On Thursday, US Eastern time, the shadow cast by the Federal Reserve remained unabated, with a number of central banks following its pace of sharply raising interest rates, adding to investor fears of recession, with US stocks falling for the third day in a row.

In the bond market, it is thrilling. Yields on European and American government bonds continued to hit multi-year highs. Yields on benchmark 10-year gilts rose more than 20 basis points in intraday trading and continued to hit a 2011 high. The yield on 10-year Treasuries rose above 3.70% for the first time since 2011. The yield on 2-year Treasuries, which is more sensitive to the outlook for interest rates, broke through 4.10% after the Federal Reserve raised interest rates on Wednesday. It rose further on Thursday, continuing its highest level since 2007 for more than a week.

After the central banks have stepped in, the volatility of the foreign exchange market is even more shocking. The dollar index rose more than 1% in intraday trading for two consecutive days, continuing to hit its highest level since 2002. The central bank of japan remained ultra-loose, but finance ministry officials confirmed that for the first time since 1998, the yen, which hit its lowest level against the dollar earlier Thursday, rose sharply against the dollar, up more than 2% on the day.

What risks are hidden behind the landing of the interest rate hike boots in September?

01 What do you think of raising interest rates?

The Fed interest rate meeting and Powell's speech mainly conveyed two points:

1) in order to control inflation and return to 2%, aggressive interest rate hikes will continue.

2) the probability of economic soft landing is getting smaller and smaller.

Specifically, the Fed raised interest rates by 75 basis points, which is fully in line with market expectations. The result of this interest rate hike has also been digested by the market. But the interest rate lattice chart panicked the market and exceeded expectations. According to the chart, the median interest rate will reach 4.4% by the end of 2022. The current rate is 3%, 3.25%, which means that interest rates will be raised by at least 125 basis points this year, that is, 75 points at a time and 50 basis points at a time.This completely shattered any illusion that the Fed would loosen monetary policy.

The Federal Reserve slashed its economic growth forecast. The median forecast for GDP growth in 2022-2024 is 0.2 per cent, 1.2 per cent and 1.7 per cent respectively. The expectations announced on June 16 this year are 1.7%, 1.7% and 1.9%, respectively. In terms of economic growth this year, it is expected to grow by 2.8 per cent in March and 4 per cent in December. It can be seen that the Fed is psychologically clear that in the context of such high inflation, a sharp increase in interest rates is bound to greatly cool the economy, and a recession seems inevitable.

For the unemployment rate, it was 3.8%, 4.4% and 4.4% respectively from 2022 to 2024. It is expected to be 3.7%, 3.9% and 4.1% in June and 3.5%, 3.5% and 3.6% in March this year. It can be seen that the unemployment rate is expected to rise with the passage of time this year. In fact, this should happen in the context of a weak economy. After some good non-farm data in previous months, US officials and analysts shouted how strong the job market was, but this was an illusion caused by the caliber of statistics. In addition, the fed expects the unemployment rate to rise sharply to 4.4% next year, suggesting that the u.s. economy is bleak and that a soft landing is becoming increasingly unlikely.

For PCE inflation, it was 5.4 per cent, 2.8 per cent and 2.3 per cent respectively in 2022-2024. In June this year, it was 5.2%, 2.6% and 2.2% respectively, and 4.3%, 2.7% and 2.3% in March. In addition, the core PCE is also improved.

In my opinion, the Fed's forecasts for the economy, unemployment and inflation send a clear and clear signal:The United States will fall into stagflation-the economy is getting worse, unemployment is getting higher and higher, but inflation is high and difficult to control.

From the perspective of pricing logic in the stock market, one is the performance fundamentals and the other is the discount rate. All micro enterprises are reflected in the macro level, that is, macroeconomic and monetary policy. At present and for a long time in the future, the US economic performance is downward and monetary policy continues to tighten, which is a Davis double kill for the stock market, and the bear market pattern of the US stock market will continue.

02 A series of influences

This year, the Fed has raised interest rates five times, namely 25BP, 50BP, 75BP, 75BP and 75BP. The cumulative rate increase is as high as 300bp. Together with the remaining two increases of at least 125bp this year, the Fed will raise interest rates by at least 425bp this year. This is a radical rate hike that has not been seen in the last 40 years.

Us inflation rose to 2.6 per cent in March last year, soared to 4.2 per cent in April, continued to climb to 5 per cent in May and reached 7 per cent by the end of the year. At that time, the Fed declared on various occasions that "inflation is only temporary" from March to the end of the year, and continued to expand its balance sheet, flooding financial markets. The aim of this foolishness is to push global inflation and financial asset bubbles to historical highs. Before the March call to raise interest rates, the perpetrators set fire to Russia and Ukraine, which eventually led to war between the two sides, further pushing up global inflation and oppressing global central banks to follow the Fed in aggressive interest rate hikes. The massive tightening of global monetary liquidity is rushing all the way to prick the bubble.

Global bond markets suffered an epic sell-off.The Bloomberg global composite index, the benchmark for government and corporate bonds, has fallen nearly 20 per cent from its high in early 2021, the biggest since the index was established in 1990 and far exceeding the 10.8 per cent decline during the 2008 financial crisis.

