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The Fed Raises Interest Rates By 75bp For The Fourth Time, “The Tightening Is Not Over” Powell Says!

Economic Observer.com reporter Liang Ji  On November 2, local time, the Federal Reserve announced a 75 basis The Fed raises interest rates hike at the November interest rate meeting, raising the target range of the federal benchmark interest rate to 3.75%-4%; The interest rate was 75bp, in line with market expectations. Since this round of rate hikes, the Fed has raised rates by 375bp.

The minutes of the meeting on interest rate increase 2022 showed that the Fed reiterated that it would maintain a restrictive tightening of monetary policy to bring inflation back to the 2% target level and was open to cutting interest rate hikes in the next two meetings on interest rates. Powell said it was “premature” to consider pausing the rate hike process now and “have a ways to go.” It is worth noting that the resolution of this meeting was passed unanimously, showing that there is no disagreement within the Fed.

Previously, the market expected the Fed to raise interest rates by 50bp in December after raising interest rates by 75bp in November and gradually approaching the end of the rate hike. However, Fed Chairman Powell’s statement at the press conference disappointed the market. The three major U.S. stock indexes rose first, then fell, and finally went green across the board, and the Nasdaq fell more than 3%.

CICC commented that Powell hinted that interest rate hikes might slow down, but the high point of interest rates will be higher, and interest rates will stay at high levels for longer. Such a statement means that the monetary tightening is far from over, and the turning point of interest rates is far from coming. A longer-lasting tightening will further tighten financial conditions and restrict the rebound of risky assets.

Yu Dingheng, general manager of Yihu Investment, told the Economic Observer.com that the Fed raised interest rates by 75 basis points for the fourth time in a row and released a hawkish signal, showing that the Fed’s struggle with inflation is far from over, and the final interest rate level will be higher than previously expected. U.S. stocks fell sharply. 

The overall performance of A-shares is stable, the Shanghai index continues to seesaw around 3,000 points, and the expectation of interest rate hikes has been fully reflected, which is bearish.

Interest Rate Hike

From November 1 to 2nd, the Federal Reserve held its November interest rate meeting. The Fed stated that the Federal Open Market Committee (FOMC) is committed to maximizing employment and long-term inflation of 2 percent. The committee decided to raise the federal funds rate to a target range of 3.75%-4% to support these goals.

What Happens To The Stock Market When The Fed Raises Interest Rates?

Year-to-date, persistently high inflation pressures have prompted the Federal Reserve to raise interest rates continuously. In March, May, June, July, September, and November 2022, the Fed will raise interest rates by 25bp, 50bp, 75bp, 75bp, 75bp, and 75bp, respectively. But U.S. inflation remains high.

The September consumer price index (CPI) released by the U.S. Department of Labor showed that the U.S. consumer price index (CPI) in September rose 8.2% year-on-year, higher than market expectations of 8.1%, and the previous value was 8.3%; it rose 0.4% month-on-month, and the market expected 0.2%. The last value was 0.1%. The data showed that core inflation growth remained high, reflecting the resilience of U.S. consumption and high wage growth. The personal consumption expenditures price index (PCE) released by the U.S. Commerce Department also remained high. Data show that in September, PCE rose 6.2% year-on-year, the same as the previous month; core PCE rose 5.1% year-on-year, compared with the initial value of 4.9%.

The statement on interest rates showed that “In deciding the pace of future interest rate hikes, the Committee will consider the cumulative effect of tightening monetary policy, the lag of the policy’s impact on economic activity and inflation, as well as economic and financial developments.” Carefully considering the resonance effect of raising interest rates, U.S. stocks rose for a while.

Powell’s Statement

However, Powell’s subsequent statement disappointed market expectations. Powell said at a news conference that it was too early to consider stopping rate hikes. In addition, Powell noted that from a risk management perspective, the Fed is considering failing to tighten enough and loosening policy too soon.

