The Zhitong Finance App learned that Zhang Shiqi, head of the Wealth Strategy and Analysis Department of the Bank of China Hong Kong (02388), said that the market is watching the inflation data to be released by the US on Wednesday. Currently, the market expects the core CPI increase to fall back to 3.7%, while housing costs, which account for nearly 30% of the index, continue to fall. It is expected that even if inflation is repeated, it will gradually move towards the central bank's target level, so cutting interest rates during the year is still the general direction. If the core CPI does not fall as expected by the market, I believe it will also delay the time the market expects interest rate cuts, or cause fluctuations in the investment market. However, there are still two sets of inflation data released until the June interest rate meeting. April and May can be called an observation period for the Federal Reserve, and the volatility of this period cannot be ignored.

However, Zhang Shiqi believes that with moderate economic growth and a gradual decline in inflation, when the Federal Reserve starts cutting interest rates, it is expected that asset prices will be supported, so the fluctuation during this observation period will bring investors an opportunity to enter the market. However, before it is difficult to determine when the Federal Reserve actually cuts interest rates, investors should add investment instruments to their portfolios that can hedge high interest rates, including short-term corporate bonds and income instruments such as high-yield stocks, to mitigate the impact of waiting for late interest rate cuts on asset prices.

As to whether the US can start cutting interest rates this year, Zhang Shiqi believes there are two main factors why the market feels that interest rate cuts are getting farther and farther.

First, different Federal Reserve officials are managing the market's expectations that interest rate cuts will begin. Recently, various Federal Reserve officials have reiterated that the timing of interest rate cuts depends on progress in containing inflation. As can be seen from their statements, many officials are taking precautions against future inflation trends and expressed hope to see more data on declining inflation before starting to cut interest rates. Some officials have even said that if progress in curbing inflation stalls, especially if the economy remains strong, then interest rate cuts may not be necessary this year. Of course, the most important thing is that the chairman of the Federal Reserve mentioned waiting to see more clear signs of declining inflation before cutting interest rates.

Second, US data shows that the job market is still resilient. The number of new non-farm payrolls in the US reached 303,000 in March, the highest in nearly a year. The performance exceeded expectations, while the unemployment rate fell slightly to 3.8%.

Affected by these two factors, interest rate futures show that the market's current expectations for interest rate reduction opportunities in June have dropped to around 50%, while the chance of interest rate cuts in July has also fallen to 80%. At the same time, the annual decline is expected to be smaller than the 0.75% forecast in the March interest rate bitmap. This means that the market no longer has 100% confidence that the Federal Reserve will cut interest rates by 0.25% 3 times this year.

Interest rate cuts seem to be getting farther and farther away, but Zhang Shiqi believes that cutting interest rates during the year is still the general direction; however, we need to be very careful about the timing. In terms of economic growth, both manufacturing and service indices in the US are expanding. Furthermore, the forward-looking US Economic Advisory Committee Leading Index returned to positive growth for the first time since 2022, reflecting market optimism about the economy. If the Federal Reserve cuts interest rates too soon, it is not ruled out that companies will increase investment and cause inflation to rebound somewhat.

Zhang Shiqi said that investors can imagine that if the Federal Reserve starts cutting interest rates when it doesn't have much control over the downward trend in inflation, once inflation actually rebounds, the Fed will even need to raise interest rates again to control it. It is believed that this situation will bring more volatility to the investment market, so this explains why the Federal Reserve is so cautious about opening the door to interest rate cuts.