In the early morning of December 14, Beijing time, the Federal Reserve made public the decision of its December interest rate meeting and announced that it would maintain the target range of the federal interest rate at 525% to 55%, the first time since September 2023 that the Fed has kept this range unchanged for three consecutive times. Since March 2022, when the Fed began its aggressive rate hike cycle, the Fed has implemented 11 rate hikes, with a cumulative increase of 525 basis points.
The Fed's dovish voice strengthened market easing expectations.
Since November, the market's expectations for the start time and pace of Fed rate cuts in 2024 have become more and more dovish due to a number of weaker or less than expected economic data, and this December meeting has strengthened this expectation.
The statement at the December meeting changed the description of the economy to "economic growth slowed down from the third quarter", acknowledging that "inflation has come down in the past year". On the economic front, the Fed raised its real GDP growth rate for 2023, revised its economic forecast for 2024 downward, and lowered its inflation forecast across the board. Against this backdrop, the dot plot and Powell's speech are on full display. The December dot plot showed that the median interest rate forecast for 2024 was lowered by 50 basis points to 46%, implying that there will be three 75bps rate cuts in 2024, which also reflects the overall tendency of FOMC members to be further dovish. At the press conference, Powell said that the policy rate may have reached or is close to the peak of this tightening cycle, and although he did not rule out the possibility of further tightening in appropriate circumstances, he admitted that the Fed has begun to discuss interest rate cuts, which is a sharp turn from the previous statement that "it is too early to talk about rate cuts".
The core main line of asset allocation next year.
In the short term, according to the CME Fed, after the December interest rate meeting, the mainstream expectation in the market is that the Fed will start cutting interest rates in March 2024 and cut interest rates by 150bps for the whole year, which is still too optimistic compared to the 75bps rate cut expectation shown in the December dot plot. However, in the context of the convergence of U.S. fiscal expectations + little excess savings left + the gradual emergence of the utility of high interest rates (which has gradually suppressed new demand in the United States), the Fed's transition from the interest rate hike cycle to the interest rate cut cycle is still the core theme of next year's major asset allocation.
In the Fed's interest rate cut cycle, U.S. bonds are the most certain investment products, and in addition to U.S. bonds, Chinese dollar bonds are also worth paying attention to. Chinese US dollar bonds are US dollar-denominated bonds issued by Chinese enterprises in the offshore market, borrowed from overseas, and their pricing is based on US dollar interest rates, but the underlying asset is Chinese corporate credit. According to statistics, the Markit IBOXX Asia Chinese US Dollar Bond Index and US Treasury yields have a significant negative correlation most of the time. Especially during the downward period of U.S. bond yields from the end of 2018 to the beginning of 2020, the Chinese U.S. bond index fell by about 15%, with significant returns.
Returning to the domestic market, in addition to the marginal improvement of the external environment, the low-slope recovery in 2024 is the core judgment, the policy provides upward traction, and the certainty of A-shares is increasing. In October, the issuance of 1 trillion yuan of treasury bonds exceeded expectations and broke through the deficit, which has released a great signalThe December Economic Work Conference held this week pointed out that next year it is necessary to introduce more policies that are conducive to stabilizing expectations, growth and employment, and continue to implement a proactive fiscal policy and a prudent monetary policy. After "* leverage" takes over from "local leverage", it is expected to drive enterprises and residents to increase leverage, thus forming a virtuous positive cycle of "corporate profits, employment and residents' income". In this context, the three factors that affect the pricing of A-shares in 2024 are expected to usher in positive changesSecond, the monetary policies of China and the United States are expected to resonate, and liquidity will remain accommodativeThird, due to the simultaneous development of policy determination and tension, the impact of U.S. bonds and the U.S. dollar on A-shares is expected to reverse, and risk appetite is expected to usher in a window period of positive improvement.
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