Key investment points:
The causes of inflation and structural changes may make the Fed's attitude towards raising interest rates hawk before dove after dove.
An important factor in the upward cyclical inflation in 2020 is that the epidemic is essentially a public health crisis, moving the aggregate supply curve to the left. According to the analysis of Phillips curve, we estimate that other conditions remain unchanged. When the supply bottleneck effect caused by covid-19 epidemic completely subsides, inflation may fall by more than 40% compared with the current level, which means that if supply constraints are opened, the Fed's attitude towards inflation may be eagle in the front and dove in the back.
The Federal Reserve has a high probability of starting this round of interest rate hike cycle in March, and it is expected that the pace of subsequent interest rate hikes will always be slower than market expectations.
We believe that some factors restraining inflation in the recovery cycle of 2020 have subsided compared with the previous cycle, which means that in order to curb inflation, the overall tightening pace of the Federal Reserve will be significantly faster than that in the 2008 cycle; However, due to the steeper Phillips curve faced by the United States in 2020, the Federal Reserve will face worse trade-offs. The pace of interest rate hike may always lag behind market expectations, and the end interest rate of interest rate hike may be higher than that of the previous cycle.
The structural reason for the resurgence of inflation is that the US economy is in the upward stage of the debt cycle.
The recovery cycle after 2008 corresponds to the deleveraging stage of the debt cycle; The crisis in 2020 is different. After 2008, the deleveraging of the household sector, the liquidation of the enterprise sector and the slow expansion of credit in the financial sector have all restrained the rise of inflation. The inhibitory effect of structural factors will disappear in 2020.
Other reasons for the resurgence of inflation include 1) stronger fiscal and monetary stimulus compared with previous cycles, and 2) supply constraints caused by the epidemic.
On the demand side, it is difficult to say that the size of the 2020 cycle crisis is twice that of 2008, but the intensity of fiscal expenditure in the 2020 cycle is twice that of 2008, and the liquidity trap relief rate provided by the finance is 4.5 times that of 2008; The intensity of quantitative easing in the 2020 cycle is also greater. In addition, the labor market and supply chain are disturbed by the epidemic, and there are obvious bottlenecks.
Overvalued value and natural interest rate may rise are the main vulnerabilities of the market?
There are both risks and opportunities in the stock market. In theory, there is a range that can make the stock market continue to rise. From the past history, the average return in the six months after the Fed raised interest rates is still positive. On the other hand, risks are indeed accumulating. The valuation of the market at present is much like that before the dotcom bubble burst in 2001. The pace of Fed tightening in this cycle will probably be faster than that in the previous cycle, so the most dangerous time of US stock correction should also be significantly ahead. At the same time, in the 2020 new debt cycle, the corresponding natural interest rate may have an upward trend, which is also an important factor that the end interest rate of the Fed's interest rate hike may be higher than that of the previous cycle.
Risk tips
The US economy recovered less than expected, the epidemic repeatedly exceeded expectations, and geopolitical risks exceeded expectations
