Fed's Decision on 18th Sep 2024 - The long awaited "Fed pivot" has officially begun! ...
1. Fed cuts interest rates by 50 bps (FFTR ranges from 4.75% to 5.00%) for first time since 2020 ... For those asking, 105 out of 114 economists were wrong (in expecting 25bps).;
2. Fed sees 2 more 25 basis point rate cuts in 2024 (8th Nov &19th Dec). So FFTR range will become 4.25% to 4.50% by end-2024;
3. Fed expects 100 bps of rate cuts in 2025, so FFTR range will become 3.25% to 3.50% by end-2025; and Fed sees 50 bps of cuts in 2026, although there is increased uncertainty regarding this forecast.
Sparc Capital's Perspective:
1. Declining Money Market Fund Returns:
The returns on money market funds (in both USD and HKD) have been on a downward trend and are expected to decrease further. We recommend considering the Sparc Mortgage Income Fund for better returns.
The Hong Kong property market may soon experience positive developments, particularly with the anticipated cut in the Prime rates.
Just In: HSBC will cut best lending rate by 25 basis points to 5.625% per annum in Hong Kong from 20th Sep 2024 (1st time since 2019!). HSBC will also cut savings rate for its Hong Kong dollar savings deposits by 25 basis points.
2. Interest Rate Projections:
If Fed maintains a Federal Funds Target Rate (FFTR) around 3% by end-2025, it suggests that a long-term yield of 4-4.5% for longer maturities is more realistic. The current long-end yield being below 4% appears overly optimistic, indicating that the market may have priced in too much too soon. Following a 50 basis point cut by the Fed, both the 2-year and 10-year yields, along with 10-year real yields, increased on that day, signaling potential market adjustments.
3. Beware of Volatility: We are cautious regarding long-dated bonds at current yield level given the potential for economic shifts associated with both a mild recession and the upcoming presidential election, which are likely to create volatility and affect investor behavior in the bond market.