Macro Economy Weekly | Bitmidas
2023–11–14
Countdown to U.S. interest rate cut, risks of hard landing in Europe rising
The U.S. real interest rate is sufficiently restrictive, but Fed officials are cautious and need to maintain high interest rates for a longer time. Overall we’re in the countdown to interest rate cuts; the European economic situation is facing more risks of a hard landing.
Important Data of the Week
Since the Federal Reserve has raised interest rates by 525 bp since 2022, the overall financial pressure in the United States has increased significantly: the actual interest rate level has turned positive in April 2023. In theory, the interest rate in the United States has become restrictive on economic activities. But compared with that before the financial crisis in 2008, it was still relatively low and maintained for a shorter period of time. It will take some time to manifest the restrictive effect on the economy.
U.S. Real Interest Rate
The CME federal funds futures model shows that the expected probability of raising interest rates in December is only 4.8%. It closed at 19.8% last week, and no rate increase is expected in December. The probability of raising interest rates in January next year is 8.6%. Before Powell’s announcement, the probability of an interest rate cut in May 2024 was close to 50%.
After Powell stated that the Fed would not hesitate to further tighten monetary policy, the probability of an interest rate cut in May 2024 dropped. The earliest reliable time point for interest rate cuts is expected to be postponed to June.
The interest rate path forecast based on the implied interest rate of federal funds futures indicates that interest rate cuts will begin as early as Q1~Q2 of 2024.
The winning bid yield of the U.S. 30-year Treasury bond was 4.769%, which was lower than the winning bid rate of 4.837% in the last auction on October 12, but higher than market expectations before the auction. U.S. long-term bonds are under pressure, with the 2-year U.S. bond yield once again exceeding 5%, and the 30-year U.S. bond yield recorded its largest single-day gain since March 2020.
Europe’s current economic growth continues to decline. As of the third quarter of 2023, the Eurozone GDP increased by 0.1% year-on-year, and the quarter-on-quarter growth rate was -0.1%, among which Germany, as the most major economy in the Eurozone, is currently in a “technical recession.” French 3rd quarter GDP year-on-year growth was 0.3%, and quarter-on-quarter growth was 0.09%, both declining from the second quarter.
The Eurozone manufacturing PMI in October 2023 recorded 43%, a decrease of 0.4 percentage points from September. Germany’s manufacturing PMI in October was only 40.8%. The economic climate index of the 20 countries in the Eurozone was 93.3 in October, which has been declining for 6 consecutive months. From this series of high-frequency economic indicators, it continues to go below the threshold, which is very pessimistic.
As economic pressure increases, consumer and investor confidence is also obviously insufficient. In October, the consumer confidence index in the Eurozone recorded -17.9, falling for four consecutive months, and the Sentix Investment Confidence Index recorded -21.9 in October, falling for four consecutive months. A 3-month decline can easily lead to a vicious cycle.
Federal Reserve Balance Sheet
The Federal Reserve keeps interest rates unchanged at 5.25%~5.5%, but the Federal Reserve’s balance sheet will continue to shrink, and its size has shrunk to a size of US$7,866.664 billion (not updated this time).
Recession Indicators-U.S. Debt Inversion
The winning bid yield of 30-year U.S. Treasury bonds was 4.769%, exceeding market expectations. U.S. long-term bonds were under pressure, with 10-year and 30-year yields rising. The inversion spread is 40.4 bp.
Market Performance
The U.S. labor market has cooled, and the U.S. index has seen a certain correction. However, U.S. bond sales plumaged, and Powell stated that the Fed will not hesitate to further tighten monetary policy to boost the US dollar, and the US dollar index rebounded to hit 106; the interest rates will remain for a long time, and the US dollar index will remain relatively high.
The Fed’s attitude is hawkish or cautious, which is negative for Gold prices. Gold failed to effectively break through the $2,000 and fell back. Gold is still running at a high level, with high volatility.
The non-agricultural data cooled off last week, causing the S&P 500 to form a V-shaped rebound at the key support of 4100. Yesterday, the U.S. 30-year U.S. Bond auctions were “bad”, US stocks were under pressure, and the S&P 500 fell back. Overall US stocks are still running at a high level, and in the short-term sideways.
Under the expectation of halving and spot ETF expectations, as well as the cooling of the US non-farm payroll and the advance of interest rate cut expectations, BTC continues to record a new one-year high and touched $38,000. The $38,200~$38,600 resistance is the key resistance this month and has a certain influence on the price. There will be a certain pressure on BTC in the short term. If there is an effective breakthrough after the adjustment, it will be easy to reach $40,000~$46,000.
Summary
The current real interest rate of the Federal Reserve is already restrictive enough, but it is still relatively low compared with that before the 2008 financial crisis. The duration is short, and it will take some time for the restrictive effect on the economy to be reflected, and inflation is still facing uncertainty. Federal Reserve officials are generally cautious and agree to maintain high-interest rates for a longer period of time and will flexibly adjust interest rates based on subsequent data. They do not rule out the possibility of further hikes.
However, based on the current overall data, if inflation does not rebound unexpectedly, the probability of raising interest rates will be lower and the probability of lowering interest rates will be higher. March 2024 is the earliest time for a rate cut, more reliable interest rate cuts are in May or June 2024.
As the Fed’s interest rate hike cycle may end and enter the countdown to cut interest rates, the Fed’s interest rate tightening will not be the main factor in the future. Uncertainty around economic growth and debt supply will be a new focus. However, at this stage, the situation is relatively optimistic. Observe the follow-up CPI and other data. If nothing unexpected happens, the countdown to interest rate cuts may be advanced.
Compared with the United States, Europe is not so optimistic, with weak manufacturing, declining economic indexes, and a continued decline in consumption and confidence. It has theoretically entered a recession, and the risk of a hard landing has increased. The need to end interest rate hikes is more urgent than in the United States.
Completion of this report: 2023–1110–15:52 (UTC+8)
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