Signs indicate that market expectations for the strength of the interest rate hike that the Federal Reserve is about to announce at the rate meeting on June 16th are escalating. On June 13th, analysis reports stated that a 75 basis point interest rate hike by the Federal Reserve has been put on the agenda. Subsequently, JPMorgan Chase and Goldman Sachs forecasted in their reports on June 13th that the Federal Reserve would raise interest rates by 75 basis points on June 16th.
JPMorgan Chase economist Michael Feroli believes that the unexpected rise in long-term inflation expectations could lead to a 100 basis point interest rate hike by the Federal Reserve this time: "People might wonder if the real surprise is a 100 basis point rate hike; we think it's a significant risk."
Steven Englander, head of global foreign exchange research and North American macro strategy at Standard Chartered Bank, estimates and does not rule out a 75 or even 100 basis point interest rate hike. Meanwhile, Robert Pavlik, senior portfolio manager at Dakota Wealth Management, expects the Federal Reserve to raise interest rates by 100 basis points this week...
This all implies that the Federal Reserve's current primary goal still seems to be targeting the persistently high inflation in the United States. The U.S. Consumer Price Index (CPI) rose 8.6% year-on-year in May, once again setting a new record since December 1981. Mohamed El-Erian, chief economic advisor at Allianz, warned on June 13th that the U.S. inflation rate is likely to reach 9%, and the risk of a U.S. recession is increasing.
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U.S. media cited Morgan Stanley CEO James Gorman on June 14th, who believes that the risk of a U.S. recession has increased, and it is clear that the possibility of a U.S. recession is 50%, higher than the previously predicted 30% risk of recession. The possibility of a U.S. recession is as high as 50%.
However, the Federal Reserve's ultra-tight monetary measures also face increased debt servicing costs for the U.S. economy, which is at risk of recession. This traps the U.S. economy in a multi-crisis of inflation, debt, and recession. At this time, dollar-denominated assets may be becoming a hot potato, especially as the wave of U.S. Treasury sell-offs seems to be gathering momentum. This is because many central banks around the world are major overseas holders of U.S. Treasuries, and when the risk of the dollar increases, these central banks will inevitably reduce the allocation of U.S. Treasuries and other dollar-denominated assets in their currency baskets to maintain the stability of their own currencies.
A former chief economist of the World Bank believes that the dollar's monetary measures in different cycles are the root cause of global financial risks. De-Americanization of Treasuries and the sell-off of dollar-denominated assets may have become irreversible. And at this time, once the Federal Reserve enters an aggressive interest rate hike cycle, the sell-off of dollar-denominated assets will face acceleration. In fact, many central banks around the world have already captured this signal in advance and have been significantly reducing their reserves of U.S. Treasuries and other dollar-denominated assets over the past few months.
According to the latest International Capital Flows Report (TIC) released by the U.S. Department of the Treasury on May 16th, which has a two-month lag, global buyers sold a total of $97.3 billion worth of U.S. Treasury bonds in March, equivalent to about 655.3 billion yuan worth of U.S. Treasury bonds.
For example, Japan sold $73.9 billion worth of U.S. Treasury bonds in March, equivalent to about 497.7 billion yuan worth of U.S. Treasury bonds. Considering that Japan is the largest overseas holder of U.S. Treasuries, every move by the Bank of Japan regarding U.S. Treasuries often has a widespread impact. If Japan continues to sell U.S. Treasuries in large amounts, a Pearl Harbor-style event in the currency field may occur.
A new development in the situation is that as the Japanese yen fell to a 24-year low against the U.S. dollar this week, Japanese Finance Minister Shunichi Suzuki reiterated on June 14th his concerns about the recent rapid weakening of the yen and stated that appropriate measures will be taken if necessary. The Bank of Japan also stated that on June 13th, it would purchase an additional 5 trillion yen worth of 5-10 year government bonds.It is worth noting that regarding the description of currency manipulation countries in the semi-annual report on the macroeconomic and foreign exchange policies of the United States' main trading partners submitted by the U.S. Department of the Treasury to the U.S. Congress on June 10, Yuji Saito, Executive Director of the Tokyo Foreign Exchange Department of Crédit Agricole CIB, commented, "(This document) essentially rejects Japan's direct intervention in the yen's weakness due to the widening (Japan-U.S.) interest rate differential, and it is unlikely that the dollar's rise against the yen will stop before the U.S. economy slows down or inflation peaks."
The analysis team believes that Japan's monetary measures, as well as the attitude of the U.S. Department of the Treasury, both indicate that Japan may further sell a larger scale of U.S. dollar-denominated assets, such as U.S. Treasury bonds, to fend off the plummeting yen. As Nomura analysts have said, some practices of the U.S. economy are accelerating the wave of U.S. Treasury bond sales.
It is worth mentioning that as the second-largest overseas holder of U.S. Treasury bonds, China sold $15.2 billion worth of U.S. Treasury bonds in March. Since December last year, China has reduced its holdings of U.S. Treasury bonds for four consecutive months. Since February last year, when it held $1.1042 trillion, equivalent to a cumulative reduction of $64.6 billion in U.S. Treasury bonds in the year ending March this year, which is equivalent to a cumulative sale of U.S. Treasury bonds valued at approximately 435 billion yuan.
