[Interest rate cut 2024] How will the US rate cut affect the market? With US meeting schedule

On September 18, the Federal Reserve announced a 50 basis point rate cut, the first rate cut in over four years, lowering the target range to 4.75% to 5%. After the rate cut, the three major U.S. indices soared, with the S&P 500 index and the Dow Jones index reaching historic highs, while U.S. bonds experienced short-term volatility on the basis of the previous rate cut expectations.

What impact will the U.S. rate cut have on the stock market? How much investment space is there really for buying long-term bonds with the rate cut? How to seize investment opportunities?

What is a rate cut?

Rate cut, also known as interest rate reduction, refers to the action of a country's central bank to lower the domestic benchmark interest rate. It is the core of the 'quantitative easing monetary policy.' Simply put, a rate cut means that banks/financial institutions can provide loans to businesses and individuals at lower borrowing costs, offering low loan rates to help them access capital.

Why did the U.S. cut interest rates? The Federal Reserve's previous interest rate hikes were aimed at controlling high inflation. Currently, the U.S. core inflation has fallen to a reasonable level, achieving the previous goal of interest rate hikes. To control the unemployment rate and promote economic growth, the Fed's monetary policy needs to shift, hence the decision to cut rates.

Interest rate cuts in 2024 | US interest rate schedule.

The Federal Open Market Committee (FOMC) holds 8 regular meetings every year, below is the specific schedule for the Federal Reserve in 2024.

From the chart above, we can see that after the interest rate cut on the first day of September, the Fed has two more meetings in November and December. The market expects both meetings to cut interest rates by 25 basis points or more each time, taking the US benchmark interest rate down another level, and continuing the rate-cutting cycle from 2025 to 2026, ultimately lowering rates to around 3%.

What impact does the Fed's interest rate cut have on various global assets?

Is the Fed's interest rate cut good or bad for various global assets? We can understand the impact of interest rate cuts on asset prices through the following chart. In general, rate cuts will promote economic growth, be negative for the US dollar, and be positive for US stocks, bonds, gold, crude oil, and other assets.

What impact does the US interest rate cut have on Hong Kong?

On the second day of the Fed's interest rate cut announcement (September 19), the Hong Kong Monetary Authority announced a 0.5 basis point cut in the benchmark interest rate. What impact will the rate cut have on Hong Kong? It is mainly divided into three aspects:

• Bullish on the Asian stock market.

  Bullish for Hong Kong stocks: As the Hong Kong dollar is pegged to the US dollar, any US interest rate cut will directly affect Hong Kong's interest rates, thereby improving Hong Kong's cost of funds and liquidity, benefiting the Hong Kong stock market.

  Bullish for mainland A-share market: With the US dollar maintaining a strong trend in recent times, causing a substantial inflow of funds into the US; under the impact of interest rate cuts, the interest rate differential between the US and the Asian region will narrow, potentially prompting some funds to flow back into the Chinese market.

• Bullish on the real estate market.

  Real estate is one of the industries directly benefiting from interest rate cuts (also a positive for related stocksRelated stocks), as a rate cut will help reduce the cost of buying a house. However, whether property prices will rise again depends on more macroeconomic factors.

• Bullish on the operation of small and medium-sized enterprises.

  Interest rate cuts can to a certain extent drive the economy, benefiting the operation and development of enterprises. In addition, lower borrowing costs also benefit enterprises in expanding their business or purchasing more equipment needed for production.

Understanding the expectations of US interest rate cuts

US interest rate cuts have always been a topic of great concern to investors, with annual discussions on whether there will be 'big cutting opportunities?' 'When will the rate cut happen?' etc. Consumer price index (CPI) and non-farm payrolls are key economic indicators determining the possibility of interest rate cuts. We can predict the likelihood of changes in the interest rate decisions of the Federal Reserve in the future based on historical interest rate data and 30-day US federal fund futures price analysis. However, the calculation process is complex, not every investor can easily calculate.

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With the Federal Reserve opening the way for interest rate cuts, what impact will it have on the stock market? How to seize investment opportunities?

Generally speaking, interest rate cuts are used to stimulate the economy during economic downturns or slowdowns, which also benefits the stock market. Looking at the market situation, during rate cuts, utilities industry,REITsDuring the interest rate cut period, utilities, REITs, and other stocks with relatively fixed dividend income are more advantageous because their dividend rates are more attractive than bank deposit rates; and real estate stocks may also be relatively advantageous due to the possible rise in property prices caused by the interest rate cut.

In addition, interest rate cuts will ease the financial pressure on biomedical stocks and small-cap stocks with higher financing costs, and will also boost the valuation of more growth-oriented technology stocks.

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The impact of US interest rate cuts on US Treasuries

Historical data shows that during the interest rate reduction cycle, when the Fed announces interest rate cuts, the face interest rate of newly issued US Treasuries will decrease, generally producing the following effects:

• Prices rise.

• Yields fall.

US bond prices have an inverse relationship with benchmark interest rates.

How to invest in US bonds during interest rate cuts.

Data shows that after eight interest rate cuts, the prices of short-term and long-term US bonds rose, with even more significant gains for long-term bonds that are more sensitive to interest rates.

• Hold until maturity.

• Capture price differences by buying bonds when prices are low and selling when prices rise to earn differential profits. Long-term bonds offer greater potential return opportunities due to greater price fluctuations.

Performance of US Treasury Bonds (%) during the rate-cutting cycle

Further reading:How to invest in bonds during an interest rate cut cycle

Further reading:How to invest in TLTW during an interest rate cut cycle?

How to buy US bonds on Futu.

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1. Based on the historical data above and the assumption of the linear relationship between interest rates and prices mentioned in the duration model, if the long-term neutral interest rate is expected to fall to 2.5 basis points, assuming the risk-free rate is expected to fall to 2.5 basis points in the long term, the current rate is expected to fall by an additional 1.3 basis points. This means that investments in long bonds like TLT could yield around 25%. However, it should be noted that based on the latest dot plot assumptions, it may take until the end of 2026 or longer for the rates to reach this level, resulting in an approximate annual compounded return of about 9% for TLT over this 2.5-year period.(Register Now)

2. Assuming investors are not concerned about the above risks, the conclusion would be that investing in bonds currently offers relatively safe and reasonable returns, which are more attractive compared to seeking short-term returns through fixed-term deposits.

3. After accessing the bond homepage or conducting a search, select the bond you want to trade, and then click on 【Buy】 on the bond details page.

4. Enter the desired face value and expected purchase price, and place an order based on the 'ask price for reference'. (This price is only a 'reference price', and the actual executable fill price may differ.)

5. Click 'buy' - enter the trading password, after the order is successfully submitted, please wait patiently for the trade matching, and the fill price will not exceed the order price.

Further reading:How to invest in digital currency during a rate cut cycle?