China Merchants Macro: Ten Questions and Ten Answers: A panoramic view of the impact of the Fed’s current round of Taper

The Fed’s new round of normalization of monetary policy is imminent. In light of the past, we refer to the previous round of Taper’s experience in 2013, and combined with the latest market conditions at the current stage. A panoramic view of the impact of the market and international capital flow situation.



Regarding the time point when Taper's influence took effect, looking back from 2013 to 2014, the Taper policy showed a strong "buy expectations, sell facts" effect, and the impact of tightening liquidity was mainly reflected in the expected stage. The current market may have basically digested the Fed’s expectations of Taper this year. The key to monetary policy expectations lies in the changes in the Fed’s interest rate hike expectations in 2022 and 2023. This expectation will be further strengthened in the short term.

Judging from the experience from 2013 to 2014, the expected strengthening of the Fed’s Taper through multiple channels will have varying degrees of impact on the prices of various assets in China and the United States. In contrast, the current round of Taper's negative impact on the financial market has already been reflected to a certain extent. Given that the global financial cycle is in an expansion phase rather than a contraction phase, and the global economic situation is relatively stable, it is predicted that the magnitude of this shock will be relatively milder than the global economic downturn from 2013 to 2014. However, in terms of time, considering the relatively strong fundamentals of the US economy and the potential strengthening of expectations for future interest rate hikes, the impact of the current round of the Fed’s monetary policy tightening has not yet been fully reflected.

Accordingly, in terms of exchange rate, it is expected that the US dollar index will continue to strengthen gradually, but will return to a long-term downward trend again thereafter; the RMB exchange rate will weaken, but the depreciation will be limited, and the RMB exchange rate index will remain high. In terms of international capital flows, the United States may experience a periodical decline in the scale of international capital inflows; and the downturn in the scale of my country’s international capital inflows may continue for another two months, and is expected to improve at the end of the year. In the bond market, it is expected that the yield of 10Y U.S. Treasuries still has room for further upside during the year, and the high point may be around 1.8%; the yield of my country's 10-year Treasury bonds will rise slightly in the next two months. In terms of the stock market, short-term US stocks may continue the overall adjustment and the style of outperforming growth in value; the expected tightening of the Fed’s monetary policy may have a negative impact on A-shares from the perspectives of risk sentiment and international capital flows.

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Ten Questions and Ten Answers: A panorama of the impact of this round of Taper

After several months of deliberation, the Fed's action to start a new round of monetary policy normalization is now at hand. We combine the historical experience of the Fed in 2013 when it initiated the previous round of monetary policy normalization and the adoption of Taper, as well as the latest situation at this stage. , Predict the impact of this Taper on the market.

1. What is the current prospect and pace of the Fed’s Taper process?

The August Jackson Hole meeting has set the Fed's Taper for the year. At the Jackson Hole Global Central Bank Annual Meeting on August 26-28, Powell’s speech showed that the time has come to mature in response to the Taper process, which is generally of concern to the market. ), the process of reducing debt purchases will be initiated within this year. It can be inferred from the speech that the Fed’s only concern for launching Taper is the spread of the Delta virus and the US economic situation. “If the economy develops roughly as expected, it may be appropriate to reduce the pace of asset purchases this year.” Transmit a clearer Taper signal. Since the Fed has previously promised to send a clear signal before policy adjustments, it is clear that Taper will be launched during the year.

The FOMC meeting on September 23 continued to focus on raising Taper expectations, while the interest rate hike expectations were also more hawkish. Powell said: The Fed plans to complete Taper in the middle of next year. This progress is one quarter ahead of market expectations, and it is also significantly shorter than the completion of the Taper process (10 months) from 2013 to 2014, indicating that the monthly bond purchases of the upcoming Taper may fall more than the previous one, and the policy attitude is biased towards hawks. In addition, the dot matrix chart has further boosted interest rate hike expectations: Compared with June, the number of committee members who believe that the policy rate needs to be raised in 2022 has increased by 2 again, reaching 9; the vast majority of committee members believe that the policy needs to be raised in 2023. Interest rate, the predicted interest rate center will remain 0.75%-1% (that is, raise interest rates twice).

