Challenge coexists with Opportunity:New Trends for USA Financial Markets in June,2023 |

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Federal Reserve June News Quick Review Summary

The Federal Reserve holds 8 interest rate meetings annually, and the minutes of the meetings provide a detailed explanation of the policy formation process and the logic behind the policy, usually released three weeks after the meeting.

The minutes of the May interest rate meeting released on May 24, 2023 contain three key information.

Firstly, Federal Reserve officials did not provide a clear signal to suspend interest rate hikes during the June 13-14 meeting, and there are significant disagreements within the Federal Reserve regarding the future monetary policy path, making it impossible to decide whether to announce a halt to interest rate hikes;

Secondly, due to the current inability to provide clear guidance on the future monetary policy path, Federal Reserve officials believe that maintaining openness and flexibility is necessary ("need to retain option after this meeting");

Thirdly, based on the Federal Reserve's understanding of the economy and inflation, as well as its existing exploration framework, rate cuts within the year are still a small probability event

PMI of the US and Europe Service Industry in May

The PMI of the service industry in the United States and Europe in May was 55.1% and 55.9% respectively, significantly higher than the critical level of 50%, indicating continued expansion of the service industry; However, the manufacturing industry in the United States and Europe has weakened. The expansion of the service industry will still make the US and European economies and employment resilient.

Last weekend, the United States reached a preliminary debt ceiling agreement, and short-term overseas risk appetite is expected to slightly increase. Due to the resilience of the US economy and employment, as well as the elimination of debt default risks, the probability of the Federal Reserve raising interest rates in June has increased to 64.2%. This has certain constraints on the improvement of overseas risk appetite, and should not be overly optimistic about overseas markets.

The PMI of the service industry in the United States and Europe continued to expand in May, while the manufacturing industry weakened. The expansion of the service industry will still make the US and European economies and employment resilient

The initial PMI of the US service industry in May was 55.1%, an increase of 1.5 percentage points compared to April; The initial PMI of the service industry in the eurozone was 55.9%, a decrease of 0.3 percentage points from April, but still far above the critical level of 50%.

However, the manufacturing industry in the United States and Europe weakened in May, with Markit manufacturing PMI of 48.5% and 44.6% respectively, significantly below the critical level of 50%. The majority of employment in the United States and Europe comes from the service industry, and the continuous expansion of the service industry means that employment continues to grow.

Since the beginning of this year, the good performance of the service industry in the United States and Europe has led to better employment performance in the United States and Europe.

In April, the unemployment rate in the United States fell by 0.1 percentage points to 3.4%, which is at a historical low;

In March, the unemployment rate in the eurozone fell by 0.1 percentage points to 6.5%, reaching a new low. In the past two weeks, the number of people receiving unemployment benefits for the first time in the United States has been around 225000, a slight decrease compared to before, confirming the resilience of employment in the United States. Good employment performance means that residents' income remains relatively fast growing, which will provide some support for commodity consumption in the United States and Europe

Last weekend, the United States reached a preliminary debt ceiling agreement, and short-term overseas risk appetite is expected to slightly increase

On May 27th, the two parties in the United States reached a preliminary agreement on the debt ceiling issue. After confirming all the details of the agreement, it will be submitted for voting. The agreement was determined after thorough discussions between the two parties in the United States and is expected to pass a vote smoothly. The short-term overseas risk appetite is expected to increase slightly as the risk of US debt default is eliminated.

Due to the resilience of the US economy and employment, as well as the elimination of debt default risks, the probability of the Federal Reserve raising interest rates in June has increased to 64.2%

The continued expansion of the US service industry in May means that the employment data for May is still likely to be good. In addition, the risk of US debt default was basically eliminated, and the probability of the Federal Reserve raising interest rates in June last Friday increased to 64.2%.

In the future, we need to focus on the US inflation data for May. If the month on month increase in core services CPI in the United States rebounds in May, then the Federal Reserve is likely to continue raising interest rates by 25BP at its June meeting; On the contrary, the Federal Reserve may also suspend interest rate hikes. At present, the probability of the Federal Reserve raising interest rates in June is relatively high. This has certain constraints on the improvement of overseas risk appetite, and should not be overly optimistic about overseas markets.

Risk reminder ：Domestic economic recovery is not as expected, and risks in the US and European banking industry are spreading

Therefore, there is a tendency to believe that the high absolute level of inflation, coupled with the stickiness of wage prices, may correspond to the Federal Reserve maintaining policy interest rates for a longer period of time.

In the absence of traditional recession risks, the probability of interest rate cuts within the year is relatively low.

The Federal Reserve's decision is to seek a balance between inflation, economic growth, and macroeconomic prudence.

Simply put, in the benchmark scenario, we tend to believe that the Federal Reserve may suspend interest rate hikes in the future and maintain high interest rates throughout the year; At the same time, moderately increase its inflation tolerance.

An orderly downward trend in April inflation data continues, providing a reasonable environment for the Federal Reserve to suspend interest rate hikes. Secondly, despite the prominent resilience of the economy, the inventory cycle is still sinking, leading indicators and lagging indicators have continued to cool, and it is not ruled out that there will still be a stage of shallow recession

Although the three bankruptcies in the banking industry did not lead to the spread of financial risks, the case of First Republic Bank shows that financial fragility is still high; The first quarter bank credit opinion survey showed that under the background of high interest rates and transfer of savings from small and medium-sized banks, the credit environment further contracted. The above background all points to the need for a "compromise" outcome for the Federal Reserve, but whether this will be realized remains to be observed.

All three major stock indices have declined to varying degrees

Because the May interest rate minutes did not further point to a "conclusion", but instead showed a stronger data-dependent decision-making feature. According to Federal Watch data, the probability of the Federal Reserve suspending interest rate hikes and continuing to raise interest rates by 25bp in June was 67% and 33%, respectively.

The probability of continuing to raise interest rates was slightly higher than the previous day's 28%; But the probability of a 25bp interest rate hike and no interest rate hike in July is 46.2% and 40.9% respectively, with the previous values being 36.7% and 57.6%, respectively

The implied terminal policy interest rate for futures has risen to 5.27% (previous value was 5.20%). From the perspective of asset performance, the 10-year US Treasury yield rose by 5bp to 3.74%, while the US dollar index rose to 103.88; The uncertainty of interest rate hikes combined with the unresolved debt ceiling issue has pushed up the risk premium, and all three major stock indices have fallen to varying degrees.

The probability of the Federal Reserve suspending interest rate hikes and continuing to raise interest rates by 25bp in June

After the minutes were released, the probability of the Federal Reserve suspending interest rate hikes and continuing to raise interest rates by 25bp in June was 67% and 33%, respectively, compared to 72% and 28% the day before.

The US bond yield rose by 5bp to 3.74%; The US dollar index rose to 103.88; All three major stock indices fell, with the SP500 index down 0.73%, the Nasdaq index down 0.61%, and the Dow Jones Industrial Average down 0.77%.

Of course, when it comes to financial management in the stock market, adjustments should also be made based on one's own actual situation. For reference purposes only, it is not and should not be considered as an invitation, solicitation, invitation, or suggestion to buy or sell any investment product. The articles pushed by this official account do not constitute any form of investment advice or sales offer.

The market is risky, so investment should be cautious.

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