Introduction to the report / core points
Recently, the 10-year and 2-year term spreads of US bonds have been upside down, and the 10-year and 2-year spreads deviated from the 10-year and 3-year spreads. On the one hand, the reason for the former is that the US economy is facing real downward pressure, on the other hand, it is also disturbed by short-term inflation; The deviation between the two term spreads stems from the inclusion of more inflation expectations in the two-year period, and the three-month period is more sensitive to the actual liquidity environment. Looking forward to the future, in the short term, the 10-year 2-year yield will still be reversed repeatedly, and the deviation from the interest rate spread in March of 10 years will continue. The upside down pressure of the term spread of the former will ease periodically with the peak of US inflation, and the trend of deviation from the interest rate spread in 10 years, 2 years and March will converge with the continuous interest rate increase of the Federal Reserve. In terms of US stocks, it is difficult for US stocks in Q2 to make outstanding performance in the revision of earnings expectations and liquidity tightening expectations, but the possibility of significant withdrawal is limited. The impact of risk appetite caused by the Russian Ukrainian crisis has further mitigated the risk of US stocks in Q1.
The upside down of US bond interest rates in the past 10 years and 2 years is due to the downward pressure on the economy and the disturbance of short-term inflationary pressure
Recently, the upside down between the yield of 10-year US bonds and that of 2-year US bonds has attracted market attention. From past experience, on the one hand, the upside down of 10-year and 2-year US bond yields means the expectation of economic recession. The upside down time point is often consistent with the US economic recession cycle defined by NBER. In the past, the average time interval between the two is about 1.5 years; On the other hand, the essence of the upside down of yield reflects the expectation of tightening liquidity and weakening fundamentals. For the equity market, most of them mean the resonance between profitability and downward pressure at the valuation end, which is easy to have an impact on the price of equity assets.
Recently, there are two characteristics of various assets in the United States: first, after the upside down of the 10-year and 2-year term interest spread, the U.S. stocks have not been significantly impacted and basically maintained a volatile trend. Second, the 10-year 2-year term interest margin and the 10-year March term interest margin are obvious. The former has been upside down, but the latter is still high; From the historical experience, the above two term spreads have good synchronization; However, there has been a continuous deviation between the two since Q3 last year. At present, the 10-year and 2-year term interest margin is – 6BP, and the two have been upside down; However, the 10-year three-month term interest margin is still 185bp. We believe that the reasons for the upside down of interest rate spread over the past 10 years and 2 years are as follows: first, the US economy is indeed facing real downward pressure; Second, the yield of two-year US bonds has been disturbed by large short-term inflation pressure, which also indirectly leads to the deviation of the two major term spreads of 10 years, 2 years and 10 years in March (the above conclusions will be detailed below). From the structural characteristics of the recent trend of various categories of assets, our outlook for the future is as follows:
In terms of U.S. debt, in the short term, the 10-year two-year yield will still be reversed repeatedly, and the deviation from the interest rate spread in March will continue. The upside down pressure of the term spread of the former will ease periodically with the peak of US inflation, and the trend of deviation from the interest rate spread in 10 years, 2 years and March will converge with the continuous interest rate increase of the Federal Reserve.
In terms of US stocks, it is difficult for US stocks in Q2 to make outstanding performance in the revision of earnings expectations and liquidity tightening expectations, but the possibility of significant withdrawal is limited. The impact of risk appetite caused by the Russian Ukrainian crisis has further mitigated the risk of US stocks in Q1.
The deviation between the two term spreads stems from the inclusion of more inflation expectations in the two-year period, and the three-month period is more sensitive to real liquidity
First, the yield of two-year US bonds is more sensitive to inflation and can be more included in inflation expectations from the perspective of term premium. At present, the inflation pressure in the United States is still caused by the tension of the supply chain. Under the background of the expected gradual easing of the tension of the supply chain, the market’s inflation expectations for different periods also show a gradual easing trend. Using comparable indicators, the inflation expectations of the 1-year, 2-year, 5-year and 10-year periods currently calculated by the Cleveland fed are 2.6%, 2.1%, 1.9% and 1.9% respectively. Therefore, the valuation of short-term inflation pressure by the 2-year treasury bond yield is more sufficient than that of the 10-year period, which accelerates the narrowing of the 10-year and 2-year interest rate spread.
