Main points of report

At 23: 00 Beijing time on March 3, 2020, the Federal Reserve suddenly announced that it would cut the target range of the federal funds rate by 50 basis points to 1.00- 1.25%, and at the same time cut the excess reserve ratio (excess reserve rate) by 50 basis points to1. This interest rate cut adjustment is the first rate cut by the Federal Reserve in 2020, and it is also the fourth rate cut operation since last year. The first three interest rate cuts occurred in July, September and 10 last year. What is more noteworthy is that this interest rate cut is a sudden emergency interest rate cut, and the rate cut is also very large, reaching 50BP. How to treat this special interest rate cut, we think there are five main points worthy of attention:

Point 1: Review of the history of the Federal Reserve's emergency interest rate cut: Looking back, there have been nine emergency interest rate cuts in the history of the Federal Reserve since 1994. Judging from the previous eight emergency interest rate cuts, the reason for emergency interest rate cuts is generally to encounter major risks. The last emergency interest rate cut dates back to the economic crisis in June 2008.

Viewpoint 2: Why did the Fed cut interest rates urgently? From the reasons, the rapid spread of the COVID-19 epidemic around the world is the direct cause of the Fed's emergency interest rate cut. It is only two weeks before the meeting in March to take action, which reflects that the risks brought by the current COVID-19 epidemic are urgent and serious.

Point 3: Analysis of the US economy and epidemic situation: In terms of the US economic situation, the current US manufacturing industry is facing a situation of weak production and demand. Overall, core inflation in the United States remains weak. In terms of employment, the non-farm employment data of the United States in June 5438+ 10 was slightly better than expected, but the unemployment rate rose slightly and the manufacturing industry remained sluggish. Judging from the development of overseas epidemic situation, the epidemic situation in COVID-19 has escalated globally, affecting many countries, among which South Korea, Italy and Iran are the most serious. The escalation of the COVID-19 epidemic in the United States, strict diagnostic conditions and high testing costs may lead to the underestimation of the number of confirmed cases.

The fourth point: global market impact: US stocks fell and US debt broke 1! Judging from the trend of large-scale assets after the Fed's emergency interest rate cut in the past, although the purpose of the Fed's interest rate cut policy is to stimulate the economy, the emergency interest rate cut itself usually means that the situation is grim and the market sentiment is more inclined to avoid risks. Therefore, after the emergency interest rate cut, US stocks and US dollars will be more bearish in the short term, and US debt will strengthen accordingly. Compared with the rapid fermentation of COVID-19 epidemic abroad, the domestic COVID-19 epidemic tends to be stable, and the improvement of global liquidity brought by the Federal Reserve's interest rate cut is more beneficial to domestic assets. From the perspective of risk factors, the epidemic situation is still the main risk point that affects the current market trend. The uncertainty caused by the COVID-19 epidemic has deepened, which may have a certain impact on the global economic recovery. Therefore, from the trend of domestic assets, the impact on the domestic stock market remains to be seen, which is obviously beneficial to the domestic bond market.

Viewpoint 5: Outlook of domestic monetary policy: In terms of domestic monetary policy, the Fed unexpectedly cut interest rates to cope with the impact of the epidemic, and the domestic monetary policy space was further opened. In March, the domestic central bank continued to cut interest rates with a high probability. At the same time, the open market operation this morning deserves high attention. Considering the suddenness of interest rate cuts and referring to the experience of global central banks in stabilizing the market in 2008, domestic central banks may also choose to follow up in time. Generally speaking, interest rates will enter a new downward phase in March. We believe that the target range of 10-year national debt yield to maturity is 2.4%~2.6%.

event

At 23: 00 Beijing time on March 3, 2020, the Federal Reserve suddenly announced that it would cut the target range of the federal funds rate by 50 basis points to 1.00- 1.25%, and at the same time cut the excess reserve ratio (excess reserve rate) by 50 basis points to1. This interest rate cut adjustment is the first time that the Federal Reserve cut interest rates in 2020 and the fourth time since 2008. The first three interest rate cuts occurred in July, September and 10 last year. What is more noteworthy is that this rate cut is a sudden emergency rate cut, and the 50BP rate cut is also consistent with the previous emergency rate cut by the Federal Reserve.

main body

The first point: the historical review of the Federal Reserve's emergency interest rate cut.