Looking forward, three factors may support the launch of Taper during the year: First, the US labor market has improved significantly, and the September ADP employment data has also exceeded expectations. The opening of Taper does not require the labor market to return to full employment or perfection. Second, the high inflation has highlighted the contradiction between supply and demand, and the need to stimulate aggregate demand at the policy level has declined; third, the global epidemic and the US epidemic have entered a phase of decline, the pressure on the fundamental level has eased, and the monetary policy has eased Necessity declined.



To sum up, we believe that the Fed will formally announce the launch of Taper at the interest rate meeting on November 2-3, and it is almost a foregone conclusion that Taper will be launched within the year.

2. When will Taper's influence on the financial market manifest?

Taper can be divided into two stages: expected and actual operation. Looking back at the Fed's monetary policy normalization cycle from 2013 to 2018, the Fed's monetary policy return to normalization includes four steps of reducing QE-stopping QE-raising interest rates-reducing balance sheet. For the market, the Fed’s policy changes usually include the expected phase of the Fed’s communication with the market through forward-looking guidelines and the actual operation phase of the policy. There may be multiple iterations from expectations to actual operations. Among them, 2013.5-2013.11 is the Fed’s release. The stage of Taper signal, 2013.12-2014.9, is the stage of the Fed actually opening and completing the Taper.

The Taper policy shows a strong "buy expectations, sell facts" effect, and the impact of tightening liquidity is mainly reflected in the anticipation stage. Judging from the experience in 2013, we found that the expected phase of the Fed’s communication of Taper to the market resulted in a significant tightening of US dollar liquidity and significant adjustments in various asset prices. After the substantial reduction phase, asset prices returned to reflect With the latest information on fundamentals, the known and opened tapers no longer have a liquidity-tightening impact on the market.

The current market may have basically digested the Fed’s expectations for Taper this year. The key to monetary policy expectations may lie in the changes in the Fed’s interest rate hike expectations in 2022 and 2023. Comparing the market reaction of Jackson Hole’s annual meeting and the Fed’s meeting in September, it can be seen that although both meetings mentioned taper during the year, since Jackson Hole’s annual meeting proposed that taper is not related to interest rate hikes, it lowered interest rate hike expectations. It is interpreted as a dovish; and the policy interest rate for 2022-2023 reflected in the dot matrix of the September meeting of interest rates has risen, and the market is interpreted as a hawk. It is speculated that the market’s expectations for the Fed’s Taper this year are already relatively sufficient. Even if the taper is launched, it will not have a major impact on the market. The current market’s main focus on the Fed’s tight monetary policy lies in the expectations of the Fed’s interest rate hike from 2022 to 2023. Changes, this expectation may be further strengthened in the short term.

3. How does Taper affect the US dollar index?

Judging from the situation in 2013, the rise in the Fed’s policy tightening expectations is not very synchronized with the strength of the US dollar index. During 2013-2014, during the period when the Federal Reserve was preparing to cut QE, the US dollar index slightly strengthened, but the overall relative position of the US dollar index was not high: 2013.5-2013.11, the US dollar index showed an inverted U-shaped performance, 2013.2-2013.7, the US dollar index from the previous The level of around 79.5 soared to around 84.5, and then it began to fall back to 79 in November 2013. From the end of 2013 to the beginning of 2014, the US dollar index fluctuated at the level of around 80 until July 2014-March 2015. It quickly rose from 80 to 100.

The expected rise and fall of short-term Fed policy tightening will boost or suppress the US dollar index, but the relationship between the US dollar index and the Fed’s policy tightening in the medium-term trend is not direct. This is mainly because the U.S. dollar is the world’s U.S. dollar, and the monetary policies of the U.S. and its rival countries need to be considered comprehensively. From the second half of 2014 to 2016, the global economy was in a downturn and the United States continued to recover. During this period, the Eurozone and Japan were increasing monetary policy easing. In sharp contrast with the tightening of the Fed’s policy, the U.S. dollar index rose from around 80 to 100. After the global economy improved, it declined. The reason for the limited strength of the US dollar in 2013 was that overseas fundamentals were also relatively strong at that time.

The current US dollar index may continue to strengthen periodically, but it will return to a long-term downward trend in 2022. In the short term, based on the improvement of the U.S. epidemic, employment improvement and high inflation, interest rate hike expectations for 2022-2023 may be further strengthened. At the same time, high energy prices may inhibit global economic growth and supply constraints also exist. Against this background, the US dollar index may strengthen in stages. But from the perspective of the global financial cycle, the U.S. dollar will once again return to a long-term downward trend. This is the biggest difference between this round of Taper and 2013.

