BlackRock: Fed's 1st Rate Cut in 4 Years Not Easing Start

BlackRock issued a statement saying that, as the market expected, the Federal Reserve announced a significant interest rate cut of 50 basis points in its September decision, describing the cut as a "re-calibration" of its monetary policy.

The decision to cut interest rates was based on the Fed's assessment of the current economic situation in the United States, which is "solid," with risks to economic growth and inflation expectations "balanced," and the monetary policy is in sync with the development of the economic situation.

BlackRock mentioned that the Fed's choice to cut rates by 50 basis points instead of 25 could be explained by Fed Chairman Powell's remarks: "The U.S. economy is growing solidly... we want to maintain this momentum."

However, it can also be seen from here that the Fed is more worried about the U.S. economic growth slowing down too much than balancing risks.

Advertisement

At the same time, the Fed did not explicitly admit the risk of inflation rebounding.

It is worth noting that the Fed did not mention the positive impact of a loose policy environment on U.S. economic growth, which is unusual in the context of what should be a restrictive policy, and further confirms the atypical nature of the current economic cycle.

The impact of the Fed's rate cut on the market and its implications remind us of December 2023, when the Fed had already strengthened the market's expectations for a rate cut.

Although this move was unexpected and may have a short-term positive impact on the market, BlackRock's think tank believes that the possibility of further market fluctuations in the future will increase, especially when U.S. economic growth and inflation fail to achieve a "soft landing" according to the Fed's latest forecasts.

Given the current high uncertainty in the global economic outlook and the differences of opinion within the Fed before entering the "silent period," it may be more surprising to reach almost unanimous decisions than any dissent.

Jean Boivin, head of BlackRock's think tank, said that Fed Chairman Powell called this rate cut a "re-calibration" of monetary policy, but this term should be used when the Fed decides to pause rate cuts.

So it is clear that what is about to begin is not a full easing cycle.

We believe that the market's expectations for the size of the rate cut will eventually be disappointed, and the resilience of U.S. economic growth will become a positive news.

In addition, through the Fed's "Summary of Economic Projections (SEP)" dot plot and comments from Fed Chairman at the press conference, we further clarified the direction of future U.S. monetary policy.

The dot plot shows that the expected median interest rate for 2024 implies that there may be two rate cuts at the remaining two interest rate meetings this year, each by 25 basis points, and the expected median interest rate for 2025 indicates that the policy rate may be cut by another 100 basis points next year.

Rick Rieder, BlackRock's Global Chief Fixed Income Investment Officer, said that this rate cut decision may trigger a series of financial system reactions.

The key significance is that the Fed may continue to cut interest rates over the next two years.

As interest rates fall, fixed income assets are expected to benefit, but it does not mean that the performance of fixed income assets will show a straight upward trend.

Because the market is also affected by other factors, such as the development of the U.S. economy, the results of the U.S. elections, and geopolitical situations.

However, BlackRock still looks optimistic about assets in the middle of the yield curve, especially those with higher yields than U.S. Treasury bonds.

Because the actual benchmark interest rate in the United States is still high, even if the Fed tries to further lower interest rates in the next year, these assets may still provide considerable returns.

Globally, perhaps no place is more eager for the Fed's policy decision than Asia.

For many years, the central banks of many countries and regions in Asia have been limited in monetary policy easing due to the weak yen and high interest rate policy in the United States.

Now, with the reversal of the yen trend and the adjustment of Fed policy, this situation has finally changed.

Central banks in Asian countries are gradually regaining the independence of monetary policy.

For example, the Central Bank of Indonesia unexpectedly announced a rate cut on September 18, Beijing time, and the Central Bank of the Philippines also took rate-cutting action last month.

The 10-year government bond yields of the two countries are hundreds of basis points higher than U.S. Treasury bonds, so they have had to raise interest rates significantly in recent years to curb currency depreciation.

One of the main reasons stated by the Central Bank of Indonesia in its statement is the expectation that U.S. monetary policy will become more loose.

Navin Saigal, Head of Asian Macro Markets for BlackRock's Fixed Income Investment, said that for a long time, under the influence of external pressures, Asian regions and countries have been facing a situation of high interest rates and low inflation, but these influences are now diminishing.

