The heavyweight time window for global financial markets is approaching.
This week, the world will start the "Super Central Bank Week", and the most focused issue in the financial market is undoubtedly the interest rate decision to be announced by the Federal Reserve in the early morning of September 19th Beijing time. Traders are currently increasing their bets on a 50 basis point rate cut by the Federal Reserve. According to CME's Federal Reserve Watch tool, the market currently expects the likelihood of the Fed cutting interest rates by 50 basis points to rise to 59%, up from 43% last Friday.
Affected by this, on the evening of September 16th Beijing time, the Dow Jones Industrial Average broke through the 41700 mark during trading, setting a new historical high. As of 22:00, the increase expanded to 0.77%; The US dollar index continued to decline, currently at 100.62, down 0.49% for the day; The exchange rate of the Japanese yen against the US dollar continued to rise, breaking through the key psychological level of 140 at one point, and reaching a high of 139.58 for the day, the highest level since July 2023. Meanwhile, the price of gold has continued to soar, with spot gold prices reaching a record high of $2589.69 per ounce today.
It can be foreseen that the key decision that the Federal Reserve is about to make is likely to trigger a global financial market shock. On September 15th local time, Greg Ip, a senior central bank reporter for The Wall Street Journal, recently wrote that the demand for further interest rate cuts by the Federal Reserve is becoming increasingly apparent, calling for a 50 basis point rate cut. Regarding this, American media commented, "The opinion leader has spoken up
Global heavyweight moment
This week, the world will start the "Super Central Bank Week", and the focus of financial markets will be on the interest rate decisions announced by the Federal Reserve and the Bank of Japan. In addition, central banks in multiple countries such as the UK, Brazil, Norway, and Indonesia will also release their latest interest rate resolutions. European Central Bank President Lagarde and several members will give speeches within the week.
On the early morning of September 19th Beijing time, the Federal Reserve will announce its latest interest rate decision. At present, the market unanimously predicts that the Federal Reserve will make a decision to cut interest rates at this meeting, and the focus of market attention will be on whether to cut interest rates by 25 or 50 basis points.
It is worth noting that traders are continuously increasing their bets on a 50 basis point rate cut by the Federal Reserve. According to CME's Federal Reserve Watch tool, the market currently expects the likelihood of the Fed cutting interest rates by 50 basis points to rise to 59%, up from 43% last Friday.
On the evening of September 16th Beijing time, after the opening of the US stock market, the three major indexes showed divergent trends. The Dow Jones index broke through the 41700 mark during trading, setting a new historical high. As of 22:00, the increase expanded to 0.77%; Dragged down by the decline of chip stocks, the Nasdaq fell 0.48%, while the S&P 500 index rose 0.13%. Among them, Micron Technology and Arm fell more than 4%, while Nvidia, Broadcom, and TSMC's US stocks all fell more than 1%.
Affected by the increasing expectation of a significant interest rate cut by the Federal Reserve, the US dollar index continued to weaken today, now at 100.69, down 0.42% for the day.
Kristina Clifton, foreign exchange strategist at the Commonwealth Bank of Australia, stated that investors are increasingly betting on a 50 basis point rate cut by the Federal Reserve. The US dollar may decline this week as the global easing cycle suppresses safe haven currencies. If the Fed's dovish expectations fall through at this interest rate meeting, the US dollar may rebound later this week.
Due to the divergence in policy expectations between the Federal Reserve and the Bank of Japan, the yield gap between the US and Japan has narrowed, and the Japanese yen has continued to rise against the US dollar. Today, it briefly broke through the key psychological level of 140, with a intraday high of 139.58, the highest level since July 2023. The Japanese yen has become the best performing G-10 currency in the third quarter, with a cumulative increase of over 15%.
On the morning of September 20th, the Bank of Japan will announce its September interest rate decision, and its Governor Kazuo Ueda will hold a monetary policy press conference at 14:30. The market expects that the Bank of Japan will not take any interest rate hike action at its September meeting, and the next interest rate hike may be in December this year. Therefore, the market expects that the interest rate differential between the United States and Japan may further narrow.