4. What impact does Taper have on the RMB exchange rate?

During the last round of Taper, the RMB exchange rate gradually confirmed the correlation between "the U.S. dollar is strong and the renminbi is weak; the U.S. dollar is weak and the renminbi is strong". Beginning in May 2013, the RMB exchange rate, which had been in a relatively rapid appreciation trend, has obviously flattened and slowed down, but it has continued the previous appreciation trend, with a slight appreciation of 1.0% to 6.0932 at the end of November. 2013.12-2014.9 and 2014.10-2015.11, In the process of the strong rise of the U.S. dollar, the exchange rate of the renminbi changed from the previous upward trend to depreciation. From December 2013 to April 2014, the renminbi depreciated from 6.05 to about 6.25, and then rebounded to 6.11 in November 2014. The trend of the US dollar index is divergent, or because the European Central Bank's loose monetary policy has improved the tight liquidity situation in emerging markets. Since then, due to factors such as weak economic fundamentals and deteriorating capital flow, the yuan quickly depreciated to 6.27 at the beginning of March 2015, and remained at about 6.20 until August under the central bank's policy control. On August 11, 2015, the central bank carried out exchange rate reforms. The RMB exchange rate depreciated to 6.3231 at one time. Since then, the correlation with the fluctuation of the U.S. dollar index has increased, but it has shown greater depreciation pressure. As the U.S. dollar fluctuates and strengthens, the renminbi continues to depreciate. It was downgraded to 6.3981 at the end of November.

It is expected that the RMB exchange rate depreciation caused by the Taper will be limited, and the RMB exchange rate index will remain high. The expected tightening of Fed policy in 2013 has transformed the pattern of international capital flows, and international capital has withdrawn from emerging markets. As a result, the pressure of currency devaluation in emerging market countries/regions has increased, and the performance of the RMB exchange rate is a microcosm of the overall situation in emerging markets. For now, on the one hand, a stronger U.S. dollar and rising U.S. bond yields will still put pressure on the renminbi exchange rate, leading to a weaker renminbi; on the other hand, factors such as the improvement of Sino-US relations and the support of China’s trade surplus due to the slow recovery of overseas supply may be possible. As a result, the depreciation of the renminbi is limited, and the renminbi exchange rate index remains high.

5. What impact does Taper have on the U.S. international capital flow situation?

During the last round of Taper, US international capital inflows declined compared to the previous period, confirming that the global dollar credit expansion and contraction are the core factors affecting the capital flow situation of various countries. The net international capital flow in the United States mainly measures the capital inflows in the U.S. securities market. Unlike our intuitive perception, international capital does not flow into the U.S. on a larger scale during the period when the Fed’s monetary policy is marginal. It is precisely the U.S. itself. The received international capital inflows have also been marginally reduced. As we have analyzed in many reports on the global financial cycle, the Fed’s policy has an impact on the dollar’s liquidity on a global scale. When the Fed's monetary policy contraction starts, global liquidity tightens, and the international capital inflow situation facing the United States, like other countries, will also deteriorate on the margins. From 2013 to 2016, the net international capital inflow to the United States has shrunk significantly. The current same scenario may reappear in stages, thereby increasing the adjustment pressure on the U.S. stock and bond market.

6. What impact does Taper have on China's international capital flow situation?

The Fed's monetary policy has an effect on the US liquidity environment and the global liquidity environment. Cross-border capital flows, especially international capital inflows from emerging economies, will encounter "headwinds." Studies have shown that the announcement and actual implementation of the US QE policy have brought about international capital inflows in the stock and bond markets of the United States, emerging markets and other developed countries. According to estimates, every 10bp drop in the yield of the 10-year US Treasury bond due to QE will bring about 0.2% of the international net capital of emerging countries’ GDP to flow to emerging securities markets. Correspondingly, when the Fed's monetary policy turns, the situation of international capital flows in emerging economies may be reversed.

