Hang Seng Bank: Expects the Federal Reserve to still prefer to keep interest rates unchanged and maintain a high allocation to the Asia-Pacific stock market
Complete. Here is the key summaryHang Seng Bank Senior Economist Tang Jiayi stated that the Federal Reserve has kept interest rates unchanged, but there is an increasing internal support for raising rates. Given the easing of inflationary pressures and the rise in U.S. Treasury yields, it is expected that the Federal Reserve is inclined to remain on hold in the short term. Hang Seng Bank Chief Investment Officer Liang Junfei pointed out that although the market anticipates a higher probability of rate hikes in October, the bank still recommends a diversified allocation between stocks and bonds, and continues to overweight the Asia-Pacific stock market to capture investment opportunities
According to the Zhitong Finance APP, Tang Jiayi, a senior economist at Hang Seng Bank, stated that the Federal Reserve maintained interest rates unchanged as the market expected. However, the voting results showed that three officials cast dissenting votes, advocating for a 0.25% rate hike. This is the first time since 2016 that three officials have cast dissenting votes in the same direction, reflecting an increasing voice within the Federal Reserve in favor of raising interest rates. Although Federal Reserve Chairman Waller reiterated the authorities' 2% inflation target, he did not provide clear signals regarding future interest rate directions, leading to a slight decrease in market expectations for a rate hike in the short term.
Recent inflation data indicates signs of easing underlying inflation pressures in the U.S., with rising energy prices having limited impact on the prices of other goods or services, supporting the Federal Reserve's decision to remain on hold. On the other hand, U.S. long-term Treasury yields have risen significantly, which has somewhat contributed to cooling the economy. Unless underlying inflation pressures rise significantly, it is expected that the Federal Reserve will still tend to maintain interest rates unchanged to avoid further exacerbating economic downturn risks.
Leung Jun-fai, Chief Investment Officer of Wealth Management at Hang Seng Bank, stated that the Federal Reserve kept interest rates unchanged at 3.50% to 3.75%, but three regional Federal Reserve Bank presidents cast dissenting votes advocating for a rate hike, reflecting that more decision-makers are inclined to tighten monetary policy given that U.S. inflation has been above the 2% target for five consecutive years. The latest interest rate futures indicate that traders expect nearly a 90% chance of a rate hike in October. Following the meeting, the yield on 30-year U.S. Treasury bonds rose to 5.2%, having increased 36 basis points since July, reaching the highest level in 19 years. As funding costs rise, risk premiums increase, and U.S. stocks are also pressured alongside U.S. Treasuries. Meanwhile, concerns about significant spending by major U.S. cloud service technology companies persist, with the technology sector remaining one of the main factors dragging down the overall market.
Leung Jun-fai mentioned that equity and bond investments should be diversified. In terms of bonds, the bank emphasizes duration management and asset diversification. The volatility of U.S. Treasury yields may continue, focusing on short to medium-duration bonds and floating-rate instruments such as securitized credit bonds to reduce interest rate risk; at the same time, deploying emerging market bonds with relatively attractive yields and spreads. Regarding the stock market, the reasonableness of valuations remains a core investment factor emphasized by the bank, and diversifying across global regions and sectors is quite important. The bank continues to maintain a high allocation to the overall Asia-Pacific stock market to capture different economic dynamics and profit catalysts across the Asia-Pacific region.