Invesco: Expects the US to cut interest rates twice by a total of 0.5% before the end of the year. Money market funds will not automatically shift to riskier assets such as stocks
Zhao Yaoting, market strategist for J.P. Morgan in the Asia-Pacific region, predicts that the Federal Reserve will cut interest rates twice by the end of 2024, each time by 25 basis points. His analysis points out that the Fed's focus has shifted to employment rather than inflation, and it may increase the size of rate cuts. Despite the upcoming rate cuts, the record cash in money market funds may not automatically flow into risk assets such as stocks, as investors still prefer short-term high-quality assets
According to the financial news app Zhitong Finance, Zhao Yaoting, the global market strategist for J.P. Morgan in the Asia-Pacific region (excluding Japan), stated that Federal Reserve Chairman Powell, as expected by the market, indicated that the Fed's focus has shifted from inflation to concerns about employment. He also did not rule out increasing the rate cut magnitude in the event of a deterioration in the labor market. Investors believe that the Fed seems to have an open attitude towards cutting interest rates more quickly than expected. The basic scenario still anticipates two rate cuts by the end of 2024, each by 25 basis points, despite the slowdown in labor data, while other economic indicators in the United States remain robust. More rate cuts are expected in 2025, with the basic scenario suggesting that the policy rate may remain around 3.5% in the next 12 months.
Zhao Yaoting mentioned that once the Fed starts cutting rates, the record cash holdings in U.S. money market funds may not automatically shift to risk assets such as stocks. The current high interest rate environment is one of the reasons why market participants have record-high investments of up to $6.22 trillion in U.S. money market funds.
He pointed out that since 2019, U.S. money market funds have recorded net inflows of about $2.6 trillion in three periods. The first period was after the epidemic, when the global economy faced major uncertainties; the second period was in 2022 when the Fed began to raise interest rates, leading to inflows of retail funds; and the last period was during the regional bank crisis in March 2023.
Zhao Yaoting further noted that institutional funds currently account for about 61% of money market funds, while retail funds account for about 37%. When institutional funds exit money market funds, they tend to allocate to high-quality short-duration assets rather than stocks, as institutional investors are more driven by security rather than yield. Retail funds, which represent a relatively small portion in money market funds, tend to reallocate to stocks