Economic Observer Reporter Liang Ji As inflation reaches its peak, the Federal Reserve once again made clear its tightening attitude. On July 6, local time, the Federal Reserve released the minutes of the June 2022 FOMC (Federal Open Market Committee) interest rate meeting. The minutes showed that the Federal Reserve reached an unprecedented consensus on fighting inflation and that monetary policy will be tighter.
Since 2022, the inflation level in the United States has continued to be high. In March, the U.S. Consumer Price Index (CPI) increased by 8.5% year-on-year, setting a record since December 1981; in April, the U.S. CPI fell slightly to 8.3%; in May, it surged to 8.6%. Inflation's "high fever" has put the Federal Reserve under increasing pressure to raise interest rates. Previously, the market focus once shifted from inflation anxiety to recession concerns, but the Federal Reserve's repeated actions have shown that it is resolute in raising interest rates and is determined to control inflation regardless of economic recession.
ICBC International Chief Economist Cheng Shi believes that if the core PCE (personal consumption expenditures deflator) of the United States is required to drop from 5.2% this year to 2%-2.5% next year (Fed June FOMC forecast), unemployment will The rate of increase should range from 3.8% to 4.5%, which means that it is almost impossible for the United States to avoid economic recession and achieve a "soft landing" of inflation at the same time.
Gao Ruidong, chief macroeconomist of Everbright Securities , said that in the context of the Federal Reserve's aggressive interest rate hikes and lack of motivation for consumption and investment, the weakness of the U.S. economy has gradually emerged, and the risk of stagflation has increased significantly. The probability of an economic soft landing is low, and there is still room for downward adjustments in US stocks .
While the U.S. stock market is under pressure, based on baseline assumptions and benefiting from the gradual recovery of China's economy, will A shares emerge from an independent market in the second half of the year?
Determined to raise interest rates
On July 6, local time, the Federal Reserve released the minutes of its June monetary policy meeting. Among them, whether to raise interest rates again by 75 basis points in July has attracted special attention from the market. Minutes of the meeting showed that participants agreed to raise interest rates to a so-called "restrictive level" that is high enough to slow economic growth and that the Fed will continue to raise interest rates if inflation does not decrease. The minutes of the
meeting showed that the Federal Reserve is optimistic about short- and medium-term growth, and it expects GDP to rebound to solid growth in the second quarter. However, compared with May, the meeting minutes lowered the economic growth forecast for the second half of 2022 and 2023, but still believed that the actual GDP growth rate will be higher than the potential growth rate. In terms of inflation, the Federal Reserve's judgment on inflation is that the increase will expand to 5% during the year (previous value was 4.3%), and will drop to 2.4% and 2% from 2023 to 2024. The inflation expectation in 2023 is lowered by 0.1 percentage points from the minutes of the previous meeting. In addition, the minutes of the meeting also believed that the pressure on the U.S. labor market has improved marginally, and the credit conditions of residents and enterprises are generally stable, but the quality of speculative-grade credit has shown signs of deterioration.
Regarding the rate hike that the market is most concerned about this month, Fed Chairman Powell did not give a clear response. He only said at the press conference after the interest rate meeting that the Fed would raise interest rates by 50% at the meeting held from July 26 to 27. or 75 basis points are possible. CME Group’s interest rate watch tool FedWatch shows that the probability of the Federal Reserve raising interest rates by 75 basis points reaches 85.6%. In addition, the possibility of raising interest rates by 50 basis points in September is more than 80%.
At this interest rate meeting, participants had unprecedented unanimous opinions on the extent of interest rate hikes. Minutes of the meeting showed that among the 18 officials who participated in the interest rate meeting, only one did not support another 75 basis points interest rate hike this month, while the remaining 17 were all in favor.
As the CPI unexpectedly surged to 8.6% in May, the Federal Reserve announced a radical interest rate hike of 75 basis points at the June interest rate meeting, which was also the largest interest rate increase since 1994. Data show that energy, food, rent and labor wages became the main driving forces for the increase in CPI in May.
At this stage, the Federal Reserve is firm in raising interest rates and has shown its determination to control inflation despite economic recession. Therefore, Gao Ruidong believes that in the short term, under the background that inflation expectations are still anchored at a reasonable level and the labor market maintains resilience, the Federal Reserve's continuous and large-scale interest rate hike path is difficult to change, and there is a high probability of raising interest rates by 75 basis points in July.
CITIC Securities pointed out that the Federal Reserve’s official statement on raising interest rates in July is still to raise interest rates by 50 or 75 basis points, depending on the data and economic outlook.An important addition to the meeting minutes is that the Fed stated that "if the public questions the Fed's determination to adjust its policy stance, inflation may become entrenched and is a major risk currently facing the Fed." CITIC Securities believes that this indicates that the Federal Reserve may need a more stringent monetary policy stance to convey its determination to fight inflation. Combined with the recent support statements from many Federal Reserve officials, it is expected that the probability of the Federal Reserve continuing to raise interest rates by 75 basis points in July is still high.
Mike Wilson, chief equity strategist at Morgan Stanley , said that U.S. economic growth is slowing sharply and will be more serious than expected. As interest rates climb and equity risk premiums more accurately reflect that U.S. economic growth is slowing, U.S. stocks may be negatively affected by second-quarter 2022 results, and U.S. stocks may enter a chaotic earnings season.