Tim Riddell, a strategist at Western Pacific Bank, pointed out that the divergence in monetary policies between the United States and Japan remains a key driving factor for the strengthening of the yen against the US dollar. The Bank of Japan will moderately tighten monetary policy, while the Federal Reserve will more decisively relax monetary policy.
At the same time, international gold prices continue to soar, with spot gold prices reaching a record high of $2589.69 per ounce today.
Affected by this, the gold sector of the Hong Kong stock market led the way with strong gains today. As of the close, China Gold International, Shandong Gold, and Lingbao Gold have surged 4.18%, 4.21%, and 3.06% respectively.
Tim Waterer, Chief Market Analyst at KCM Trade, stated that the prospect of the Federal Reserve potentially cutting interest rates by 50 basis points this week has caused gold and the US dollar to move in opposite directions. The overall situation of gold remains favorable and may further rise. If the US dollar continues to decline, the price of gold may reach $2700 per ounce by the end of the year.
ANZ Bank has raised its short-term gold price forecast to $2700 per ounce and its gold price forecast for the end of 2025 to $2900 per ounce. Soni Kumari, a commodity strategist at the bank, said that as the US inflation rate returns to the Fed's target level of 2%, the Fed should initiate a rate cut cycle this month to support gold prices. The strength of the rise in gold prices will depend on the pace of interest rate cuts by the Federal Reserve in the short term.
Reduce interest rates by 50 basis points
It can be foreseen that the key decision that the Federal Reserve is about to make is likely to trigger a global financial market shock.
On September 15th local time, Greg Ip, a senior central bank reporter for The Wall Street Journal, recently wrote that the demand for further interest rate cuts by the Federal Reserve is becoming increasingly apparent, calling for a 50 basis point rate cut. Regarding this, American media commented, "The opinion leader has spoken up
Greg Ip believes that the current economic environment has undergone significant changes, and the victory of inflation is a foregone conclusion. There are sufficient reasons to support a significant interest rate cut by the Federal Reserve.
According to the latest data, some core inflation indicators have fallen below 3%, even approaching the Federal Reserve's 2% target. Taking the core inflation rate, which excludes fluctuations in food and energy prices, as an example, it has decreased from 4.2% in August last year to 2.7%.
The basic inflation rate calculated by Harvard economist Jason Furman, which is equivalent to PCE, also shows that the current level of basic inflation is approaching 2.2%, the lowest point since the beginning of 2021.
Not only has the current inflation slowed down, but the market's expectations for future inflation have also further decreased. According to data from inflation linked bonds and derivatives, the CPI is expected to rise by only 1.8% over the next 12 months, with an average inflation expectation of 2.2% over the next five years. This indicates that investors are confident in the Federal Reserve's ability to achieve its 2% inflation target.
The decline in inflation expectations means that real interest rates in the United States are rising. Greg Ip believes that this indicates that the current level of interest rates has a significantly greater inhibitory effect on economic activity than necessary. Therefore, the Federal Reserve has more reason to significantly lower interest rates.
In addition, Greg Ip further stated that there are currently some signs of cooling in the labor market.
Greg Ip believes that if we only cut interest rates by 25 basis points, the risk may be even greater. The weakness of the global economy is evident, with rising default rates for car loans and credit cards, and high interest rates putting pressure on consumers. If only a 25 basis point decrease is made this time, and if more weak data is released in the future, the Federal Reserve will fall further behind market expectations.
But Greg Ip pointed out that cutting interest rates by 50 basis points is not without risks. At present, the yield of long-term treasury bond has been lower than the short-term interest rate, forming the so-called "yield curve inversion", and may further decline, thus lowering the mortgage interest rate. US equities could turn into a foam.
Prior to this, Nick Timiraos from the New Federal Reserve News Agency also published an article stating that the 25 basis point and 50 basis point rate cuts were a "near decision". Deutsche Bank's Matt Luzzetti believes that the article tends to support a larger rate cut.