal funds effective rate climbed to 2.25% on Monday, compared with 2.14% last Friday. Under normal circumstances, near the end of the month, the end of the season or the Fed meeting, the repurchase market interest rate will be slightly higher than the federal funds effective rate, the market should also be expected, but the interest rate so strong did not make the market unexpected.

This explains why the Fed has for the first time in more than 10 years of such interventions, continuously placing dollar liquidity in the US financial system – in order to alleviate the dollar shortage in the US short-term money market.

The Fed’s intervention, the effect is immediate

The effect of the Fed’s overnight repurchase operation is immediate. The repo rate has fallen from 8.525% of the peak, showing zero at noon (meaning the trader stopped quoting), and the market has returned to calm.

What will happen to the market after the Fed cuts interest rates by 25 basis points tonight? We will wait and see.


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Iris Liang
SEKO Machinery & Technology Co., Ltd
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