Don't Think the US Rate Hike Will End Anytime Soon!!

LouisYap

Publish date: Thu, 18 Aug 2022, 11:24 AM

Regarding the performance of U.S. inflation, some investors call that U.S. inflation has peaked and will continue to fall in the future. What's more, the U.S. stock market has reversed, and there is nothing to worry about in the future. In this regard, let’s discuss about this.

Markets are expecting a slower pace of rate hikes by the Federal Reserve in September after the July inflation data was released. However, in my opinion, US inflation will most likely remain above the high 8% level in the next few months. The main reason for the decline in inflation in July was that energy fell to a large extent month-on-month, especially the fuel item fell by 7.7% month-on-month, driving the entire energy item to drop by 4.6% month-on-month. However, the core CPI still increased by 0.3% month-on-month, and the endogenous driving force of inflation is still strong. Since mid-June, the U.S. stock market has been optimistic, expecting that the Federal Reserve will end the rate hike at a relatively fast pace and open the floodgates to stimulate the weakened economy. In my opinion, the market is too optimistic, please don't underestimate the persistence of high inflation and the Fed's determination to raise interest rates.

In 1970, it lasted for an incredible 15 years. The main logic was that large-scale fiscal deficits + super-large-scale monetary easing were the main factors, and the oil crisis and food shortage were jointly caused. The big inflation in the United States did not rise to 13% at one time, but was divided into three waves. The underlying logic of this round of global big inflation is very similar to that of the 1970s, with super-large monetary and fiscal deficits, superimposed on the energy caused by the Russian-Ukrainian war. The crisis, the food crisis, and the ongoing disruption of global supply chains caused by the COVID-19 pandemic. This time, the underlying inflationary upward momentum may be greater than the last time.

In the face of all this, the determination of the Fed to raise interest rates should not be underestimated.

As the central bank, the Fed's primary task of regulation is to defend the stability of the currency value (PS: inflation in the United States is too high, the purchasing power of currency has dropped sharply, and the currency value is very unstable), and the second is to promote economic growth. From this perspective, to keep inflation down, we must continue to raise interest rates at a high intensity, at the cost of a rapid recession in the U.S. economy.

In addition, since the beginning of this year, many European banking giants have fallen significantly, far exceeding the market, including Deutsche Bank, Italian Bank of Siana, Italian Intesa San Paolo Bank, British Barclays, French BNP Paribas and so on. In my opinion, the market is trading the logic of a significant increase in bad debt rates from the European recession. Secondly, banks hold many bonds and financial derivatives, which will expose huge risks in the environment of the ebb of interest rates. If something goes wrong with European banks, it will also hit US financial markets.

But no matter how turbulent it is, it will be deduced around the pricing logic at the bottom of the stock market. The U.S. stock market has been extremely volatile. The Nasdaq plunged by 30% in the first half of the year, and set the worst half-year performance since the index was founded in 1971, even worse than the crash in the first half of 2002. However, just after June, there was a 20% rebound from the bottom, entering the so-called technical bull market. In the second half of the year, inflation hit a 40-year high, the pace of Fed rate hikes will not end easily, and the liquidity of the dollar tends to deteriorate. The combination of the two determines that the performance of US stocks in the second half of the year may not be very good, and the basic pattern of the bear market has not changed. Although it may continue a good rebound in the short term.

Compared with US stocks, we should be more worried about whether there will be problems with European debt and exchange rates, which will trigger a bigger crisis overseas.

Louis Yap

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