Fed pauses rate hikes: market sentiment and future outlook

Although many friends think that the current macro sentiment has nothing to do with the price of the currency market, this does not prevent us from understanding the changes in the macro market. After all, the funds are still the same funds. When the market continues to be in a tight state, even if the currency market can develop an independent trend, when external funds are difficult to enter, both the price increase and investor sentiment will be limited, especially when the Federal Reserve’s November interest rate meeting is held tomorrow morning. Let me first say the conclusion. As we have expected many times, the Federal Reserve will not raise interest rates in November. This is already a set tone. The US federal interest rate will continue to remain at 5.5%, but this pause is called a "hawkish pause."

In fact, since the interest rate was raised to 5.5% in July, the market generally believes that the Fed will not continue to raise interest rates. Moreover, it has been two consecutive interest rate meetings without considering raising interest rates. This is also the first time since the first interest rate hike in March 2022. Therefore, the market has more discussions and has actually entered the stage of completely suspending interest rate hikes. But is it really that simple? The economic situation in the United States is obvious to all at the digital level. GDP in the third quarter reached a high of 4.9%. House sales have remained strong. Although wage growth has not outperformed inflation, it is indeed continuing to rise. The unemployment rate is still at a historical low, with a large number of job vacancies (Bureau of Labor Statistics), and even the core PCE is still a long way from 2%. The only "good" data is the recent surge in Treasury yields.

Despite these data, many analysts still believe that the Fed is still in a state of hawkish pause. In other words, although it has paused rate hikes, it is still speaking harsh words. Powell has hinted that Fed leaders would rather wait until the rate hike campaign is nearing its end before evaluating the impact of past rate hikes on the economy. With inflation still far above the committee's 2% target and economic growth close to a two-year high, policymakers want to retain the option of taking action again. If the economy continues to remain resilient, it is not impossible to raise interest rates again as early as December. Of course, at this stage, one more rate hike or one less rate hike is no longer the biggest focus. The current interest rate is already the highest point in nearly two decades. Even if there is no rate hike, it will be a big challenge for risk markets.

Back to the hawkish pause, it means that although there will be no interest rate hike this month, Powell should maintain a hawkish tone in his speech. Even in the Q&A session, Powell should not easily state the end of the interest rate hike cycle. Instead, he is likely to emphasize that the Fed still has the possibility of continuing to raise interest rates. This may not be good information for traditional risk markets. After all, no interest rate hike in November has been expected, and the market has already reacted in advance. The move of not raising interest rates will not cause too much of a sentiment boost in the market. Ultimately, it depends on Powell's speech. In addition, before the interest rate meeting at 2 a.m., there is also the U.S. Treasury's future bond issuance plan at 8 p.m. This may be a more important event than Powell's speech, and may even affect Powell's speech.

The U.S. Treasury sells a large number of bonds to meet the borrowing needs of the federal government. In order to prepare investors, the Treasury has been issuing "quarterly refund" statements for decades. The quarterly refund announcement will reveal the extent to which the Treasury will increase the sale of long-term debt to finance the widening budget deficit. Although the Federal Reserve has made a statement of reaching the limit-level interest rate in the past period of time, the selling of Treasury bonds is still accelerating. The current yield has reached the highest level before the outbreak of the global financial crisis, which also makes the cost of redeeming Treasury bonds higher. Therefore, investors in the current market are more concerned about the supply of Treasury bonds. The current market expects a refund of US$114 billion.