Second, the three-month US bond yield is more sensitive to the real liquidity at the short end. According to the latest data on April 1, the Federal Reserve still “has” more than $1.6 trillion of liquidity in the overnight reverse repurchase. At present, the minimum bid winning interest rate of the overnight reverse repurchase is 0.5%, which is basically consistent with the three-month US bond yield of 0.52%. As a mutual substitute for short-term assets (one-year treasury bonds and fed reverse repo are the main investment assets of short-term funds such as US cargo base. For details, please refer to the previous report “pumping of us reverse repo, taper gradually approaching”), Once the three-month US bond yield rises sharply by more than 0.5%, its yield advantage over the Fed’s overnight reverse repo will attract more short-term funds to the three-month US bond, and then suppress its yield to continue to rise. In the current context, only the Federal Reserve continues to raise interest rates and raise the overnight reverse repo rate at the same time will open up upward space for the yield of three-month Treasury bonds.
The 2-year term is more sensitive to inflation. After the inflation data peaked, the 10-year and 2-year upside down pressure may be released in stages. It is expected that the 10-year and 2-year term spread upside down pressure will be relieved in May, after repeated upside down or normal. First, it is expected that the Fed may clarify the schedule reduction plan in May. The weighted average duration of treasury bonds held by the Fed is 7.6 years. The reduction of the scale of treasury bonds is mainly concentrated in the long end. The schedule reduction can raise the long-end interest rate more, delay the term spread and narrow. Second, considering that the two-year US bonds are sensitive to inflation, once the inflation data peaked and led to the decline of inflation expectations, the pressure on the upside down of the 10-year and two-year US bond term spread will be relieved. We expect the US CPI to peak in March.
The future trend of CPI in the United States still depends on the changes of two core factors: oil price and wage: Based on our current judgment, oil price Q1 rose in a pulse and fell after peaking; After the labor supply and demand gap is alleviated, the salary growth rate stabilizes and declines. The US CPI may hit the annual high in March, the high may exceed 8.5%, and will fall back to the range of 6% – 7% at the end of the year. In terms of wages, there is still room for further repair of employment supply, the upward pressure on wages will continue to ease, the year-on-year growth rate will gradually decline, there is no risk of wage inflation spiral, and the broad-spectrum inflation pressure will gradually ease in the future (please refer to the previous report when the US CPI peaked under the Ukrainian crisis for details). The US employment data in March showed that the labor force participation rate had been repairing for three consecutive months, reaching 62.4% this month; The month on month growth rate of average hourly wage was near 0 in February and March, and our judgment on the U.S. job market is gradually being fulfilled.
In terms of oil price, we should focus on the repression of supply side factors such as the Iran nuclear agreement on oil price. On April 4, Iran claimed that it was close to reaching an agreement with the United States on resuming the 2015 nuclear agreement. We believe that there is still uncertainty in crude oil supply before the end of the Russian Ukrainian crisis, which is also a good negotiation window for Iran; In the context of the recent marginal easing of Russian Ukrainian relations, April is a time node that needs to be focused on.
In addition, there is also the possibility of marginal loosening in the progress of negotiations between Venezuela and the United States on increasing crude oil production. According to Bloomberg statistics, the total idle capacity of Iraq and Venezuela exceeds 4 million barrels (Bloomberg estimated data), which is higher than the current OPEC idle capacity of 3.49 million barrels / day.
In March 2010, the term spread of US bonds is expected to continue to narrow with the gradual implementation of the Fed’s interest rate hike, and Q2 is expected to remain in a continuous convergence trend.
As mentioned above, although the impact of risk appetite caused by the Russian Ukrainian crisis has further mitigated the risk of US stocks in Q1 and the possibility of significant withdrawal of US stocks in Q2 is limited, it is difficult to make outstanding performance in the revision of earnings expectations and liquidity tightening expectations. Although the current 10-year and 2-year term interest rate spread may amplify recession concerns under the disturbance of short-term inflation pressure, the US economy does face downward pressure during the year. In terms of overall economic growth, since the ebb of Q3 financial subsidies in 2021, the core driving force of the US economy has come from replenishing the Treasury. In 2021, the contribution rate of Q3 replenishment to GDP month on month growth reached 96%, and the contribution rate of Q4 month on month growth decreased slightly, but it was still as high as 70%. From the actual growth trend of inventory estimated by us, the current replenishment rate will probably end in Q1, and the pulling effect on the economy will gradually weaken thereafter. In addition, rising commodity prices will also curb capital expenditure. In terms of consumption, American consumption has been in the central downward channel since 2015. After the normalization of the epidemic in 2022, it is expected to continue the previous downward trend. First, the excess financial subsidies granted in the past two years have overdrawn the consumption demand of some durable goods. The growth rate of durable goods consumption in the United States in the past two years is significantly higher than the trend growth rate before the epidemic. Second, the remaining space for upward repair of service consumption is also relatively limited. For example, taking the pre epidemic level as the benchmark, personal service consumption in 2021 has been repaired to 98% in 2019 (durable goods consumption and non durable goods consumption are 127% and 112% respectively before the epidemic). We believe that the annual US consumption will also return to the downward trend before the epidemic, which can not drive the economy upward than expected. On the whole, as the replenishment of core economic kinetic energy is coming to an end, the US economy will face downward pressure quarter by quarter throughout the year.