Looking back at history, since 1994, there have been nine emergency interest rate cuts in the history of the Federal Reserve. Judging from the previous eight emergency interest rate cuts, the reason for emergency interest rate cuts is generally to encounter major risks. The last emergency interest rate cut dates back to the economic crisis in June 2008. Judging from the history of the Fed's emergency interest rate cuts, the Fed has taken nine emergency interest rate cuts since 1994, namely1April 994,1June 998, June 20001year, April and June. Judging from the reasons for taking emergency interest rate cuts, the reason why the Fed chose to take emergency interest rate cuts is generally that it has encountered a major risk event. The last time the Federal Reserve cut interest rates in an emergency was on June 8, 2008, when the collapse of Lehman Brothers triggered people's worries about the economic recession. Since then, the Fed has not taken similar actions for 1 1 year, so this time the Fed announced an emergency interest rate cut.

Viewpoint 2: Why did the Fed cut interest rates urgently?

From the reasons, the rapid spread of the COVID-19 epidemic around the world is the direct cause of the Fed's emergency interest rate cut. It is only about two weeks before the meeting in March to take action, which reflects that the risks brought by the current COVID-19 epidemic are urgent and serious. Judging from the decision statement issued by the Federal Reserve for this emergency interest rate cut, the reason given by the Federal Reserve for the adjustment of monetary policy is that the current economic fundamentals in the United States are still strong, but the risks posed by coronavirus to economic activities are increasing. In view of these risks and the Fed's support for the maximum employment and price stability goals, the Fed decided to take this action. At the same time, the Fed also said that the Committee is closely monitoring the development of the situation and its impact on the economic prospects, and will use other tools and take appropriate actions to support the economy. Judging from the voting situation of this decision-making Committee, the members unanimously passed this emergency interest rate cut. Only about two weeks before the interest rate meeting in March, the Federal Reserve suddenly took action, and the members were highly unanimous, reflecting the urgency and seriousness of the risks brought by the current COVID-19 epidemic. Judging from the rate cut, the interest rate range of 50BP has been lowered this time, which is also consistent with most previous emergency interest rate cuts. Judging from the Fed's speech after the announcement of Powell's resolution, Powell mentioned the interest rate cut to help the US economy remain strong in the crisis. Monetary policy is an important tool to boost the economy, but a rate cut is not enough to solve the supply chain problem, and the financial authorities may provide support. At present, the Fed has not considered other measures, and interest rate cuts can avoid the tightening of the financial environment. Meanwhile, US President Donald Trump said that he is working with Congress to pass the $8.5 billion COVID-19 emergency appropriation bill. Judging from Powell and Trump's speeches, after the emergency interest rate cut, the Fed's monetary policy may be further relaxed, and the fiscal policy may also cooperate. After Powell's speech, according to the market reaction, the market expected the Fed to cut interest rates again in the first half of this year at 72.3%.

The third point: analysis of American economy and epidemic situation

In terms of the fundamentals of the US economy, the PMI of the US manufacturing industry was lower than expected in February, and the new orders and output index dropped significantly. At present, American manufacturing industry is facing the situation of weak production and demand. The US February ISM manufacturing PMI index was 50. 1, with an expected value of 50.5 and a previous value of 50.9. The manufacturing PMI index was lower than expected. After a brief rebound in 5438+ 10, driven by the warm winter climate, the manufacturing PMI index fell below the decline value again, and the manufacturing boom fell again. From the breakdown data, new orders, output, prices and imports all dropped significantly in February, and the decline of new order index and output index also reflected the current situation of weak production and demand in American manufacturing industry.

In terms of inflation, overall, the core inflation in the United States is still weak. In June 2020, 5438+ 10, the inflation rate of core PCE in the United States was 1.63% year-on-year, and the previous value was 1.54%. Although it rose moderately from last month, it remained at a low level and still failed to reach the Fed's policy target of 2%. From the perspective of income, investment and consumption, the average weekly salary growth rate of non-agricultural enterprises in the United States is in a downward trend, which has dragged down the upward trend of core PCE; In 20 19, the growth rate of American investment declined, making it difficult to boost inflation by boosting aggregate demand; The consumption data is marginal, but the current consumption situation in the United States may not be enough to support the 2% inflation target. Overall, core inflation in the United States remains weak.