Powell said at a news conference that the rate hikes would be slowed as soon as the next meeting or later, adding that lower inflation is not necessary for the Fed to delay rate hikes. The market interprets the Fed’s path to slow interest rate hikes as becoming more determined. However, Powell also believes that with the policy rate already rising to 4%, the height and duration of rate hikes are more critical than the speed of rate hikes in the future. With employment and inflation data still robust, future interest rate highs will be higher, and interest rates will stay high for longer.

The Fed’s interest rate meeting did not update the dot plot, but the Chicago Mercantile Exchange’s “FedWatch” tool showed that us would raise the U.S. federal benchmark interest rate to 5%-5.25%. According to the last dot plot, the endpoint of this round of the interest rate hike cycle is around 4.6%.

CICC explained that slowing interest rate hikes does not mean suspending interest rate hikes, and monetary tightening is far from over. The market interpreted Powell’s above statement as a more hawkish signal. Although the Fed plans to slow the pace of interest rate hikes, the “front” of interest rate hikes has been stretched. Monetary tightening has changed from “go big and fast” to “run small steps,” which is not suitable for risk assets.

Market Volatility

On November 2, local time, U.S. stocks rose after the release of the Fed’s decision. Still, the market interpreted Powell’s statement at the press conference as “the eagle does not change,” and the three major U.S. stock indexes fell together. As of the close on November 2, the Dow Jones Industrial Average was at 32,147.76 points, down 1.55%; the S&P 500 was at 3,759.69 points, down 2.50%; the Nasdaq was at 10,534.80 points, down 3.36%.

In terms of individual stocks, large technology stocks fell collectively. Apple (AAPL.O) fell 3.73%, Microsoft (MSFT.O) fell 3.54%, Google (GOOGL.O) fell 3.87%, Amazon (AMZN.O) fell 4.82%, Facebook (META.O) fell 4.89 %. Tesla (TSLA.O) fell 5.63%.

In terms of popular Chinese concept stocks, Alibaba (BABA.N) fell 1.76%, Pinduoduo (PDD.O) fell 0.52%, Bilibili (BILI.O) rose 0.33%, and Baidu (BIDU.O) fell 0.13%.

Under the pressure of continuous sharp interest rate hikes by the Federal Reserve, economic demand has gradually cooled. In addition, the United States is currently in an environment of inflation at a new high in nearly 40 years, and the pressure of rising prices is eroding corporate profits. Previously, the third quarterly reports of several large financial institutions showed that current yields fell year-on-year, and the performance of retail consumer giants was also eroded by inflation.

Guotai Junan’s overseas strategy team said that U.S. stocks are currently not “cheap,” and index valuations and risk premiums are only below the average. The static and dynamic price-earnings ratios of the S&P 500 have fallen below the average since 2002 and are at the historical quantile of around 30%. Since the March 2020 high, the risk premium has been around its average level since 2002. The market has not fully priced a recession from a valuation and risk premium perspective. Based on the current recession probability, U.S. stocks have not yet adjusted to the bottom situation, which means that the current U.S. stocks are still not “cheap.”

Dragged down by overnight U.S. stocks, Asia-Pacific stock indexes mostly fell on November 3. As of the close, the Shanghai Composite Index reported 2997.81 points, down 0.19%; the Shenzhen Component Index said 10840.06 points, down 0.34%; the ChiNext Index reported 2376.06 points, up 0.01%.

The net outflow of northbound funds was 4.565 billion yuan, and the net purchase of southbound funds was 6.269 billion Hong Kong dollars. The total turnover of the Shanghai and Shenzhen stock exchanges was 886.535 billion yuan, of which 370.653 billion yuan was traded in Shanghai and 515.882 billion yuan in Shenzhen, which was significantly smaller than the level of 1,052.138 billion yuan on the previous trading day.

Hong Kong stocks fell even more, with the three major stock indexes falling by more than 3%. As of the close, the Hang Seng Index reported 15339.49 points, down 3.08%; the Hang Seng China Enterprises Index said 5170.51 points, down 3.45%; the Hang Seng Technology Index reported 3035.39 points, down 3.84%. In terms of individual stocks, Tencent Holdings (0700. H.K.) fell 3.99%, Alibaba-SW (9988. H.K.) fell 6.53%, and Meituan-W (3690. H.K.) fell 3.54%.

