1. Key events
1.[Minutes of the December meeting of the Federal Reserve]
The minutes of the Fed’s December meeting show that the FOMC can raise interest rates earlier, and the rate of increase can be faster, and the rate of contraction can exceed the previous round of contraction cycle. Some participants tended to taper (underweight QE) for mortgage-backed securities (MBS) faster than that for U.S. Treasury bonds. Many Fed officials said that the pace of shrinking the balance sheet will be faster than in the past. Some Fed officials hope to quickly shrink the balance sheet following raising interest rates for the first time. Some officials believe that the Fed’s reduction of stimulus may be guaranteed. Participants believe that the supply chain disorder will last longer. It is expected that the US PCE (inflation) will drop to 2.1% in 2022 and will remain stable until 2024.
[StLouisFedPresidentBrad:FOMCcanstartraisinginterestratesasearlyasMarchandtheinterestratehikeplanmaybefine-tunedaccordingtotheinflationsituationintheUnitedStates】
The Fed is in a good shape to take more action on inflation. The operation of the Fed’s policy framework is quite in line with expectations. If inflation eases, interest rate hikes can be slowed down in the second half of the year. Brad’s view is that shortly following raising interest rates, you can start to shrink the balance sheet. You need to be prepared in case prices don’t ease as you wish. It is expected that there will be three interest rate hikes in 2022. The level of employment before the COVID-19 pandemic is not a good benchmark.
2. Follow-up market focus
The current gold prices are influencing factors such as inflation, employment variables, and the resulting uncertainties that lead to changes in the Fed’s interest rate hike path and the rebound of the epidemic. In the later period, the precious metals market needs to focus on factors such as when to raise interest rates and the epidemic.
Summary of investment bank views
Standard Chartered Bank analysts said: “If the reduction in debt purchases was completed a few months ago, we believe that the Federal Open Market Committee should raise the policy interest rate now. The unemployment rate is not significantly higher than the Fed’s long-term target, but the core and overall inflation Not so.” (Note: The current level of inflation is more than twice the Fed’s 2% target)
JP Morgan Chase: The Fed will begin to shrink its balance sheet in September. JPMorgan Chase believes that the Fed will begin to reduce its balance sheet in September to begin “quantitative tightening.” The Fed is expected to reduce its balance sheet in stages, with a rate cap of 100 billion U.S. dollars per month (this ceiling is twice the rate of its balance sheet reduction between 2017 and 2019.)
TD Securities recommends long two-year U.S. Treasury bonds, as the possibility of the Federal Reserve raising interest rates in March decreases. TD strategists wrote in the report that the rising rate of new crown infections may weaken the growth rate of the U.S. economy in the first quarter and reduce the possibility of the Federal Reserve starting to raise interest rates in March. The market expects the probability of the first rate hike in March to be 72%, which is very radical, especially considering the recent increase in new crown cases. The warming of the epidemic should have a slight negative impact on the economy. The signs of slowing growth in the first quarter may be enough to cause the market to lower its interest rate hike expectations, which should help pull down the yield on the 2-year Treasury bond in the short term. TD Securities expects bond yields to slide from the current 80 basis points to 60 basis points. If the yield rises to 0.95%, investors should exit the transaction. The risk of this trading strategy is rising inflation, which may increase the pressure on the Fed to initiate interest rate hikes early. In order to hedge this risk, the TD Bank maintains its recommendation to make long the break-even inflation rate of the 2-year inflation-protected Treasury bond. At the same time, the TD Bank expects the Fed to raise interest rates in June, September and December, which is consistent with the number of interest rate hikes predicted on the Fed’s dot chart.
(The author is the deputy general manager of Zhaojin Futures)
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