In 2013, my country experienced a five-month period of downturn in capital inflows. The change in the balance of foreign exchange settlement and sales on behalf of Chinese commercial banks can be used as one of the indicators to measure the scale of international capital inflows. Looking back at the previous round of taper period, we found that starting from May 2013, the difference in foreign exchange settlement and sales on behalf of clients dropped significantly from a level of more than RMB 200 billion. In July 2013, it fell to a minimum value of RMB 15.9 billion. About 3 months, the downturn period is about 5 months, after October 2013, it returned to the level of more than 200 billion yuan, and it was not until April 2014 that it entered a new round of downturn.



The current relative downturn in the scale of capital inflows in my country has lasted for three months, and may improve at the end of the year. At present, the capital inflow in my country’s equity and bond market has declined significantly from July 2021, and the downturn has lasted for 3 months, which is in line with our expectations of Taper from May to August 2013. In the fermentation stage, the scale of capital inflows fell in line with the situation. Based on this speculation, the marginal deterioration of my country's capital flow situation may have already manifested, and the current relatively sluggish situation may improve at the end of this year.

7. How does Taper affect U.S. bond yields?

Although Taper involved changes in the scale of the Fed’s direct purchases of U.S. Treasury bonds, from the perspective of 2013, changes in the Fed’s monetary policy also had a strong expected effect on the 10-year U.S. Treasury yield. Often before the policy was implemented, the market Corresponding adjustments have already occurred. The impact of QE's exit phase on interest rates does not occur continuously and slowly, but is concentrated in the expected and changing phases. However, in the long implementation period, the impact of economic fundamentals is an important factor in long-term interest rate fluctuations. Influencing factors. In addition, economic fundamentals are the reasons and preconditions for changes in the Fed’s monetary policy, and economic fundamentals are also an important reason for changes in long-term interest rates, and the direction of their influence is the same. Therefore, the 10Y U.S. Treasury yield has a common impact on both However, the liquidity shocks were particularly prominent only in some stages. For example, in April and May 2013, the U.S. Treasury yields were more significantly affected by liquidity factors. The U.S. Treasury yields fluctuated roughly from June to December 2013. After the Taper was really opened in 2015, the yields of U.S. Treasuries dropped significantly.



When the Fed's monetary policy first shifted, it had the greatest impact on the 10-year U.S. Treasury bond yield. From the past point of view, the changes in QE policy have had a significant impact on the yield of 10-year US Treasury bonds, but it should also be noted that the policy impact has a diminishing marginal phenomenon. The first round of QE has the greatest impact, and the third round of QE brings about assets and liabilities. Although the expansion of the scale of the table is also large, the rate of decline in interest rates is relatively small; similarly, since the Fed’s policy shifted to marginal tightness in 2013, the effect on rising interest rates has also diminished. This may be caused by changes in monetary policy. The rebalancing has changed from a change in direction to a change in degree, so the impact is significantly reduced. In the anticipated stage of taper in 2013, the yield of 10-year U.S. Treasuries rose sharply by 126BP. On the eve of the Fed's first interest rate hike in December 2015, the largest increase in U.S. 10-year Treasury yields was only 37BP.



It is expected that US bond yields still have room for further upside during the year, and the high point may be around 1.8%. The current U.S. Treasury yield has risen by 39BP to 1.58% from the recent low on August 3, which is 106BP higher than the current low of interest rates in August 2020. Taking into account the expected development direction of the Fed’s policy and the improvement of economic fundamentals during the improvement phase of the global epidemic, U.S. Treasury yields are expected to have further upside. Before the balance sheet reduction, the central bank of U.S. bond interest rates will be lower than before the epidemic, and the high point of U.S. bond yields during the year may be at 1.8%.

8. How does Taper affect the yield of Chinese government bonds?

The Sino-US policy resonance triggered a sharp increase in my country's 10-year Treasury bond yields from June to November 2013, but internal factors may have played a leading role. In general, due to the low degree of opening up of my country’s bond market to the outside world in 2013, capital flows have little impact on my country’s bond yields. However, starting from mid-June 2013, my country’s inter-bank market continued to be tight, and the lending rate rose sharply. The "money shortage" crisis and the enhanced resonance of the Fed's Taper expectations, combined with relatively strong domestic and foreign economic fundamentals, triggered an upward rise in my country's national bond yields. From June to November, the yield of my country's 10Y treasury bonds rose from 3.4% to a high of 4.7%. From December 2013 to 2014, along with the deterioration of economic fundamentals, my country’s 10-year treasury bond yield declined. Based on the performance of stock bonds and economic data, my country’s interest rates at this stage are more related to domestic economic fundamentals. Not significantly affected by the implementation of the Taper policy.



