Federal Reserve Chairman Jerome Powell hinted at his stance on rate cuts, and U.S. stocks rebounded strongly overnight, with all three major indexes rising more than 2% and posting their biggest one-day gain since January 4. The Dow closed up more than 500 points.
With a new round of global rate cuts getting under way and a fresh easing cycle emerging, whether China’s central bank will follow with "rate cuts" has become the focus of market attention. Analysts believe monetary policy will likely loosen at the margin in June, as short-term liquidity faces the pressure of maturing funds, while over the longer term the central bank must continue to lower financing costs and stabilize the economy.
Six central banks around the world have cut rates. According to Wind data, six central banks globally have announced rate cuts so far this year. As of now, Australia’s cash rate is 1.25% and New Zealand’s is 1.5%, both at historic lows.
On February 7, the Reserve Bank of India led the world in starting the first round of rate cuts, lowering rates by 25bp, followed by a second 25bp cut on April 4.
On February 15, the Central Bank of Egypt cut rates by a hefty 100 basis points.
On May 7, Bank Negara Malaysia announced a 25bp cut in its overnight policy rate to 3%.
On May 9, the Philippine central bank cut its key rate by 25bp to 4.5%, its first cut since 2016.
On May 10, the Reserve Bank of New Zealand cut its rate by 25bp to 1.5%.
On June 4, the Reserve Bank of Australia announced its rate decision, cutting the cash rate by 25bp to 1.25%.
In addition, although some central banks have not clearly signaled a rate-cut stance, easing expectations are already on the way. At the ECB’s March 7 policy meeting, apart from keeping its three benchmark rates unchanged, the bank unexpectedly announced a new round of targeted longer-term refinancing operations (TLTRO). The surprise "European-style easing" sent the euro lower against the U.S. dollar in the short term. On inflation, after hitting a five-month high in April, euro-zone inflation slipped again in May to its lowest level in over a year. With inflation still failing to pick up, the market believes the European Central Bank may introduce more stimulus measures, and ECB President Mario Draghi may once again prove he can be more dovish than the market expects. As for the Bank of Japan, Governor Haruhiko Kuroda recently said the BOJ will continue with easing policy to support the Japanese economy.
Ming Ming of CITIC Securities noted that overall, major global central banks are continuing to shift toward a more dovish policy stance.
Fed hints at rate cuts. In his latest public remarks overnight, Federal Reserve Chairman Jerome Powell signaled his stance on rate cuts, saying the Fed would take appropriate measures to sustain the economic expansion and is closely monitoring the impact of trade negotiations and other events on the U.S. economic outlook.
"We don’t know how or when trade issues and other events will be resolved," Powell said. "The Fed will always use appropriate measures to support this economic expansion." He added that U.S. core inflation has been slightly below 2% over the past 12 months. If this "below-target surprise" persists, it would bring the federal funds rate closer to the effective lower bound (ELB). The Fed must and already does take seriously the risk of inflation undershooting; if this persists in a robust economy, it could lead to difficult-to-resist downward moves in inflation expectations.
Notably, Powell’s remarks drew widespread market attention. The three major U.S. stock indexes rebounded, rising more than 2%, and posted their largest single-day gain since January 4.
Asian stocks also rebounded in early trading today. As of press time, the Nikkei 225 was up 1.73% and the KOSPI was up 0.63%.
Xie Yaxuan of China Merchants Securities pointed out that Fed voter James Bullard said on Monday that "the Fed may soon need to cut interest rates to boost inflation and mitigate the downside risks to the economy from the escalating trade war." Combined with the recently released weak ISM manufacturing PMI and falling crude oil prices, the 10-year U.S. Treasury yield fell to 2.07% on June 3, and the yield dropped 7bp in a single day on Monday. The inversion of the U.S. Treasury yield curve has deepened over the past two weeks. According to futures prices, the probability of a Fed rate cut in December 2019 has risen to 96.1%, a new high, while inflation expectations implied by U.S. TIPS yields have also declined markedly. From the perspective of U.S. economic fundamentals, the downward trend is gradually being verified by data. However, considering that the year-on-year core PCE rate in April was still 1.6%, up marginally from March, and that current inflation in both China and the United States appears to be supported more by the supply side, both countries may face certain "stagflation-like" risks. Monetary authorities may face a "dilemma" in the future, which could be an important source of market expectation divergence.
Will China’s central bank cut rates? Against the backdrop of a new global easing cycle, China’s monetary policy now faces an additional contradiction on top of the existing internal downward economic pressure, intensified Sino-U.S. trade frictions, and RMB depreciation pressure. Will China’s central bank follow global monetary policy and cut rates?
Ming Ming of CITIC Securities believes that relative to overseas rate levels, China can appropriately follow global monetary policy in lowering policy rates (such as the reverse repo rate) to guide interest rate spreads back to a "comfortable zone." In addition, earlier remarks by central bank leaders pointed out that deposit and lending rates are at reasonable levels. The main task ahead is to promote the convergence of the dual-track rates into one track—that is, keeping the benchmark deposit rate stable while abolishing the benchmark lending rate, possibly combined with cuts in the repo rate, to guide the LPR rate appropriately lower and reduce the financing costs of the real economy.
As the economy slows and global monetary policy eases, appropriately lowering policy rates, together with leverage-stabilizing policies, can better stabilize the economy and improve economic quality. In the external environment of an intensifying trade war, after the economic rebound in the first quarter, economic fundamentals have seen a "compensatory pullback" since April. The PMI has fallen below the expansion-contraction threshold for two consecutive months, increasing downward pressure on the economy. From the experience of the past few years, the financial contraction caused by rate hikes and deleveraging has transmitted to credit contraction, and under the financial accelerator effect, its impact on the real economy has become evident. With domestic and global economic growth both weakening, appropriately lowering policy rates and supporting with leverage-stabilizing policies will help achieve the goal of stabilizing the economy.
From the perspective of reducing costs, monetary policy needs to ease to lower the comprehensive credit financing costs of small and micro enterprises. The first-quarter monetary policy implementation report noted that the weighted average interest rate on general loans rose in the first quarter. Under weak aggregate demand and base effects, PPI is likely to turn negative year-on-year in June and may remain negative until the end of the year. With nominal financing costs rising and PPI turning negative, the real economy may face renewed upward pressure on actual financing costs. Therefore, it is necessary for monetary policy to ease further to achieve cost reduction.