Zhitong Finance APP learned that Dunhe Asset stated that at the end of the interest rate hike cycle, the U.S. dollar mostly peaked and fell before U.S. bond yields. The combination of high interest rate environment and domestic political division is likely to significantly weaken the fiscal expansion of the United States next year, causing the economy to be unable to maintain high prosperity and putting downward pressure on the US dollar. The recent financial conditions index has tightened significantly and exceeded the important threshold of 100, which has also caused the Federal Reserve’s stance on monetary policy to gradually turn dovish. The correlation between the U.S. dollar index and A-shares and Hong Kong stocks is higher than that of U.S. bond yields. Once the index begins to trend downward, even if U.S. bond yields are difficult to fall back significantly, A-shares and Hong Kong stocks are expected to bottom out.
Since November, the U.S. dollar index has fallen from the year’s high of around 107 to 104, a new low since September. Affected by lower-than-expected non-agricultural, inflation and other economic data coupled with speeches by Federal Reserve officials, the 10-year U.S. bond yield dropped by more than 50bp from the year’s high to around 4.5%, becoming the main driving force for the dollar’s fall. However, it should be noted that during the previous period when U.S. bond yields rose sharply, the U.S. dollar did not strengthen significantly. In early October, U.S. bond yields hit a new high since the subprime mortgage crisis, and the actual interest rate implied by TIPS also reached 2.5%, much higher than the high of 1.7% in November last year. From the perspective of interest rate spreads, the nominal and actual interest rate spreads between the United States and Germany in 10 years have also rebounded to the highs in the fourth quarter of last year, with the differences exceeding 200bp.butIn stark contrast to interest rates that continue to hit new highs, although the U.S. dollar has continued to rebound since the second half of the year, it has not returned to the level of the fourth quarter of last year.110-115s levelwhen interest rates hit a new high in October, the U.S. dollar overall still fell.Why is the U.S. dollar already showing signs of weakening during the period of rising interest rates?
Generally speaking,Treasury yields and the dollar tend to rise in tandem early in a Fed tightening cycle, but1990At the end of each round of interest rate hike cycles since 2009, the U.S. dollar has basically peaked and fallen before U.S. bond yields.Why did the US dollar peak first? If a country’s currency exchange rate is understood as the stock price of the entire country, then the driving force behind it is still the quality of the country’s economic growth. Therefore, the U.S. dollar is more susceptible to the economic growth expectations of the United States relative to other countries, and will also Reflect changes in economic fundamentals before other assets. Changes in U.S. bond yields are not only affected by fundamental factors, but also encounter interference from supply factors and the direction of the Federal Reserve’s monetary policy. Only when expectations of a shift in monetary policy toward easing begin to rise will U.S. bond yields have the power to continue their decline. The change in monetary policy mainly depends on inflation and employment data. Such indicators usually respond laggingly to economic downturns, so the dollar’s turning point is often ahead of U.S. bond yields. The high probability that the U.S. dollar will begin to fall means that the expectation that the U.S. economy will be more resilient than other economies is beginning to change. The U.S. dollar will begin to peak and fall in September 2022, corresponding to the U.S. Markit Comprehensive PMI falling below the 50 boom-bust line in July. U.S. bond yields did not start to fall from their highs until the end of October.
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This year, the nominal GDP and real GDP of the United States have both risen to their highest levels since 2000. However, the strong economic growth has clearly deviated from the trend of some microeconomic data that have continued to decline. For example, industrial electricity consumption in the first seven months was almost the same as the same period last year. There was no growth, and import growth also turned negative. The core reason for this divergence is that the U.S. manufacturing industry is weak, but the service industry has recovered rapidly. The U.S. Markit manufacturing PMI has remained below 50 since the beginning of the year, but the services PMI has risen again to above 50 since February. It can also be seen from the consumption structure of residents that the growth rate of commodity consumption has dropped back to the average level before the epidemic, while the growth rate of service consumption is still twice the average level before the epidemic. It needs to be emphasized that the service industry is far more important to the U.S. economy than manufacturing. From the perspective of the U.S. economic and industrial structure, the added value of the service industry accounts for about 70% of the U.S. nominal GDP, while the manufacturing industry only accounts for 10%; from the perspective of the impact on employment, service industry employees account for 10% of the current non-agricultural employment population. The ratio has also reached 72%, and the manufacturing industry contributes less than 10% to US employment.soThis year, the resilience of the U.S. service industry has offset the weakness of the manufacturing industry, and the overall economic performance has been relatively stable.In other words, the service industryPMIThe changes are more critical to the judgment of the dollar’s turning point.It was precisely this year that the service PMI rose back above 50, and the U.S. dollar index stopped falling and rebounded. So can the high prosperity of the service industry be maintained? The author thinks it is relatively difficult.
