Guotai Junan International released a research report saying that the Federal Reserve's interest rate resolution tonight is likely to result in a “different story” situation, and the market is unlikely to form a unanimous expectation as to whether interest rates will be cut in March. To a certain extent, this means that the market will have a “garbage time” between interest rate meetings. The best synchronized indicator for the 10-year US Treasury interest rate trend would be GDPNow. In other words, investors need to continuously compare, form, and break opinions based on economic patterns until the Federal Reserve unravels the mystery in March. Currently, there is still a high probability that the Federal Reserve will begin the process of cutting interest rates in March. This also means that interest rate cut transactions have once again become the mainstream trading theme in the market after a break between interest rate meetings.

Guotai Junan International's views are as follows:

The US Treasury spoiled the refinancing plan for the first half of 2024 before the first interest rate meeting in 2024.

The overall plan is more “dovish” than previously anticipated, which also means that the supply pressure on US debt has weakened marginally. Specifically, in the first quarter of 2024, the US Treasury issued 760 billion US dollars of treasury bonds, a decrease of about 55 billion US dollars from the previous forecast of 816 billion US dollars. The main reason for the decline in the scale of debt issuance compared to expectations is that the US Treasury's TGA account balance is higher than expected. At the same time, expected improvements in fiscal revenue have also reduced deficit pressure.

The performance of the US economy that exceeded expectations in the fourth quarter of last year confirmed the improvement in fiscal conditions to a certain extent.

To a large extent, there is positive or negative feedback between finance and the real economy, which also seems to mean that there is no need to be overly pessimistic or optimistic about the US economy — because fiscal policy will be “countercyclical,” and as the economy improves and interest rates rise, the Treasury's motivation to issue bonds will also decline; conversely, as interest rates decline, the Treasury not only has a better incentive to issue debt (supports the economy), but also has a better issuance window. If you understand the relationship between finance and the economy from this perspective, you will find that excessive one-sided interest rate expectations on US bonds may not be in line with actual changes in the economy. More importantly, the “landing” pattern of the US economy, where the market is more entangled, may be more complicated than expected. Because when the price of the bond market declines or even declines — which shows an inversion of the interest rate curve, the Treasury can support economic development by issuing large numbers of treasury bonds — especially long-term treasury bonds — and in fact outweigh the risk of the US economy's recession. Therefore, when we discuss the trend of the US economy, it seems that the hardest answer to get is about the state of “landing.” It is also because it concerns the fundamental interests of all investors and policy makers that it forms a paradox that the more eager for answers and the more difficult it is to solve.

From this perspective, the role played by the Federal Reserve from the monetary policy side will be very interesting. When the economy is rising and inflation is rising, the Federal Reserve tends to tighten; when the economy is declining and inflation is declining, the Federal Reserve tends to ease. However, with the current economic upturn compounded by declining inflation, the Federal Reserve is likely to hesitate. In the last pattern — a downturn in the economy and an increase in inflation — the Federal Reserve will throw the pot on the treasury.

Based on the above discussion, we will find that tonight's interest rate resolution by the Federal Reserve will likely result in a “different talk” situation, and the market is unlikely to form a unanimous expectation as to whether interest rates will be cut in March. To a certain extent, this means that the market will have a “garbage time” between interest rate meetings. The best synchronized indicator for the 10-year US Treasury interest rate trend would be GDPNow. In other words, investors need to continuously compare, form, and break opinions based on economic patterns until the Federal Reserve unravels the mystery in March. Currently, there is still a high probability that the Federal Reserve will begin the process of cutting interest rates in March. This also means that interest rate cut transactions have once again become the mainstream trading theme in the market after a break between interest rate meetings.

Of course, the topic that the Federal Reserve will directly care about is about downsizing.

Since large-scale short-term bond issuance has absorbed a large amount of cash liquidity from the market, the Federal Reserve is likely to present a roadmap to slow downsizing tonight and use this to pave the way for a process of interest rate cuts that may begin in the future.

As far as the US dollar is concerned, a relatively neutral interest rate decision seems unlikely to have an excessive unilateral impact on the US dollar exchange rate.

Currently, the main factor affecting the US dollar is still the euro. Due to the weak performance of the European economy, the euro recently showed an adjustment trend; also because interest rate cut transactions involving the Federal Reserve have cooled down, the US dollar has gradually begun to gain strength. Since tonight's interest rate meeting makes it difficult to provide too much unilateral guidance to the market, the euro will continue to be weak, and the US dollar index is likely to rise steadily.