It is expected to raise interest rates three times in March, may and June of the whole year. It is expected that the interest rate increase and contraction table in the first half of the year will be pushed forward step by step, and the tightening will be suspended in the second half of the year. We expect the Federal reserve to raise interest rates three times in March, may and June of the whole year. If the oil price continues to be high or the CPI goes higher than expected, the possibility of raising interest rates by 50bp in May and June will not be ruled out. After the interest rate increase and contraction table in the first half of the year is pushed forward. Our previous report pointed out that the goal of the Fed’s control focuses on inflation expectations. The essence of the current hawkish attitude is to suppress inflation expectations through tightening expectations. After inflation expectations fall, the current hawkish attitude of the Fed may not be able to be continuously fulfilled. Based on our judgment on the rhythm of inflation (it is expected that the current round of upward inflation growth in the United States is expected to peak in March, and the inflation expectation will gradually decline. For details, please refer to the previous report “when the CPI in the United States will peak under the Ukrainian crisis”), we expect the Federal Reserve to raise interest rates three times in March, may and June of the year, and we expect the interest rate increase and contraction in the first half of the year to be pushed forward step by step, and the tightening will be suspended in the second half of the year; The constraints of short-term austerity stem from financial stability. The more important constraints of the whole year stem from the decline of inflation expectations, and the primary goal is to gradually give way to growth. The problem of financial stability mainly stems from the risk of further upside down of the yield curve, which will not be detailed here. The more important reason why it is difficult to raise interest rates in the second half of the year is that after inflation expectations fall, the primary goal gradually gives way to steady growth under the background of winning the election. The pressure on the inflation side will weaken marginally. After the peak of inflation growth in the United States in March, inflation expectations will gradually fall, and the risk of runaway inflation will be gradually falsified; The pressure on the growth side will increase marginally, and the downward pressure on the economy will continue to increase after the stock replenishment is coming to an end. In this context, the primary goal of the Federal Reserve may gradually switch to steady growth, and the necessity of further raising interest rates or even shrinking the table will decline. US stocks will continue to rebound after the interest rate increase expectation is falsified to help the Democratic Party win the election. In the whole year, it is expected that the Federal Reserve will raise interest rates once and it is difficult to shrink the table.
CPI has not yet peaked, and there is still room for tightening expectations. The current round of US bond yields is expected to peak and fall in May. In terms of US bonds, we believe that the current round of US bond yields is close to peaking. However, when CPI has not peaked in the short term and there is still room for tightening expectations (Fed officials have made more efforts to shrink the table in the forward-looking guidance or the rate increase at the interest rate meeting in May and June is higher than expected), there is still a small upward space, The high point is expected to be around 2.5%; It is expected that after the tightening expectation in May is gradually fulfilled, the US bond yield will peak and fall. Before that, it is expected that the US bond yield will remain high and volatile. The 10-year and 2-year term spread may be reversed repeatedly.
In terms of U.S. stocks, asset prices will gradually desensitize after the normalization of confrontation between the United States and Russia in the future, and the asset price correction due to the impact of risk appetite will be gradually repaired. In the short term, US stocks still need to return to the main line and pay attention to the impact of the expectation of future interest rate hikes and the downward resonance of corporate profits on US stocks. There is limited space for Q2 sharp correction, but it is difficult to make outstanding performance, and there is a high probability of maintaining the shock trend; After the interest rate increase expectation in the second half of the year was gradually falsified, the economic downturn expectation was superimposed, and the rebound opportunities of growth stocks were concerned.
In terms of gold, in the short term, the price of gold also rose sharply, which is in line with our early judgment; After the conflict is gradually normalized, it is expected to pull back from the current high level. However, we are still optimistic about gold throughout the year, especially the decline of the second half of the US dollar will drive the gold price higher. Throughout the year, we believe that the London gold price will exceed US $2000. In terms of the US dollar, driven by risk aversion in the short term, it is expected to pull back from the current high level after the gradual normalization of future conflicts. In 2022, the US interest rate hike was less than expected and the European reserve replenishment lagged behind the US. The US dollar index is expected to return to the downward channel and go down 90.
Risk warning: the epidemic situation exceeded expectations, resulting in the extension of the easing cycle; Higher than expected inflation led to rapid tightening by the Federal Reserve.
