The Federal Reserve's stance on monetary policy in this meeting is broadly in line with expectations. In September, they will decide to maintain the option of raising interest rates and have denied the possibility of cutting rates within this year. The description of the economy is more positive now, as they no longer consider a recession as the baseline expectation and the current economic performance slightly exceeded expectations.
During the second half of the year, the focus on monitoring the Fed's decisions will be on two areas: bank credit and the job market.
Both are currently experiencing marginal declines but still remain relatively strong overall, which is not yet sufficient to prompt a shift in the Fed's stance. Therefore, it is not advisable to have overly high expectations for dovish signals from the Fed during the August Jackson Hole Symposium.
Before a trend of credit tightening emerges, US bond yields and the US dollar do not have a basis for a downward trend. This probably implies a negative performance for gold but we need to consider other macro factors at play such as de-dollarization where demand for gold is high. Current resistance level: 1984.
Looking at Q3, after the rate hike in July, there is a higher probability of no rate hike in September. As for the policy path in Q4, it is still subject to careful consideration, but I believe that the likelihood of no further rate hikes in Q4 is relatively high.
From an economic perspective, I expect the continuous contraction of credit in the United States banking sector to be the baseline scenario, which could further restrain the resilience of the job market. The credit tightening is primarily due to the increasing default rates of problem assets within the banking system and the impact of stricter regulations.
There are three main factors contributing to the rising default rates:
1. Commercial Real Estate (CRE) default rate: The deteriorating risk is primarily driven by the prevalence of the "work-from-home" model, leading to an increase in vacancy rates for office buildings and a continuous rebound in default rates for commercial real estate.
2. Student loan default rate: The worsening risk stems from the expiration of the exemption policy implemented by the Treasury Department during the pandemic for student debt, which is set to end in August. After the expiration of this exemption, the default rate may return to pre-pandemic levels, possibly exceeding 10%.
3. Potential Strengthening of Banking and Capital Regulations: Federal Reserve Chairman Jerome Powell mentioned in a congressional hearing in June that they might increase the primary capital adequacy requirement for banks by 20% on top of the existing basis.
During the second half of the year, the focus on monitoring the Fed's decisions will be on two areas: bank credit and the job market.
Both are currently experiencing marginal declines but still remain relatively strong overall, which is not yet sufficient to prompt a shift in the Fed's stance. Therefore, it is not advisable to have overly high expectations for dovish signals from the Fed during the August Jackson Hole Symposium.
Before a trend of credit tightening emerges, US bond yields and the US dollar do not have a basis for a downward trend. This probably implies a negative performance for gold but we need to consider other macro factors at play such as de-dollarization where demand for gold is high. Current resistance level: 1984.
Looking at Q3, after the rate hike in July, there is a higher probability of no rate hike in September. As for the policy path in Q4, it is still subject to careful consideration, but I believe that the likelihood of no further rate hikes in Q4 is relatively high.
From an economic perspective, I expect the continuous contraction of credit in the United States banking sector to be the baseline scenario, which could further restrain the resilience of the job market. The credit tightening is primarily due to the increasing default rates of problem assets within the banking system and the impact of stricter regulations.
There are three main factors contributing to the rising default rates:
1. Commercial Real Estate (CRE) default rate: The deteriorating risk is primarily driven by the prevalence of the "work-from-home" model, leading to an increase in vacancy rates for office buildings and a continuous rebound in default rates for commercial real estate.
2. Student loan default rate: The worsening risk stems from the expiration of the exemption policy implemented by the Treasury Department during the pandemic for student debt, which is set to end in August. After the expiration of this exemption, the default rate may return to pre-pandemic levels, possibly exceeding 10%.
3. Potential Strengthening of Banking and Capital Regulations: Federal Reserve Chairman Jerome Powell mentioned in a congressional hearing in June that they might increase the primary capital adequacy requirement for banks by 20% on top of the existing basis.
Comment:
The net interest margins of many regional banks have narrowed in the second quarter compared to the first quarter. As U.S. commercial banks' liability costs gradually converge with policy rates, the current deeply inverted yield curve may foreshadow further compression of net interest margins in the future, thus suppressing credit expansion by banks. This implies that the "lagging effect" of U.S. monetary tightening may be on its way.