There is a risk that the current market interest rate cut of 1.4 times/35 bps will continue to fall, and there is a risk that interest rates on 10-year US Treasury bonds will rise to 4.8-5.0%.
The Zhitong Finance App learned that Fangzheng Securities released a research report saying that high volatility dragged GDP back to +1.6%, and the final domestic sales after excluding it recorded +2.8%, reflecting the “stagnation” of the US economy. PCEPI surpassed expectations and rebounded to +3.7%, echoing CPI that continuously exceeded expectations in January-March, reflecting that the “inflation” of US inflation is real inflation. Looking ahead, the bank expects the resilience and inflationary stickiness of the US economy to continue. Currently, the market is expected to cut interest rates of 1.4 times/35 bps, and there is a risk that interest rates on 10-year US bonds will rise to 4.8-5.0%. However, once it approaches 5.0%, the US bond version of the Fed Put may have been restarted since the end of October last year, and the Federal Reserve may switch to caring for the market, making expectations of interest rate cuts pick up again.
Fangzheng Securities's views are as follows:
24Q1 US GDP: High volatility dragged down the GDP decline beyond expectations, and PCEPI rebounded beyond expectations.
The 24Q1 US GDP quarter-on-quarter annual rate was +1.6%, 67 analysts expected +2.5%, the Federal Reserve's GDPNow model expected +2.7%, and the previous value was +3.4%. The 24Q1 US core PCE price index had a quarter-on-quarter annual rate of +3.7%, expected to be +3.4%, and the previous value was +2.0%. Among them, consumption is +1.68%, investment is +0.91%, inventory changes are -0.35%, foreign trade is -0.86%, and the government is +0.21%. However, after excluding highly volatile foreign trade and inventory changes, the 24Q1 US GDP final sales to domestic purchasers (final sales to domestic purchasers) quarterly annual rate was +2.8%, and the final quarterly domestic private demand rate was +3.1% month-on-month.
Economic stagnation: After excluding highly volatile items, domestic sales ultimately showed that the US economy is still resilient.
Although the GDP data for the first quarter unexpectedly fell short of the Federal Reserve's long-term growth forecast of +1.8%, which closed the output gap, the current data fell less than expected. After filtering out highly volatile items, the final domestic sales (private sector consumption+fixed asset investment+government purchases) and final domestic private sales (private sector consumption+fixed asset investment) showed signs of weakness in the US economy, but it is not stagnating.
From a structural point of view, ① Consumption: Motor vehicles and energy products are leading the decline, and the service consumption gap is confirmed to be closed. The driving rate of 24Q1 consumption on GDP fell from +2.2% to +1.68%, with the commodity driving rate falling from +0.67% to -0.09%, a new low since 22Q4. This was due to the slump in motor vehicle consumption (-0.25%, falling into negative growth for the fourth quarter in a row, mainly affected by the epidemic and high motor vehicle consumption, high vehicle prices and car loan interest rates before the CHIPS Act, car insurance price increases, etc.). On the other hand, it was dragged down by a negative shift in energy consumption (-190.Q22%, driving rate -190.22%, etc.) (1) The worst since the Russian-Ukrainian conflict saw a sharp rise in oil prices). However, while commodity consumption weakened, the service consumption drive rate rose from +1.54% to +1.78%, and finally closed the consumption gap caused by the impact of the pandemic.
② Investment: The return of the manufacturing industry is moving from factory construction to equipment procurement, and the real estate cycle is confirmed to restart at the bottom. The ratio of fixed assets to GDP rebounded from +0.61% to +0.91% in 24Q1. In terms of segmented contributions, investment in manufacturing continued to fall from +1.21% to +0.61%, while information equipment (+1.03% → +1.12%) and industrial equipment (0% → +1.06%) grew significantly, reflecting the transition of the US manufacturing industry from the construction period to the equipment purchase period. In addition, residential investment was boosted by +3.01% month-on-month, a new high since 21Q1. Benefiting from expectations of rising interest rate cuts in Q1, the real estate cycle, which was at the bottom, rose rapidly. ③ Foreign trade: The sharp increase in commodity imports is the biggest drag on net exports turning negative and GDP slowing down. Specifically, industrial products, capital goods, and motor vehicles all increased to varying degrees from month to month.
Real inflation: The unexpected rebound of the core PCEPI once again confirms that US inflation is still sticky, and the market's expectations of the Fed's interest rate cut continue to be postponed.
At the beginning of the year, the market's final catalyst for six interest rate cuts during the year was that the 23Q4 US core PCEPI hit +2.0% month-on-month, but the 24Q1 reading surpassed expectations and previous values made the market's interest rate cut expectations have to continue to be delayed. This is also in line with the CPI reading, which continued to rise above expectations in January-March. In an environment of total supply contraction, given the benchmark assumption that the Federal Reserve will not adopt a more aggressive monetary policy leading to an economic recession, the stickiness of US inflation is likely to be stubborn, and the Federal Reserve's path to getting rid of inflation will still be long, which also forms a necessary condition for a second round of US inflation.
Market strategy: false stagnation and real inflation, making it difficult to reduce interest rates.
Under the “false stagnation and real inflation” data mix, market trading is delayed. Currently, federal funds futures traders expect the Federal Reserve to cut interest rates for the first time in November (probability 98%), cutting interest rates 1.4 times/35 bps throughout the year. Interest rate cuts were delayed → US stocks & gold fell, but then commodities once again showed an independent trend — gold, copper and oil all fluctuated, and copper prices basically showed no retreat. Looking ahead, if the room for interest rate cuts is reduced to 1 time, there is still room for the US Treasury interest rate to rise by 10 bps. If the pressure falls completely to 0 times, then the 10-year US Treasury interest rate may break through 5%. Of course, the Federal Reserve may try to appease the market when interest rates on US bonds are approaching 5% to prevent financial conditions from triggering financial risks. The market may repeat the script of when interest rates on US bonds peaked at 5% in October last year: US bonds hit 5% → the Federal Reserve dovish → interest rates fall → demand rebounds → the Federal Reserve hawks → interest rates rise → US bonds hit 5%. Finally, if the Fed's interest rate cut is actually delayed until Q4, the uncalculated risk of Trump winning the election may smooth out expectations of interest rate cuts during the year and accelerate the tightening of dollar liquidity.
Risk warning: The Fed started the interest rate cut cycle too early, triggering a rebound in inflation or even getting out of control; the Fed's austerity cycle continued for too long, triggering a liquidity crisis in the financial system; the downward rate of inflation fell short of expectations.