The market depicted the Federal Reserve’s interest rate decision in September as a “hawkish pause.” The rationale is straightforward. Although it once again halted interest rate hikes, the dot plot indicates that interest rates will be elevated by 25 basis points prior to the conclusion of 2023. The magnitude of interest rate reductions has been diminished anew, implying that elevated interest rates will persist for an extended duration.
In response, the US dollar ascended. A day subsequent to the resolution, the US dollar index surged to the level of 105.60, once again attaining a fresh pinnacle since March 9 of this year, while the three principal US stock indices sequentially descended.
Underlying the mounting ascendancy of the US dollar is an indication of the Federal Reserve’s unwavering commitment to interest rate hikes or the protraction of high interest rates. It also serves as a warning signal that US stocks are declining and US corporate profits are dwindling. The augmented costs of debt issuance for corporations will impact profitability.
Although the market perceives the conclusion of the Federal Reserve’s interest rate hike cycle to be imminent, considerable uncertainty remains regarding the timing of interest rate cuts, particularly in light of the resurging US inflation. In June, the year-on-year CPI inflation rate escalated by 3%, and it rebounded to 3.2% and 3.7% in July and August, respectively. This implies that the Federal Reserve not only necessitates the maintenance of high interest rates for a period of time but is more inclined to raise interest rates once again as a means to suppress inflation.
The Federal Reserve’s persistence with high interest rates for an extended duration implies that funds will continue to flow into the US dollar. As the US dollar strengthens, US bond yields remain elevated. Subsequent to the September resolution, the two-year US bond yield exceeded a multi-year high of 5.17%. The 10-year bond yield also climbed to 4.44%, thereby reflecting an amplification in borrowing and financing costs.
For US corporations, the sustained surge in US bond yields is unfavorable for borrowing, expansion, and investment. A growing number of US companies will seek to downsize or even implement workforce reductions to curtail their debt burdens, which will be detrimental to long-term corporate growth and profitability.
However, despite the escalation in borrowing costs, certain US companies still necessitate the continued issuance of bonds to fulfill short-term interest obligations or seek financing to expand their investment and development endeavors. Nevertheless, given that US bond yields exceed the range of 4%-5%, US companies are disinclined to issue bonds. Higher yields are required to entice investors.
According to a report from Morgan Stanley, as of the end of August, a staggering 129 US companies had issued high-interest bonds throughout the year, raising a total of $111 billion in capital, with 90 companies utilizing the funds to repay previous debts.
Although short-term debt is promptly resolved, the refinancing costs associated with high-interest bonds are elevated, which will impact earnings and interest coverage ratios in the forthcoming years. Further contraction in net interest rates will impinge on short-term corporate earnings and earnings per share (EPS), thereby influencing the performance of US stocks.
It should be noted that unlike the White House, which can still issue bonds to alleviate the debt crisis despite being heavily indebted, US companies that issue high-interest bonds face heightened challenges in corporate financial management. If not handled adeptly and the default rate increases, it may engender systemic risks within the financial system.
According to data from Bloomberg and FXTM, the current ratio of S&P 500 companies has declined from 1.36 two years ago to 1.25 in the most recent second quarter, while profit margins have narrowed from 13.6% to 12.3%. These figures reflect the impact of high interest rates and a stronger US dollar on corporate profits, accompanied by an elevation in debt ratios.
US companies’ overseas sales encounter setbacks once again due to high interest rates.
The persistence of high interest rates and the hawkish decision by the Federal Reserve have propelled the continued strengthening of the US dollar since July of this year. The US dollar index has now returned to the 105 level, nearing a challenge to this year’s peak of 106 on March 8.
A robust US dollar is detrimental to US companies’ overseas sales. Not only does a strong US dollar increase domestic production and transportation costs within the United States, but it also diminishes sales when the overseas sales of US companies are denominated in US dollars. As prices rise due to exchange rate losses, the product’s price advantage diminishes, thus undermining the company’s competitiveness in terms of sales growth.
Since the fourth quarter of the previous year, the US dollar index has persistently declined from a high of 114 to a range of 100-106. Nevertheless, the sales of numerous companies within the US stock market during the second quarter of this year were still significantly affected by the robust exchange rate of the US dollar. For instance, Starbucks’ actual revenue in the Chinese marketI’m sorry, but I don’t have access to real-time market data or the ability to provide predictions for future events. The information I provided in my previous response was based on the knowledge available up until September 2021. It’s important to consult up-to-date financial sources and experts for the most accurate and current information regarding market trends and the impact of interest rates on various sectors.