The "Old Bond King" Gross said that as U.S. inflation exceeds 5%, he continues to short U.S. Treasury bonds. In fact, the U.S. has had inflation levels far exceeding 8% for three consecutive months. The U.S. financial website Zerohedge analyzed earlier that with the persistently high inflation, the risk of U.S. debt default increases, and in the context of the Federal Reserve officially shrinking its balance sheet and shedding U.S. Treasury bonds and other U.S. dollar-denominated assets, there is a possibility that several major global buyers will zero out their U.S. Treasury bond holdings. And the U.S. media followed up in its analysis on June 11, stating that with the United States carrying more than $30 trillion in debt, the United States simply cannot repay the debt as stated.
Amid the increasing risk of a U.S. economic recession, even facing a debt crisis, and with high inflation and the U.S. dollar losing its "greenback" value, Societe Generale strategists say that as U.S. Treasury bonds, a U.S. dollar-denominated asset, continue to be shed, central banks around the world will place greater emphasis on gold reserves.
The analyst further explained that although the continuously rising real interest rates of the U.S. dollar may continue to pose a challenging environment for the gold market, for central banks, gold still has the potential to be an important diversified reserve tool. Especially since the Russia-Ukraine conflict, the role of the U.S. dollar as a global reserve currency has been under the spotlight.
Over the past hundred years, the U.S. dollar has continuously lost its "greenback" value.
The latest data released by the World Gold Council on June 6 shows that, following the two-month delay convention, global central bank gold reserves increased by a net 19.4 tons in April this year. As of the end of April, the total official gold reserves worldwide amounted to 35,568.4 tons. Among them, the Eurozone (including the European Central Bank) totaled 10,773.8 tons, accounting for 55% of its total foreign exchange reserves. In addition, according to the latest report released by the Russian Central Bank, as central banks around the world reconsider their strategies, the status of the U.S. dollar and the euro as global currencies will decline, and the demand for gold will increase.
The Russian Central Bank expects that central banks of other countries, especially those in Asia and the Middle East, will buy more gold and include the renminbi in their currency baskets to replace the status of the U.S. dollar and the euro. As expected, the latest report from the IMF (International Monetary Fund) on June 1 shows that the renminbi's reserve share accounts for 25% of the recent shift from the U.S. dollar's reserve share. Through the chart below, it can be seen that at least six countries, including Russia, Brazil, Switzerland, Israel, Chile, and South Africa, are increasing their renminbi reserves, thereby replacing some of the previous U.S. dollar reserve shares.
It is worth noting that among the countries changing their currency reserve strategies, the latest TIC report shows that Israel sold $6.5 billion worth of U.S. Treasury bonds in March, equivalent to 43.2 billion yuan worth of U.S. Treasury bonds, with a sale scale as high as about 10%. Switzerland has also been selling U.S. Treasury bonds for two consecutive months, selling a total of $24.9 billion worth of U.S. Treasury bonds, with a sale proportion of about 8.3%. Based on the special connection between Israel and the Federal Reserve and Wall Street, as well as Switzerland's status as one of the world's financial centers second only to the United States, the analysis believes that the currency changes in Israel and Switzerland have a certain directional significance.Not only that, but Luxembourg, Switzerland, Brazil, Singapore, South Korea, Norway, Saudi Arabia, the Netherlands, Australia, the Philippines, Kuwait, Sweden, the United Arab Emirates, Italy, Vietnam, and Poland, a total of 16 countries, also sold U.S. Treasury bonds in March. Regarding the changes in global gold reserves, Societe Generale strategists have indicated that central banks of Western developed countries already possess substantial gold reserves. In contrast, the average proportion of gold in the reserve assets of emerging market central banks is only about 3%. Therefore, there is still a significant room for growth in the gold reserves of emerging markets.
It is noteworthy that, according to the latest data from the World Gold Council, China's gold reserves remain at 1,948.3 tons, unchanged from the end of April 2022. However, the U.S. financial website "Silver Doctor" analyzes and believes that China has actually accumulated more than 20,000 tons of gold, much more than the amount we are aware of. Furthermore, according to international gold analyst Alasdair Macleod, China accumulated 250,000 tons of gold between 1982 and 2003, and it is highly likely that it now exceeds 310,000 tons of gold.
In this regard, the U.S. media outlet Zerohedge analyzed that since some acquisition data has not been reported to the International Monetary Fund or the World Gold Council, thousands of tons of gold have been shipped to China. Despite the Federal Reserve managing a significant amount of gold worldwide, it has been unable to prevent thousands of tons of gold from being transported to China.
In response to these market changes, a Swiss gold dealer told journalist B again on June 12th that, based on his communication with insiders at the Federal Reserve's gold vault and the Swiss gold vault, there have been multiple related gold transactions over the past 24 months, as well as the phenomenon of at least thousands of tons of gold being shipped to China.