After the Federal Reserve's aggressive rate cut of 50 basis points in September, it now appears to have "fooled the whole world" with its once ultra-dovish stance...

This Wednesday, following the Federal Reserve, the Reserve Bank of New Zealand also increased its rate cut to 50 basis points, making it the second G10 central bank to cut rates by this unconventional margin. However, as central banks around the world, led by the Federal Reserve, have begun to cut rates at an increasingly faster pace, the doves at the Fed seem to be gradually "running out of steam"!

Last Friday's significantly better-than-expected U.S. non-farm payrolls data quickly cooled market expectations for aggressive rate cuts by the Federal Reserve. Speculations about the direction of the Fed's November interest rate meeting have shifted from whether it will cut rates by 25 or 50 basis points to whether the Fed will skip the November rate cut altogether. Recent speeches by Federal Reserve officials have also seen the "dove flavor" diminishing day by day, while the sense of "caution" has become increasingly strong—phrases like "balanced," "data-dependent" have become the officials' mantras.

Advertisement

This has directly led to several noticeable shifts in the global financial markets compared to the third quarter:

The "anchor of global asset pricing," the 10-year U.S. Treasury yield, has risen above 4%, and the strong dollar has noticeably "awakened" over the past week...

Market data shows that the ICE U.S. Dollar Index touched its highest level in eight weeks this Wednesday. The Bloomberg Dollar Spot Index has risen for eight consecutive trading days—the longest streak since April 2022.

On Wednesday, the dollar rose against all G10 currencies, with the New Zealand dollar, which experienced a central bank rate cut that day, showing a particularly significant increase!

Barclays foreign exchange strategist Skylar Montgomery Koning said, "When the September labor market report was released, the market sentiment was still very bearish on the dollar. (Now) the continued unwinding of dollar bearish positions may further support the dollar."

According to two European-based traders, local companies have been buying dollars against the pound in recent days, while hedge funds continue to increase their long positions in dollars against the yen. Since the release of last week's non-farm employment report, euro bearish option structures have also been popular, and market sentiment ahead of next month's U.S. elections is the most optimistic for the dollar in over three months. Over the past 11 days, the premium for holding dollar call options against major currencies has increased for 10 days.

Neil Jones, Managing Director of TJM Europe, said this is a continuous and gradual process of reducing dollar short positions. He added that long-term investors in Asia and the Middle East are selling euros and pounds because they have abandoned their long-standing bullish views on these currencies.From the pricing in the interest rate futures market, traders currently anticipate that the Federal Reserve will cumulatively cut interest rates by about 44 basis points before the end of the year, significantly lower than the nearly 70 basis points at the beginning of this month. At the start of this month, the market was once indecisive about whether the Federal Reserve would cut rates by 25 basis points or 50 basis points next month, but now the certainty of a rate cut is also not a foregone conclusion—the probability of holding steady next month has reached about 17%.

U.S. Treasury yields across various maturities also rose further on Wednesday. By the end of the New York trading session, the 2-year U.S. Treasury yield increased by 6.6 basis points to 4.03%, the 5-year U.S. Treasury yield increased by 7.3 basis points to 3.924%, the 10-year U.S. Treasury yield increased by 6 basis points to 4.077%, and the 30-year U.S. Treasury yield increased by 5.2 basis points to 4.346%.

Currently, the U.S. 10-year Treasury yield, known as the "anchor of global asset pricing," has reached its highest level in seven weeks, while the two-year U.S. Treasury yield, which is more sensitive to interest rate expectations, has risen in five out of the past six trading sessions.

What exactly is the Federal Reserve doing?

In fact, many investors may currently be puzzled about what the Federal Reserve is "doing," not quite understanding why everything has changed just a few weeks after an aggressive rate cut. In reality, the Federal Reserve itself may have significant disagreements within its ranks regarding the decision to cut rates by 50 basis points last month—the Federal Reserve minutes released on Wednesday have vividly revealed this point.

As early as three weeks ago, Caixin had warned investors in a forecast article titled "Really Think There's Only One Dissenting Vote? Federal Reserve Officials Opposing a Large Rate Cut May Be Far More Than Imagined" that there might be more than just "Hawk King" Bowman opposing the decision to cut rates by 50 basis points last month, and ultimately, the core message revealed by Wednesday's meeting minutes is precisely what we asserted three weeks ago.

The minutes released on Wednesday show that:

"The vast majority" of participants agreed to lower the federal funds rate by 50 basis points, yet "some participants" indicated that a 25 basis point rate cut would have been a better choice. What's more, there were also some "50ers" who publicly sat on the fence, expressing that they could have actually supported a decision to cut rates by 25 basis points.

Those who believe that a 25 basis point rate cut is more reasonable emphasized that adopting an unexpected rate cut pattern is inconsistent with the Federal Reserve's intention to gradually lower policy rates. At the same time, the economic data itself only supports a rate cut but does not point to an outsized rate cut.

Pantheon Macroeconomics Senior U.S. Economist Oliver Allen wrote that the minutes "paint a somewhat cautious picture of the Federal Reserve's attitude towards rate cuts" and "indicate that unease about a 50 basis point rate cut is not limited to Governor Bowman alone."LH Meyer/Monetary Policy Analytics economist Derek Tang pointed out, "The hawkish tone was, 'If this (a 50 basis point rate cut) is what you want, we'll give you that.' However, many people at the meeting actually preferred a 25 basis point rate cut. Regarding the phrase 'the vast majority' supporting a 50 basis point rate cut in the meeting minutes, Tang believes this is also a relatively 'rare expression.' If there was truly a high degree of internal consensus, the Fed would typically state that almost everyone supported this point.

It's worth mentioning that from the dot plot released after the Fed's September meeting, we can also roughly infer the number of 'some' participants who indicated that a 25 basis point rate cut would have been a better choice, as well as the approximate number of fence-sitters.

The latest interest rate dot plot released with the September decision showed that as many as seven officials expected the target range for the federal funds rate to be between 4.5% and 4.75% by the end of the year, indicating that they anticipated the Fed would only cut rates by 25 basis points in one of the last two meetings of the year. The dot plot even had 'two dots' (two decision-makers) who believed that the Fed's policy rate would not change at all in the second half of this year.

It's not hard to predict that these two most hawkish dots would almost certainly believe that a 25 basis point rate cut should have been implemented last month, and among the second layer of seven dots, several would also fall into the 'some' category of hawkishness.

In any case, three weeks after the Fed's September decision, people actually don't need to pay too much attention to these Fed minutes anymore, because now it seems that whether the Fed will cut rates in November has become a question. As for whether the Fed 'deliberately' feigned a dovish stance to deceive the world, or whether it was also 'deceived' by U.S. data, or whether there are more 'considerations' before the upcoming election this year, perhaps only Powell himself knows...

On the economic data front, what we currently want to share with investors is an interesting and even dramatic chart, which is Citi's U.S. Macroeconomic Surprise Index. This index measures the difference between the actual performance of U.S. economic data and expectations. It's not hard to see that before the Fed's September decision, this index had been in negative territory for a long time, which directly fueled the continuous升温 of the market's aggressive rate cut expectations...

But in the past few weeks, the index has magically and rapidly turned positive and reached a new high in over half a year. It's important to note that the permeation effect of Fed rate cuts won't be that fast, and most of the current data are also from at least September or earlier.

So, has Powell himself also been 'tricked' by the differential performance of U.S. data before and after the rate cut...

Finally, investors need to be reminded that the 'big test' of the U.S. monthly CPI is coming tonight!