The Zhitong Finance App learned that Guojin Securities released a research report saying that the US economy may have a smooth “soft landing” three quarters ago. Housing investment is a major contributor to negative GDP growth and is an “indicator” of whether the economy is desensitized to financial conditions. In this round of the Fed's interest rate hike cycle, residential investment has experienced a complete recession cycle, but it has now been growing for 3 consecutive quarters, indicating that the US economy has come out of a period of interest rate sensitivity. Moreover, the willingness of enterprises to spend capital has begun to pick up, and both bank credit supply and demand have improved markedly, which means that the recovery trend in private fixed investment can continue in the short term. At the same time, with the labor market running well, consumption is unlikely to “collapse” without warning.

Guojin Securities's views are as follows:

The “no landing” of the US economy has become a consensus, and “secondary inflation” has subsequently become the main line of market transactions. As the economy shifts from a supply-side narrative to a demand-side narrative, it is more difficult for the Federal Reserve to balance growth and inflation. However, trading and the Fed's decision are “two different things”: the more the market trades and does not cut interest rates, the more likely it is that the Fed will cut interest rates.

Three quarters ago, the US economy had already “landed”!

The delay is fake; the inflation is real. The US GDP growth rate in the first quarter was lower than expected, but mainly net exports and inventories dragged down, and overall domestic demand remained stable. The internal and external temperature difference is the main cause of the drag on net exports. Considering that the first quarter is at the end of storage removal and early replenishment, subsequent inventory changes may still have a boosting effect. After the GDP data was released, US bond yields and the US dollar index all rose, but US stocks opened low and remained high throughout the day after opening and falling, which was not in line with the “stagflation” trading situation.

The overlooked factor is that US fiscal spending in 2024 may exceed expectations, boosting the growth rate of GDP and residents' income throughout the year. The sharp decline in US fiscal spending in the first quarter was mainly due to short-term factors such as the risk of a government shutdown and temporary funding restrictions. According to the Official Appropriation Act, total fiscal expenditure in 2024 may rise from $6.1 trillion last year to $6.6 trillion. We expect the growth rate of total US fiscal expenditure to rise to 8% for the whole year. Excluding interest expenses, effective fiscal expenditure will also reach 5.1%.

The US economy may have had a smooth “soft landing” three quarters ago. Housing investment is a major contributor to negative GDP growth and is an “indicator” of whether the economy is desensitized to financial conditions. In the eight recessions in history, real GDP retraced an average of 1.7 percentage points (quarterly annualized), and private fixed investment contributed an average of 1.6 percentage points. Among them, residential investment experienced negative growth 7 times, dragging down real GDP growth by an average of 0.8 percentage points; non-residential investment only experienced negative growth 2 times.

In this round of the Fed's interest rate hike cycle, residential investment has experienced a complete recession cycle, but it has now been growing for 3 consecutive quarters, indicating that the US economy has come out of a period of interest rate sensitivity. Moreover, the willingness of enterprises to spend capital has begun to pick up, and both bank credit supply and demand have improved markedly, which means that the recovery trend in private fixed investment can continue in the short term. At the same time, with the labor market running well, consumption is unlikely to “collapse” without warning.

When it comes to the “last mile” of inflation, the Federal Reserve has a “dilemma.” Based on the Phillips curve framework, the Federal Reserve can balance growth and inflation only in a narrative where supply-side restoration dominates. Otherwise, when the economy enters a demand-side dominated zone, the economy will either overheat or slow/decline. Based on the breakdown of PCE inflation, it can be seen that the source of core PCE inflation stickiness from January to March 2024 is both the supply side and the demand side.

The Federal Reserve's policy position can be summarized as a “four quadrant”: economic gap → interest rate cut; good economy, lower inflation → interest rate cut; good economy, flat inflation → longer; good economy, higher inflation; the Fed is already “behind the curve.” At the June regular meeting, the Federal Reserve is likely to lower the guidelines for subsequent interest rate cuts. In tracking, we need to pay attention to the Fed's statement on inflation risk: when it emphasizes that upward inflation risks prevail, it will significantly lead to an increase in term premiums and tightening financial conditions.

The bank believes that the austerity deal triggered by fears of further inflation is not over yet. Therefore, we should not solidify the time when the Federal Reserve cut interest rates, and we should not take it lightly that interest rates on US bonds have peaked. Negative feedback can only be considered when it rises to a certain position, which in turn leads to tighter financial conditions. Commodities may be the “last link” of negative feedback. However, trading and the Fed's decision are “two different things”: the more the market trades and does not cut interest rates, the more likely it is that the Fed will cut interest rates.

Risk warning: geopolitical conflict escalates; the Federal Reserve raises long-term neutral interest rates; financial conditions shrink marginally;