Fed taper impact steel market geometry?


On 4 November, the Federal Reserve released its November Monetary Policy Committee decision to officially start the Taper process while keeping the policy rate unchanged, in order to reduce the amount of stimulus to the market.Under the plan, the Fed will reduce the pace of its bond purchases by $15 billion a month.On the Fed's policy path, if it buys $15 billion less each month, the total of $120 billion in monthly asset purchases would be exhausted in eight months, meaning the Fed would end its open market bond purchases by June.

The Federal Reserve began to taper bond purchases, is bound to have a certain impact on the steel market.The preliminary analysis is mainly reflected in the following aspects:

First of all, it means serious inflation in the United States, which produces certain variables for import tariffs on Chinese goods.Us prices continued to rise through 2021, with another surge in September pushing the year-on-year inflation rate to 5.4%, the highest since 2008 and well above the Fed's target of 2% a year.All this has led the current US administration to admit that "decoupling" trade with China is unrealistic and that it needs to improve trade relations with China.Moreover, the high tariffs on Chinese goods imposed by the Trump administration have undoubtedly pushed up the PRICE index in the US.As a result, U.S. tariffs on Chinese goods are expected to be adjusted, which will help China export steel products such as mechanical and electrical products.

Second means economic recovery is confirmed, steel market demand should be boosted.Fed officials expect stronger economic growth in 2021 than previously projected as the labor market recovers and inflation picks up, and policy makers expressed confidence in achieving their goals of full employment and stable prices over the next few years, according to a statement released after the previous Fed meeting.This suggests that the Fed's incentive to tighten monetary policy comes from a better economy, not the other way around.It is precisely because of this, so after the Announcement of the Federal Reserve decision, the three major U.S. stock indexes jumped, the S&P, Dow Jones index intraday deep V reversal, the three indexes refreshed the record high again.If the continued economic recovery, though likely to slow, is confirmed, demand for steel in and outside China will also increase.

Again, the soaring prices of raw materials such as energy and ore have been restrained, and the cost pressure of the steel industry has been reduced.The fed's gradual tapering of debt purchases and the return to normal of ultra-loose monetary policy will reduce the flood of market liquidity, reducing the impact of speculative capital such as "hot money" on soaring commodity prices.Crude oil fell more than 3 percent after the Fed's tapering announcement, while cloth oil fell to its lowest level in nearly three months. U.S. oil briefly fell below $80 in after-hours trading, falling more than 5 percent at one point, its biggest drop in nearly two months.The relatively large drop in oil and gas prices in the international market will also lead to a certain drop in coal, coke and ore prices, which will reduce the cost pressure on the steel industry in the future, at least not further increase.

Finally, sentiment has been boosted.At the latest meeting, Fed Chairman Jerome Powell also stressed that the start of tapering does not signal an increase in interest rates, and that the Fed "can be patient" in terms of the timing of rate increases, and that now is not the time to increase rates.That, to some extent, eased fears of a Fed rate hike, including those in the steel market.

Of course, as has been analyzed many times before, fed tightening is also a double-edged sword.This is mainly due to the reduction of liquidity supply and interest rate hike expectations will lead to the appreciation of the US dollar and US dollar assets, attracting us dollars to return to the local market, resulting in financial and futures market turbulence, causing a certain degree of shock in the steel market, such as market risk preferences change, induced steel price correction.Fortunately, the price of Chinese steel and black series commodities, especially finished materials and iron ore, has been sharply adjusted before, and the risk factors have been released in advance. In addition, the People's Bank of China will also introduce corresponding measures to protect the stable economic growth, so we can calmly face the negative impact of the Federal Reserve tightening monetary policy.