The Federal Reserve is set to announce its June interest rate decision at 2 a.m. Below are the key considerations and strategic outlooks based on the current economic and geopolitical landscape.
Core Viewpoint: Watch the Fed’s QT Policy
Economic Growth and Labor Market
The US labor market remains stable in the short term, reducing the urgency for short-term interest rate cuts. In May, the number of new non-farm payrolls increased by 139,000 (with the existing stock growth rate dropping to 1.10%), while job openings rose to 7.391 million (vacancy rate increased to 4.8%). Wage growth slowed to +3.9% (weekly salary). However, the decline in the business climate index in May could impact expectations.
Inflation Outlook
The slowdown in credit growth and the decline in wage growth indicate limited core inflationary pressure. However, geopolitical uncertainties in the Middle East could pose an upside risk to energy costs and inflation expectations, restricting the conditions for the Federal Reserve to start cutting interest rates again. Compared to interest rates, more attention should be paid to potential revisions in the Federal Reserve’s balance sheet policy.
Domestic US Situation
The pressure on dollar assets from balance sheet contraction is gradually increasing. Close attention should be paid to the potential end or even reversal (re-QE) of the Federal Reserve’s QT policy as pressures rise.
Strategy Outlook
Expected Federal Reserve Actions
We anticipate the Federal Reserve will lower its economic outlook in June, leaving room for a policy shift in the summer.
US Dollar
Short-term: Continue to hold the volatility long (+VIX) position under the current risk scenario, and monitor the impact of Middle East uncertainties on European investment positions.
Currency Positioning: Continue to reduce the euro long (+EUR) position at higher levels.
US Treasuries
Flexibility: Maintain flexibility in US dollar assets. Expect the yield curve to flatten (-2s10s) as uncertainty rises.
Trend Outlook: Since May, the improvement or end of risks suggests paying attention to the pricing of a faster rate cut by the Federal Reserve in September (+2s).
China Bonds
Curve Positioning: Maintain a strategic steepened position (+2s10s). The curve dropped to a low level in early May and only marginally improved. Monitor short-term pressure on the curve structure after the Fed’s June policy implementation.
Short-term Judgment: Maintain the view that T and TL are bearish (due to liquidity at the end of the June quarter) but not short (due to short-term risk uncertainty).
Commodities
Demand Outlook: Continue to expect commodity demand to face challenges under the current risk assumptions.
Supply-Side Focus: Pay attention to the impact of supply-side factors on commodity pricing, particularly disruptions in energy and agricultural supplies caused by the geopolitical situation in the Middle East.
Trend Opportunities: Recommend maintaining a configuration-oriented approach to industrial commodities after adjustments.
Risk Considerations
Economic Data: Short-term economic data could fluctuate downward.
Liquidity: Liquidity conditions may be looser than expected.
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