Us bond yields have accelerated, reaching a multi-year high of more than 4% in 1 year, 2 years and 3 years, and 3.5% in 5 years, 7 years, 10 years and 30 years. In Europe, what the market is most concerned about, and most dangerous, is Italian government bonds, which have soared to more than 4.2% in 10 years, surpassing the market's perceived death line of 4%-Italy's fiscal burden is unsustainable and the probability of default has greatly increased. The Phantom of Europe's debt crisis is back.

The foreign exchange market is even worse, and many countries are waging a defensive war.The yen has depreciated by nearly 30% against the dollar since the beginning of last year, second only to the Asian financial turmoil in 1997. The strong attack on the US dollar forced Japan to choose one of the two-- or to maintain the exchange rate. Abandoning the YCC policy and maintaining the exchange rate may lead to a debt crisis and a crisis in banks and financial markets. And continue to adhere to the YCC policy, to ensure interest rates, regardless of the exchange rate, will also have a comprehensive impact on Japan's economy and financial markets.

South Korea, as early as last August began to raise interest rates, and all the way to 2.5% yesterday, but the exchange rate is still sharply depreciated, there are signs of crisis. The won has fallen to 1413.9 against the dollar, its lowest level since March 2009 and a depreciation of nearly 30 per cent since the beginning of last year. South Korea's foreign exchange bureau was so nervous that on September 19, major banks were required to report hourly real-time data on dollar transactions, foreign exchange-related positions and other real-time data, in order to strengthen the monitoring of South Korea's foreign exchange market and start the currency defense war.

Apart from Japan and South Korea, Asian currencies such as Thai baht and Philippine pesos have also depreciated greatly. The euro, too, has fallen below parity, plunging 20% from last year and is in deep trouble.

The sharp depreciation of the exchange rates of these countries mentioned above means that a large amount of foreign capital has fled, which is extremely detrimental to the stability of their financial markets. In particular, once the devaluation gets out of control, there will be chain systemic risks in bond markets, stock markets, commodities, derivatives and other markets, which will also have a direct impact on the economy. The 1997 Asian financial crisis was also a gory case.

The US dollar violently raised interest rates, rapidly cooling the overseas real estate market.In September, the US NAHB real estate index stood at 46, the lowest level since May 2020 (the COVID-19 crisis). It was the ninth consecutive month of decline and the sharpest decline in confidence in the U. S. housing market since 2008. The index is a confidence survey of real estate construction manufacturers, mainly reflects the current and the next six months of sales expectations, similar to PMI, 50 is the rise and fall line.

In August, sales of existing homes in the United States fell for the seventh consecutive month to 4.8 million, the lowest since May 2020. Excluding the upheaval period that COVID-19 just broke out in April-May 2020, existing home sales have returned to 2014 levels. This is a sharp drop of 25% from the peak sales in January.

The sharp decline in trading volume is an important prerequisite for house prices to fall. Before that, the average house price in the United States soared from $374000 in 2020Q2 to $525000 in Q2 this year, up 40% in two years.

The interest rate on 30-year mortgages in the United States has soared from 3% at the beginning of the year to 6.25% now, which has a significant cooling effect on the housing market. Us house prices have loosened and fallen since August. In the four weeks to Sept. 4, the median price of a single-family home in San Francisco fell 7% from a year earlier, the biggest annual decline since 2012 to $1.4 million, according to Redfin.

With the exception of the US, bubble markets such as Australia, New Zealand and Canada are already facing double-digit house price falls. The response of the property market will lag behind other financial assets, but after all, bubbles are bubbles, which will react in the context of sharp interest rate increases.

In addition to financial markets, a sharp increase in interest rates to shrink liquidity has a significant impact on the fragile real economy. Since the Federal Reserve raised interest rates sharply in March, manufacturing PMI and service PMI have changed rapidly from hot to cold. According to statistics, the comprehensive PMI has dropped rapidly from 57.7 in March to 44.6 in August, the lowest level since the outbreak of COVID-19, and lower than in any year before the outbreak (since statistics are available). The same is true in Europe.

03 The end.

In the face of the increasing pressure on the dollar, the Japanese government and the central bank can no longer sit still. The real sword entered the market to buy Japanese yen for US dollars, making the first foreign exchange intervention since June 1998. After the move, the yen quickly rose more than 2% against the dollar and is now stable at around 143. However, through the consumption of foreign exchange bullets, there can only be one emergency. But as the Fed continues to violently raise interest rates, it is almost certain that the yen will fall to 145.

Japan is having a hard time, and so is Europe.The latter, located on the front line of Russia and Ukraine, is facing a serious energy crisis, causing direct and comprehensive damage to the economy. In August, German PPI surged 45.8% from a year earlier, far exceeding market expectations and the highest year-on-year increase since the statistics began in 1949. In the same period, the CPI is 8.8%, and the difference between the two scissors is 37%, which makes the burden on enterprises unbearable. The big shift made in Europe will be a general trend, which will deal a heavy blow to the local community economy.

Japan and Europe are currently the main targets of Wall Street's targeted harvest. And like the bursting of the Japanese bubble in 1989 and the European debt crisis in 2012, they don't seem to have much room to fight back.