Hello, Tigers~
On the evening of the 25th, Federal Reserve Governor Michelle Bowman delivered a speech on monetary policy. Bowman stated that there would be no rate cuts in 2024 and that the Fed might delay rate cuts until 2025: “We are not yet at a point where it is appropriate to lower the policy rate. Given the risks and uncertainties in my economic outlook, I will remain cautious when considering future changes to the policy stance.”
The Fed’s latest dot plot from June shows that 4 members do not expect any rate cuts this year, 7 members expect one rate cut, and 8 members expect two rate cuts. No one expects three or more rate cuts this year, which is significantly more hawkish compared to the previous dot plot. In March, 10 members anticipated three or more rate cuts!
Given the lowering expectations for rate cuts, how should tigers looking to invest in U.S. Treasuries choose between short-term and long-term bonds?
In fact, now is a great time to invest in long-term bonds despite the unclear outlook for rate cuts.
Here are two reasons why:
1.Weaker-than-expected retail sales in may indicate reduced consumer spending
From a macroeconomic perspective, retail sales in May grew by 0.1% month-over-month, lower than the expected 0.2%. Core retail sales (excluding autos, gasoline, and building materials) grew by 0.4% in May, below the expected 0.5%, and April’s data was revised down by 0.4%.
Another data point shows that consumer credit and income growth are slowing.
The growth of revolving credit is slowing, and delinquency rates are rising, suggesting that households may be reaching their borrowing limits. Income growth is also slowing due to a weakening labor market, which will reduce households' ability to spend on discretionary goods and services. Survey data also shows that households are becoming increasingly pessimistic about their financial situation.
If consumer data continues to weaken, expectations for rate cuts may rise again.
2.Rising unemployment rate may prompt the Fed to cut rates
Fed Chair Jerome Powell’s macroeconomic analysis during the June FOMC meeting also revealed signs of economic weakness:
1.Powell raised the unemployment rate forecast for the next year and the year after;
It is believed that the Fed has noticed the weakening labor market and hinted that it will not stand by if it deteriorates rapidly. This suggests that if unemployment continues to rise and inflation does not spike again, the Fed might cut rates.
2.The Fed Might be making its last hawkish stand
The Fed’s stance remains data-dependent. With the economy still stable, the Fed might adopt a hawkish tone to counteract market expectations for rate cuts driven by this week’s disappointing macro data (CPI, PPI, and University of Michigan Consumer Sentiment Index).
In conclusion, the current U.S. economic data is not optimistic, and market expectations for rate cuts this year still exist. If consumer weakness and rising unemployment continue to impact the data in the short term, rate cuts could exceed most people’s expectations. Therefore, investing in long-term bonds now is a very wise choice!
To proceed, open the Tiger International app, click on [Wealth], then [US Treasury Bonds], and select bonds with a maturity period >36 months!
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