In a high interest rate environment, the resilience of the U.S. service industry is mainly due to the continued expansion of U.S. fiscal policy.The U.S. fiscal deficit will reach 1.7 trillion in fiscal year 2023, far exceeding the budget deficit of 1.2 trillion in the 2023 fiscal year bill, and also higher than the 1.4 trillion deficit in fiscal year 2022. The U.S. fiscal deficit grew more than expected in the first half of the year, causing the U.S. service industry PMI to continue to rebound. However, U.S. fiscal expenditures have begun to fall since July, and the rolling 12-month fiscal deficit has narrowed. The U.S. Markit service industry PMI has also dropped to 50 again. near the line.andThe domestic political division in the United States is likely to prevent the U.S. fiscal deficit from remaining high next year.The removal of Republican House Speaker McCarthy reflects that the two parties have less and less consensus on the content of fiscal spending, and it has reached an irreconcilable level. Part of the market believes that next year’s U.S. election will lead to Biden continuing to maintain high fiscal spending to stabilize the economy. However, for the Republican Party, opposition to additional spending bills in the election year is more likely to affect the outcome of the election.
As an important part of the service industry, real estate is increasingly affected by high interest rates. The current 30-year mortgage interest rate in the United States has risen to 8%, the highest level since 2000. U.S. existing home sales have continued to weaken since February 2023, with monthly sales falling below four million units, which is close to the lows during the subprime mortgage crisis. As fiscal efforts are limited and rising interest rates gradually reveal their reflexive effects on the economy, there is a high probability that the service PMI will fall back into the contraction range, putting downward pressure on the U.S. dollar.
Geopolitical conflicts do not seem to be able to provide more support for the dollar.The dollar began to rise significantly after the Russia-Ukraine conflict broke out last year. The core reason was that soaring oil prices raised energy costs and weakened the competitiveness of European manufacturing. Since the current Palestinian-Israeli conflict broke out, oil prices have weakened. The United States has intervened in the Palestinian-Israeli conflict to a much greater extent than the Russia-Ukraine conflict, and a new round of aid to Ukraine has been put on hold.Restricted fiscal expansion makes the United States unable to do anything else, and its global leadership position will naturally be weakened.
The asset mix of U.S. stocks and bonds will often cause the financial conditions index to tighten significantly and generally break through100After this important threshold level, the Fed’s stance on monetary policy will gradually turn dovish, and the dollar will begin to weaken.Goldman Sachs’ Financial Conditions Index FCI consists of five sub-items: long-term interest rates, credit spreads, exchange rates, stocks and short-term interest rates. The higher the index, the tighter the financial conditions. Driven by the rise in long-term bond yields and the fall in U.S. stocks, the financial conditions index began to break through 100 at the end of September, once rising to 100.7, a new high for the year, approaching the high of 100.9 in the fourth quarter of last year. Although U.S. bond yields have fallen since the end of October and major U.S. stock indexes have rebounded significantly from their lows, the financial conditions index remains in a tight range above 100. Judging from historical experience, once the financial conditions index reaches the threshold of 100 during an interest rate hike cycle, the Fed’s attitude will soften somewhat, so the US dollar generally begins to peak and fall after that, such as in December 2018 and 2022. September. After the current financial conditions index exceeded 100, the rhetoric of Fed officials since October has gradually shifted from the previous hawkish stance to dovish. Some officials believe that policy interest rates have reached restrictive levels, and the sharp rise in long-term bond yields itself has reached the point of another interest rate hike. Effect.
Compared with U.S. bond yields, because the U.S. dollar index is more forward-looking and can better represent the flow of funds in the global market, the U.S. dollar index andAThe correlation between stocks and Hong Kong stocks is higher than U.S. bond yields.After foreign holdings accounted for more than 1% of the circulating market value of A-shares in 2017, the direction of the U.S. dollar index has basically remained consistent with the risk premium of A-shares. For example, in the fourth quarter of 2017, U.S. bond yields fluctuated up to nearly 3%, while the U.S. dollar index continued to fall below 90. During this period, A-shares and Hong Kong stocks showed an upward trend, with the CSI 300 and Hang Seng Index rising by as much as 14% and 20% respectively. Until January 2018, the U.S. dollar index bottomed out. During the period when the U.S. dollar index strengthened since late July this year, the cumulative outflow to the north has exceeded 170 billion.Once the U.S. dollar index trends downward, it will be difficult for U.S. bond yields to fall significantly(U.S. bond yields generally do not rise significantly when the U.S. dollar declines.AHong Kong stocks and Hong Kong stocks are also expected to bottom out driven by global liquidity.