The yield of my country's 10-year Treasury bond is expected to rise slightly in the next two months. At present, on the one hand, due to the significant increase in China’s bond market opening to the outside world and the expected tightening of the Fed’s policy, U.S. bond yields have risen and the spread between China and the United States has narrowed, which may cause the marginal decline of the scale of foreign capital flowing into China’s treasury bond market. In July and August, we saw that the marginal reduction or even outflow of international capital inflow constitutes a marginal factor for raising the yield of 10Y Treasury bonds, and this situation may continue in the next two months; on the other hand, the yield of Treasury bonds still depends on Due to the influence of domestic factors, it is expected that China's interest rate environment will not repeat the 2013 scenario under the circumstance that monetary policy is expected to remain accommodative but not substantially tightened.

9. How does Taper affect the US stock market?

Experience in 2013 shows that US stocks have been significantly affected by liquidity tightening expectations at certain stages, but the overall rise in US stocks has not changed at that time. Looking at the situation in 2013, first, the S&P 500 index was in an upward trend from 2013 to 2018. Secondly, the S&P 500 index experienced a short-term decline from 2013.5-2013.6 and 2013.8 due to the expected increase in liquidity tightening. It has not changed the overall upward trend of U.S. stocks. The reason behind this may be: on the one hand, the tightening of the Fed's policy indicates a relatively unfavorable liquidity environment; on the other hand, the reason why the Fed can tighten is still due to the strong economic fundamentals. Both of these points will have an impact on US stocks. In the case of moderate monetary policy tightening, economic fundamentals may occupy a dominant position; in terms of style, both the expected policy tightening and the substantial tightening phase make US stocks more value-oriented.



The current U.S. stock market may continue the overall adjustment and the style of value outperforming growth. Currently, U.S. stocks are facing the interference of fiscal tightening policies such as the Fed’s monetary policy tightening expectations, high energy prices and inflation, stagflation concerns, the U.S. debt ceiling and potential tax hikes, and there is certain pressure to adjust. Since September, the S&P 500 Index has fallen by about 3%, and adjustments have been initiated. The Nasdaq Index has fallen by 4.4% and the Dow Jones Index has fallen by 1.9%. Growth underperforms value. It is expected that this style and adjustment may continue.

10. How does Taper affect the Chinese stock market?

In 2013, Taper expects that the A-share market will fall due to large fluctuations during the fermentation stage, and the follow-up trend will be dominated by domestic factors. During the expected fermentation period of Taper in 2013, the Shanghai and Shenzhen 300 Index adjusted significantly in June and July, falling 15.9% in two months, rebounding in August and September but still lower than the May high, and falling slightly in early October and November, and in November. After a rebound in the second half of the year, it has entered a volatile decline for nearly a year since December 2013. We believe that Taper's previous performance of A-shares during the period from June to November 2013 may have been affected by global liquidity expectations and international capital flows. The performance in 2014 is more related to the fundamentals of the domestic economy.



The expected tightening of the Fed's monetary policy may have a negative impact on A shares from the perspective of risk sentiment and international capital flows. In principle, the expected tightening of the Fed's monetary policy may have an impact on the stock markets of emerging countries/regions, and the fundamentals of the United States may be different from those overseas. If the economy is in a period of economic downturn, the Fed’s tightening measures will even trigger panic and capital outflows in emerging market countries/regions. The impact of the local currency in the foreign exchange market will also be transmitted to the stock market, equity funds and bond funds in emerging markets. All may be redeemed. The adjustment of US stocks and the rise of the VIX volatility index will also affect global risk sentiment.

In view of the capital flow situation, since July this year, the scale of foreign capital inflows into the A-share market has declined, and the Shanghai and Shenzhen 300 Index has tended to decline amidst turbulence. It fell by 6.8% from July to September, which may partly reflect the negative impact of the change in Taper's expectations. However, the strong trend of US stocks in the early period has certain support for global risk appetite. If the adjustment of US stocks continues in the next 1-2 months, it may also intensify the adjustment pressure on A-shares.

Source: Financial World Network