In terms of employment, the data of non-farm employment in the United States in June was slightly better than expected in 5438+ 10, but the unemployment rate rose slightly. The growth of non-agricultural employment is mainly contributed by the construction industry and service industry driven by the warm winter climate, while the manufacturing industry is still in a downturn. The monthly rate of non-agricultural employment in the United States increased by 225,000 1, the expected10.6 million, and the previous value10.45 million; The unemployment rate is 3.6%, the expected rate is 3.5%, and the previous value is 3.5%; The employment participation rate is 63.4%, the expected rate is 63.2%, and the previous value is 63.2%. The average hourly wage increased by 3. 1% year-on-year, expected to increase by 3%, and the previous value increased by 2.9%; The chain increased by 0.2%, expected to increase by 0.3%, and the previous value increased by 0. 1%. The growth of non-agricultural data in June 5438+ 10 was mainly contributed by the construction industry and the service industry, which were closely related to the weather because of the warm winter climate. However, the performance of the manufacturing industry was sluggish, and the number of newly-added employees continued the downward trend of 65,438+in February, and the number of employed people decreased by1.20,000.

The escalating epidemic situation, strict diagnostic conditions and high testing costs in COVID-19, USA may lead to the underestimation of the number of confirmed cases. As of March 3, the cumulative number of confirmed cases in COVID-19 reached 102, and the number of confirmed cases has increased rapidly since the end of February; The cumulative death and cure cases were 6 and 9 respectively, and many places in the United States have declared a state of emergency. Before February 26th, for the diagnosis conditions of suspected infected persons, the CDC's testing guidance was that patients "must have been to China, or had close contact with people who had been to China before receiving testing", and this standard was stricter, which may lead to the number of confirmed cases in the United States being lower than the true value. After the confirmed cases of "community transmission" appeared in northern California, the conditions for diagnosis in the United States were relaxed and the number of confirmed cases surged. In addition, the test cost of $3,600 may also cause some patients to give up the test because they can't afford it, resulting in underestimation of the epidemic data.

The epidemic in COVID-19 has escalated globally and spread to many countries. As of March 2, there have been confirmed cases in 64 countries except China. Among them, South Korea, Italy and Iran are the most serious, with more than 2,000 confirmed cases. Since February 22, the number of newly diagnosed coronary pneumonia in Italy has surged. As of March 3, the cumulative number of confirmed cases in Italy has increased to 2,502, and the cumulative death toll has increased to 79. The epidemic spread rapidly and escalated. Since February 20th, the number of newly diagnosed coronary pneumonia in Korea has increased rapidly. By the afternoon of March 3, the cumulative number of confirmed cases in Korea had reached 5 186, an increase of 974 cases over the previous day.

Viewpoint 4: In the global market outlook, US stocks fell and US debt broke 1!

Judging from the trend of large-scale assets after the Fed's emergency interest rate cut in the past, although the purpose of the Fed's interest rate cut policy is to stimulate the economy, the emergency interest rate cut itself usually means that the situation is grim and the market sentiment is more inclined to avoid risks. Therefore, after the emergency interest rate cut, US stocks and US dollars will be more bearish in the short term, and US debt will strengthen accordingly. Historically, the trend of large-scale assets is more downward after the Federal Reserve cut interest rates in the next few days. The reason behind this is that although the purpose of the Fed's interest rate cut is to stimulate the economy and prevent risks, the emergency interest rate cut itself usually means that the situation is grim. After taking emergency interest rate cuts, market sentiment tends to avoid risks, so the short-term impact on US stocks is more negative. The loose monetary policy of the Federal Reserve also brought the depreciation pressure of the US dollar. Under the influence of market sentiment tending to hedge, the impact on US debt is more favorable. As a safe-haven asset, U.S. debt strengthened and its yield declined. After the announcement of the Federal Reserve's emergency interest rate cut resolution, as of 4: 00 Beijing time on March 3, the Dow Jones Industrial Average reported 26,020 points, down more than 700 points or 2.77% from the opening. The yield of 10-year US bonds once fell below 1%, and the US dollar index was reported at 97. 16, down 0.42% from the opening.

