U.S. stocks continue to rebound after soaring U.S. bond interest rates? Yes, this is the situation since March 15, 2022. In less than two weeks, the interest rate on 10-year US bonds rose from 2.14% to 2.48%, while the S & P 500 index rebounded 8.9% from a year low of 4173. It is also noteworthy that the surge in US bond interest rates occurred against the background of the Fed's shift to radical interest rate hikes, and the market's bet on such radical interest rate hikes did not suppress gold.
U.S. stocks rose and gold rose, which seems to contradict the scenario of soaring U.S. bond interest rates, especially under the background of the full turn of the Federal Reserve into an eagle. How can we understand the anomalies in the performance of these asset prices? We believe that the core lies in the real policy interest rate of the United States. As shown in Figure 2, as a representative of the real policy interest rate, the real interest rate of two-year US bonds has been at a historical low recently. It can be seen that the surge of nominal interest rate has not restrained the rebound of inflation expectation, which indicates that the monetary policy is still relatively loose in fact; Historically, when the actual policy interest rate soars, there will be a sharp correction in US stocks.
Therefore, in the future, the trend of real policy interest rate in the United States is particularly critical. If the real policy interest rate follows the surge of nominal interest rate, the current decline of US bonds and the rise of US stocks will turn into a double kill of stocks and bonds, and it is difficult for gold to continue to strengthen. Will this scenario occur? Since the real interest rate = nominal interest rate inflation expectation, we might as well judge the trend of the real interest rate of two-year US bonds from the two items on the right of the equation.
In terms of nominal interest rate, the two-year US bond interest rate will continue to rise with the federal funds rate. As shown in Figure 3, in history, the interest rate of two-year US bonds and the federal funds rate tend to be consistent, but the former has rebounded much more than the latter since 2022; The last time there was a similar situation was in 1994. From the situation at that time, during the two consecutive 50bp interest rate hikes by the Federal Reserve, the two-year US bond interest rate continued to rise by 63bp. Therefore, if the Federal Reserve raises interest rates for two consecutive 50bp from May to June, the nominal interest rate of two-year US bond interest rate is still expected to rise further
From the perspective of inflation expectations, the market's short-term inflation expectations are likely to continue to rise in the second quarter. As the interruption of the global supply chain has not been effectively alleviated so far, and the current surge in inflation has not yet caused substantial demand damage to the US economy, we expect the market's expectation of short-term inflation to continue to rise in the second quarter. Especially under the influence of the Russian Ukrainian war, mainstream institutions are still likely to continue to raise the inflation forecast of the United States this year and next year, which also means that the inflation expectation of US bonds in the two-year period is expected to rise further.
Based on the above analysis, although the real policy interest rate of the United States is likely to rise in the second quarter, we expect it to be within 50bp. Historically, this moderate upward trend is not enough to trigger a sharp correction in US stocks, which also means that the rebound in US stocks under the recent surge in US bond interest rates is expected to continue. Similarly, as the market's bet on the Federal Reserve's radical interest rate hike did not curb the rebound of inflation expectations, we will continue to be optimistic about gold in the second quarter unless the Russian Ukrainian war is over.
Risk tip: the epidemic spread exceeded expectations, and the policy hedging economic downturn was less than expected
