Wang Jinbin, text
The fact that the financial cycle has not yet significantly downturned is an important reason why the Fed has not yet said to cut interest rates. The easing of financial conditions has weakened the effect of monetary policy tightening, and the rise in risk appetite and the rise in housing prices, the core variables of the financial cycle, are important reasons for the easing of financial conditions.
In this tightening cycle, the United States has raised interest rates by the most among major advanced economies, at 525 bps. On a quarterly basis, data from the Federal Reserve's Chicago branch showed that the U.S. financial conditions index peaked in the fourth quarter of 2022; IMF (WEO, JAN, 2024) data peaked in Q2 2022; Their quarterly data showed that the US financial conditions index has largely declined since 2023, suggesting that the rate hikes have not led to a tightening of US financial conditions, but rather have become somewhat accommodative in the months following the pause (Figure 1). Looking at the weekly data, data from the Federal Reserve's Chicago branch also showed that US financial conditions have largely become more accommodative since the end of March 2023.
Figure 1: Changes in the U.S. Financial Conditions Index.
Why do US financial conditions become looser under the pressure of high interest rates? In addition to the return of global capital from the U.S. interest rate hike (according to recent data released by the U.S. Treasury Department (TIC), the total net capital inflow of the U.S. long-term and short-term** and banking sector in 2023 will exceed $840 billion), it is more necessary to observe the changes within the U.S. economy. In our view, there are two areas to focus on.
Reason 1: Risk appetite in the U.S. financial markets has risen.
Looking at the data for the week of late February 2024, the NFCI index is -052, the risk indicator contributed -023。Since the end of March 2023, the contribution of risk indicators has been increasing, from -004 has increased almost all the way to the current -023。The upward trend in market risk appetite is mainly reflected in the decline in the compensation of premium for risk assets. The risk premium for Moody's AAA corporate bonds and the U.S. 10-year Treasury note has declined significantly since the Fed paused its interest rate hikes in July 2023, and the average monthly risk premium from July 2023 to February 2024 was only 63 of the pre-pandemic 2017-2019 monthly average7%, and the average monthly risk premium from January to February 2024 is only 66 from the monthly average from 2017 to 20195%。Compared with the risk premium from March 2022 to June 2023 during the interest rate hike period, the average monthly risk premium from January to February 2024 is only 78 of the monthly average during the interest rate hike period4%。Looking at the U.S.**, according to data provided by Wind, as of March 4, 2024, the dividend yields of the S&P 500, Nasdaq and Dow Jones are respectively. 71% and 143%, which is lower than the average of the last five years. 5% and 143%；The S&P 500, NASDAQ, and Dow Jones each met PE (TTM). 0 and 262 times, **risk assets** are not cheap, and it also reflects the high risk appetite of investors in the US financial market.
Reason 2: The core variable of the financial cycle, residential housing prices, has risen.
The Fed's Monetary Policy Report for the first half of 2024 shows that many households bought or refinanced their homes in 2020 and 2021 when fixed mortgage rates were at historic lows, with most outstanding mortgages at interest rates below 4% (60-70% so far in 2020). The slowdown in house price growth in recent months reflects a rebalancing of supply and demand in the housing market and has seen record home prices due to year-on-year increases**. The difference is that commercial real estate has seen a significant appearance. According to an IMF study (Andrea Deghi, et.).Al, Jan 18, 2024), as of the third quarter of 2023, U.S. commercial real estate*** is up 11%, erasing the gains of the previous two years. According to the Mortgage Bankers Association, there is an estimated 1$2 trillion in commercial real estate debt will mature in the next two years. Of these, about 1 4 are loans to the office and retail sectors, most of which are held by banks and commercial mortgages**, which are associated with the recent risks associated with community banks in New York. The continued suppression of high interest rates has caused commercial real estate** to decline, but the U.S. residential housing market **is still **.
In addition, from the perspective of consumer credit, consumer credit in the United States will grow by 2 in 20234%, revolving credit and non-revolving credit increased by 84% and 04%。In the fourth quarter of 2023, the seasonally adjusted annual growth rate of consumer credit remained at 26%, but with a seasonally revised annual growth rate of 04%, there was a slowdown.
On the whole, the easing of financial conditions in the United States has not caused the U.S. financial cycle to decline significantly, and it may be that the expectation of a soft landing has supported investors' risk appetite to remain high, which is also the underlying factor supporting the core inflation rate (PCE) in the United States to remain around 3%. From this point of view,The fact that the financial cycle has not yet significantly downturned is an important reason why the Fed has not yet said to cut interest rates.