Will the Fed be forced to declare a final interest rate increase due to the rekindling of the Palestinian crisis

With the outbreak of the Palestinian crisis on the 7th of the weekend, there is a high possibility that the uncertainty surrounding the Fed's monetary policy will be put to an end for the time being. Along with the US interest rate hike cycle that began in 2022/3, the Fed's monetary policy has always been accompanied by three uncertainties: 1. The presence or absence of further interest rate hikes (25 bp), 2. Whether there is a final interest rate hike declaration, and 3. When to cut interest rates, Mr. Powell has faced it with a stance that all of monetary policy is “dependent on data” and does not clearly answer any of them. Even at the Jackson Hole Conference held in August, Mr. Powell persevered through his ambiguous position. Three points were taken up, such as uncertainty about an appropriate interest rate level, uncertainty about the time lag in monetary policy effects, and uncertainty in the US labor market that could be inflationary pressure, etc., and Mr. Powell pointed out the three uncertainties in making monetary policy decisions. In preparation for the soft landing of the US economy, it was seen that Mr. Powell was struggling with dialogue with the market through references to various uncertainties, but with the resurgence of the Palestine conflict, he witnessed heightened “geopolitical risks in the Middle East,” and the uncertainty surrounding the Fed's monetary policy is now equal to chicken ribs, and it seems that Mr. Powell will be forced into a final interest rate hike declaration.

While the US bond market on the 9th was closed due to the Columbus Day holiday, ETFs linked to US bonds rose rapidly, and German and Italian government bonds were all bought. German 10-year bond yields temporarily fell 12 bps to 2.773%, and Italian 10-year bond yields temporarily fell 6 bps to 4.862%. In addition to actual demand and purchases of US bonds associated with heightened geopolitical risks, the elimination of US bond futures sales by hedge funds will also contribute to a decline in long-term US interest rates. According to data calculated by the Bank for International Settlements (BIS) based on data from the U.S. Commodity Futures Trading Commission (CFTC), it became clear that the oversales amount of US bond futures by hedge funds had swelled to 564.9 billion dollars as of early September to the largest scale ever. BIS pointed out that the level of leverage seen from futures margin and investment amounts is at a high level of 50 to 70 times, and warned that movements to eliminate leverage could shake the core of the bond market. Hedge funds will be forced to expand their losses due to market deleveraging (rewind), but the situation where actual US bonds are slightly undervalued compared to futures will improve. Since Mr. Powell showed a change in monetary policy at the IMF Annual Meeting (9-15), it is expected that US bonds will enter a medium- to long-term bull exchange rate.

If long-term US interest rates turn to a decline, it seems that the benefits of major US tech companies with high PER are greatest. In the factset summary (as of 10/6), the profit growth rate forecast for the 3Q US IT sector in '23 was drastically revised upward from a 4.6% increase in profit from the same period last year and a 0.6% increase in profit as of the end of June. The stock price performance of the US IT sector was ▲ 4.9% compared to the upward revision of the EPS forecast during the period.