The Nikkei 225 was at 27,663.39 points, down 0.06%; the Korea Composite Index was at 2,329.17 points, down 0.33%, and the FTSE Singapore Straits Index was at 3,103.77 points, down 1.19%.

Rong Hao, a wealth management partner of private equity Pai Pai.com, told the Economic Observer.com that there are long-term deterministic opportunities for the Shanghai index to pull around 3,000 recently repeatedly. Still, short-term fluctuations will be significant and last for some time. First, due to the continued occurrence of domestic epidemics, although the production side is sufficient, consumption is weak, and it will take time to restore 

The smooth circulation; second, the fact and expectation that various domestic policies will continue to support will not change; third, the Fed’s interest rate hike boots have 

The aggressive interest rate hike cycle is ending, the marginal effect on global capital has weakened, and the period with the most significant impact on A-share sentiment has passed. fed interest rate decision today.

European Risk

On November 2, local time, the European Central Bank‘s interest rate hike by 75bp took effect. The primary refinancing rate, deposit facility rate, and marginal lending facility rate in Europe rose to 2.00%, 1.50%, and 2.25%, respectively. On October 27, the European Central Bank held a monetary policy meeting and announced a 75bp interest rate hike, raising the benchmark interest rate to 1.25%. Previously, the European Central Bank raised interest rates by 50bp and 75bp in July and September this year and has raised interest rates by 200bp so far.

The European Central Bank said that the primary objective of monetary policy is to reduce inflation and will not be discouraged by a recession. European Central Bank President Christine Lagarde said at a news conference after the November rate meeting that the eurozone economy will slow down at an accelerated rate in the next two quarters, and inflation is expected to continue to rise and remain at the central bank for a long time. On top of the target, the European Central Bank will likely resume raising interest rates in the next few meetings.

The macro team of Great Wall Securities believes that in this round of inflation reduction, the European Central Bank has adopted the practice of sharply raising interest rates and slowly shrinking the balance sheet by adjusting the minimum reserve ratio and refinancing operation interest rates to alleviate market liquidity risks and control interest rates Risk of rising too fast. This policy requires the European Central Bank to maintain a substantial interest rate hike. Otherwise, the “slow shrinking of the balance sheet” will affect the effect of interest rate hikes, and inflation will be difficult to fall.

According to Eurostat data, the euro zone’s October CPI rose 10.7% year-on-year, the previous value was 10%, and the expected value was 10.3%; the core CPI rose 5% year-on-year, the last value was 4.8%; from the perspective of sub-items, the energy sub-item is still The core source of pressure, the contribution rate to inflation pressure in the euro area reached 42%.

The overseas strategy team of Chuancai Securities believes that since the outbreak of the Russian-Ukrainian conflict, the restrictions on the export of Russian gas and Russian oil have caused a sharp rise in international energy prices, and inflationary pressures in Europe have continued to rise. In October, the cost of natural gas in Europe fell significantly. 

Considering that there are still many external uncertainties, it is still uncertain whether the price of natural gas can continue the downward trend. At this stage, the European Central Bank’s monetary policy has lagged behind inflation. Considering that the European inflation value has not yet shown a downward trend, the European Central Bank is still under tremendous pressure to raise interest rates in the future. 

Judging from the way of raising interest rates, the European Central Bank has a high possibility of maintaining a tightening stance and continuing to raise interest rates. The subsequent rate hike will depend on critical data such as the economy, employment, and labor market. next fed meeting on interest rates 2022.

In addition, the European manufacturing PMI has continued to fall since the beginning of this year. The initial value of the euro zone’s manufacturing PMI in October was 46.6, falling below the dry line for the fourth consecutive month. Considering that the ECB is less likely to turn its monetary policy in the short term and is affected by factors such as energy shortages, the European debt crisis, and tightening liquidity, the Risk of the eurozone economy falling into recession has increased.

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