Therefore, the current time may be the ideal time for global investors to continue to include Asian fixed income assets in their investment portfolios.

Shen Yufei, Chief Equity Investment Officer of BlackRock Fund, Manager of BlackRock China New Vision Mixed Fund, and Manager of BlackRock Industry Selection Mixed Fund, said that at the current point, the Fed's rate cut is expected to reduce the exchange rate pressure of various countries, open up room for monetary policy easing, and the global liquidity easing will provide strong support for valuations.

And the downward trend of interest rates leads to the decline of marginal cost of funds, which will enhance the attractiveness of stable high dividend assets.

High dividend assets in Hong Kong stocks are more likely to benefit directly and may also benefit the performance of some interest rate-sensitive industry assets.

Of course, the market is most concerned about the release of China's monetary policy space brought by the U.S. rate cut.

If there is a follow-up of loose monetary policy domestically, it is expected to boost the performance of the stock market.

However, overall, we believe that the above impacts are marginal, and the impact of the U.S. rate cut on the domestic stock market is more on the gradient rather than directional.

The performance of stocks essentially reflects the profitability of enterprises, which is more related to the domestic economic fundamentals and long-term industrial policy trends.

Therefore, in terms of investment, we will follow the macro front while consolidating research, looking for industry and stock opportunities with alpha logic from the bottom up, and closely monitoring the possibility of some bottom assets turning around in distress.

Liu Xin, Chief Fixed Income Investment Officer of BlackRock Fund, Manager of BlackRock Xinyue Fengli Bond Fund, Manager of BlackRock Pu Yue Fengli One Year Holding Mixed Fund, and Manager of BlackRock Central Treasury Bond 0-3 Year Index Fund, said that the Fed's first rate cut exceeded expectations, and then the short-term yield of U.S. Treasury bonds fell rapidly, and the yield curve of U.S. Treasury bonds became steeper.

However, looking at the dot plot, there are only two rate cuts expected this year, which is lower than the previous market pricing, and as a result, U.S. Treasury bond yields rebounded slightly.

He believes that overall, under the background of the Fed's 50 basis point rate cut, the domestic bond market and policy direction are still "centered on me."

We judge that the fundamentals are expected to be long-term favorable for the domestic bond market.

The Fed's rate cut in the second half of the year will ease exchange rate pressure and further open up the space for monetary policy.

Credit bonds are short-term due to valuation and the slowdown of demand at the end of the year and other resistances, and it is estimated to be a volatile trend, but the overall long-term financing cost is expected to decline in the long run.

Wang Xiaojing, head of multi-asset and quantitative investment of BlackRock Fund, said that after the Fed's rate cut, the central bank should have a greater space for rate cuts, which is favorable for the bond market.

The central parity rate of the yuan has been almost the same as the spot price, showing that the central bank has a certain operational space in guarding against exchange rate risks, and there is no need to worry about the short-term exchange rate fluctuations brought about by rate cuts.

The risk point is that the long-term interest rate falls too fast or the curve is inverted.

He said that if the rate cut and reserve requirement ratio reduction are implemented, although it is slightly later than the market's expectations, it will help to repair the sentiment and confidence of the stock market.

The continuous shrinkage of the interest spread is not conducive to the financial industry, but it is beneficial to other industries.

If there is a fiscal policy that is launched on a large scale and takes effect quickly at the same time, it will pull the overall market from the demand side.

The risk point is that the monetary and fiscal policies are not timely and not scaled.

Measured by the long-term risk premium of the CSI 300, the overall valuation of the current large-cap stocks is the third cheapest point in the past 20 years, only after the stock market crisis in 2015 and October 2022.

However, some industries and style factors have been fully or even overpriced in the long-term value in the low interest rate and low growth environment, and caution is needed in the short term.

He mentioned that attention should be paid to the appreciation potential of the yuan exchange rate - in August alone, the national commercial banks' agency settlement and sale of foreign exchange has turned positive, and the first seven months were all negative.

If the positive inflow of settlement continues, it will form a partial push for the yuan exchange rate.