Compared with the rapid fermentation of COVID-19 epidemic abroad, the domestic COVID-19 epidemic tends to be stable. From the perspective of domestic asset prices, the improvement of global liquidity brought about by the Fed's interest rate cut is a favorable factor. Judging from the overseas epidemic situation, many countries have taken some decisive measures in the early stage of responding to the COVID-19 epidemic, but the results show that there is no effective prevention. For example, Italy is the first EU country to enter a state of emergency, and it is currently facing the coordination problem of central and local prevention and control implementation; South Korea once achieved zero growth from February 12 to February 15, but then the secondary infection stage increased rapidly with the spread among domestic people. Judging from the situation in these countries, although the imported cases are strict, the mutual transmission between people in China has broken out relatively quickly, and the virus is highly contagious, which has aggravated the concerns of the global market. Compared with the domestic epidemic situation, the current domestic epidemic situation of COVID-19 tends to be stable. Therefore, under the background that the epidemic is on the rise overseas, the improvement of global liquidity brought by the emergency interest rate cut by the Federal Reserve is more conducive to improving investors' investment preference for domestic assets, and the improvement of global liquidity is a positive factor for domestic assets.

From the perspective of risk factors, the epidemic situation is still the main risk point that affects the current market trend. The uncertainty caused by the COVID-19 epidemic has deepened, which may have a certain impact on the global economic recovery. Therefore, from the trend of domestic assets, the impact on the domestic stock market remains to be seen, and the impact on the domestic bond market is more obvious. From the perspective of risk factors, the rapid spread of COVID-19 epidemic around the world is still the main risk point that affects the market trend. The Fed also pointed out that coronavirus poses an increasing risk to economic activities, which is one of the reasons for this emergency interest rate cut. Judging from the global economic recovery, the uncertainty caused by the COVID-19 epidemic continues to deepen, or it may have a certain impact on the global economic recovery. Therefore, judging from the trend of domestic large-scale assets, the impact on the domestic stock market remains to be seen. For the bond market, the current spread between China and the United States is still at a high level, and the Fed's emergency interest rate cut may further depress the yield of US bonds. From the perspective of spreads, the impact on the domestic bond market is relatively more obvious.

? Fifth point: Outlook of domestic monetary policy.

For domestic monetary policy, the Federal Reserve unexpectedly cut interest rates to cope with the impact of the epidemic, and the domestic monetary policy space was further opened. Against the background of the continuous spread of overseas epidemic, the fermentation of pessimistic economic expectations and the sharp adjustment of the capital market, the Federal Reserve urgently lowered the target range of federal funds interest rate and excess reserve interest rate by 50bp to cope with the economic uncertainty brought about by the epidemic. After the Federal Reserve announced a rate cut, the UAE central bank also cut interest rates by 50bp, and the money market also reflected the expectation that both the European Central Bank and the Bank of England would cut interest rates in March. It is foreseeable that more countries will follow suit and enter the interest rate reduction channel. The further easing of global monetary policy has opened up a space for domestic monetary policy: (1) The COVID-19 epidemic has gradually developed into a factor threatening global economic uncertainty, and international coordination should be strengthened in monetary policy to cope with risks. Earlier, the G7 Finance and Central Bank Governor said that the G7 Group is ready to take action at the necessary moment, and compared with European and American countries, the Bank of China has more room for conventional monetary policy easing; (2) After the Federal Reserve cut interest rates, 10 US debt approached 1%, the spread between China and the United States continued to widen, and the RMB exchange rate also strengthened significantly, which did not significantly restrict domestic monetary policy easing and international coordination; (3) The emergency interest rate cut by the Federal Reserve by 50bp reflects that the Fed's estimation of the impact of the epidemic is pessimistic. With the global spread of the epidemic, the uncertainty of the global industrial chain intensifies the uncertainty of domestic economic recovery. In the policy easing channel with steady growth and stable employment as the primary goal, the early monetary easing is better than the later monetary easing. In addition to targeted quantitative support tools, price tools should also play a role. We believe that the Bank of China will continue to cut interest rates in March, or may follow the Federal Reserve to cut interest rates this morning.