U.S. stocks are under pressure
html On the day when the minutes of the 16 monetary policy meeting were released, U.S. stocks rose during the session, and fell slightly towards the end of the session. As of the close of the day, the Dow Jones Industrial Average closed up 0.23%, the Nasdaq Index closed up 0.35%, and the S&P 500 Index closed up 0.36%. Previously, U.S. stocks have closed higher several times after the Federal Reserve determined the extent of interest rate hikes, but the market is quite pessimistic about its direction in the second half of the year. html Since the beginning of this year, the Dow Jones Industrial Average has fallen from above 36,000 points to near 31,000 points, a drop of nearly 15%; during the same period, the S&P 500 Index has dropped by 18.64%, and the Nasdaq Index has fallen by 26.6%, entering the " technical bear market ”.Mike Wilson predicts that if the U.S. economy shrinks, the S&P 500 index will fall to near 3,000 points later this year. It pointed out that because the profit expectations of the S&P 500, Nasdaq 100 index are still much higher than the overall profit trend line of the US stock market after the financial crisis by more than 20%, there is a risk of earnings revision in the US stock market. The bear market in U.S. stocks will bottom out only when earnings expectations are revised down to a more reasonable level or when the entire valuation has priced in this risk. Currently, the S&P 500 index is above 3,900 points.
It is worth noting that at a time when economic recession expectations are coupled with high inflation, rising corporate costs and further decline in consumer confidence may continue to damage corporate profits. Previously, on the day that the US retail giant Target released its first quarter report, its net profit plummeted 51.9%, causing its stock price to plummet 24.87% in a single day; Walmart also suffered a sharp drop in its stock price due to its first quarter report performance falling short of expectations. These factors once caused the market to collapse and U.S. stocks plummeted across the board. The financial report shows that product, raw material and wage prices have significantly eroded the company's profit performance, which has also triggered market concerns about future profitability and growth prospects.
Cui Rong, chief overseas macro analyst at CITIC Securities, believes that the minutes of the Federal Reserve’s June meeting still did not express concern about the economic recession. In particular, we need to pay attention to the Fed’s attitude and stance on the economic recession in the context of rising recession expectations in the near future. At this point, even if the U.S. economy begins a technical recession, the Fed will maintain a hawkish stance until inflation shows no obvious signs of falling. While the Federal Reserve maintains its hawkish monetary policy, it is difficult for U.S. stocks to bottom out and recover, and the marginal easing of the Fed's monetary policy stance in the future may be a signal for U.S. stocks to bottom out in a periodic manner.
Foreign investors are optimistic about the independent market of A-shares
The Federal Reserve's tightening of monetary liquidity has put pressure on the external market, but some institutions expect that the independent market of A-shares will continue. Since hitting the bottom at the end of April, A-shares have continued to recover. From April 26 to July 8, the Shanghai Composite Index and range rose by 16.27%, the Shenzhen Stock Exchange Component Index rose by 25.97%, and the GEM Index rose by more than 30%, reaching 31.02%. Compared with the reality that European and American stock markets are affected by economic recession expectations and uncontrollable inflation, A-shares have experienced a positive independent market with the support of the recovery of domestic economic fundamentals and the easing of epidemic control measures.
Nomura Orient International Securities believes that high inflationary pressure is raging around the world and forcing major overseas central banks
to adjust the pace of monetary policy contraction; at the same time, the shadow of economic recession has intensified the volatility of global financial markets in the near future. Although China cannot be alone, its domestic demand environment in the early stages of recovery may play a greater supporting role in the domestic stock market.Based on baseline assumptions, the gradual recovery of China's economy in the second half of the year will drive the strength of A-shares, and the momentum driving market performance may shift from the recent rebound in sentiment to the recovery of fundamentals. Against this background, as various industries are driven by policy stimulus, credit and demand, the order of recovery among industries will bring about industry rotation opportunities for A shares. In the second half of the year, the A-share market will show four characteristics: first, the industry rotation under the recovery of domestic demand, from the early-cycle investment end to the late-cycle consumer end; second, the strong implementation of consumption stimulus policies, aiming at the driving force of the industry Strong optional consumption stimulation and subsidies for residents’ consumption power; the third is the impact of overseas recession on China, the decline in external demand and the fall in commodity prices; the fourth is the decline in risk appetite of foreign capital positions , the high proportion of foreign capital holdings and the correlation between the stock price and the external market Strong financial pressure on industries.Goldman Sachs studied and analyzed fund flows and investor allocation trends in the Asia-Pacific Portfolio Strategy Report published at the beginning of the month, and judged that Asian stock markets should perform better than U.S. stocks. The report stated that Asian stock markets were under pressure in the first half of the year amid the adverse backdrop of tightening interest rates, heightened concerns about the U.S. recession, and the appreciation of the U.S. dollar; although the outlook for net profit performance is unclear, the Goldman Sachs strategy analysis team believes that given the current low valuation , lower allocation, favorable policy environment in China and other factors, Asian stock markets should perform better than U.S. stocks.
Goldman Sachs recommends increasing allocations to A shares, ASEAN , banks and other defensive stock selections. It pointed out that since January last year, foreign capital outflows from Asian markets outside China have totaled US$111 billion, exceeding the US$93 billion outflow during the global financial crisis. Capital inflows in China have improved. Against the background of capital outflows of US$21 billion from other Asian markets in June, A-shares recorded northbound capital inflows of US$11 billion that month. The market is worried about the U.S. economic recession or a major market adjustment, which has had a huge impact on Asian markets, especially capital flows in North Asia. However, A-share and ASEAN markets are more stable.
The MSCI China Index has rebounded 25% from its mid-March low, indicating that market sentiment has improved. The Goldman Sachs strategy analysis team judged that investors' positions have not yet fully reflected the more positive sentiments. Active global public funds are still underweight Chinese stocks by 440 basis points, while the allocation of emerging market and Asian public funds to the Hong Kong stock position and the Chinese concept stocks sector also needs to be improved.
