Research conclusion
The war between Russia and Ukraine has had an important impact and changes on the macro environment. In some dimensions, these changes are more complex and stubborn than we expected in advance and in the event. Now, we must stand on the lasting influence of the conflict between Russia and Ukraine and test and calibrate these pre war narratives. On the basis of the macro recession and geopolitical outlook, we once again pay attention to the problems of the overseas market, such as the recession and the geopolitical outlook.
Commodity supply shock: the worst case is cleared, but it is difficult to return to the past
Since the outbreak of the conflict between Russia and Ukraine, the blocking of commodity supply was once the strongest concern of the market. Now, on the optimistic side, we see that the extreme situation of the impact has been cleared. On the negative side, the impact of geography seems to be sustainable, and the supply and demand pattern is more difficult to return to normal than expected.
In early March, the United States and Europe had different decisions on the trade embargo against Russia: the United States and Britain announced an embargo on energy products to Russia, but Europe did not follow up as a whole. From the perspective of bulk price trend, the market identified this as the inflection point of bulk commodity supply risk. Taking this as a watershed, the stage of sharp upward rise in commodity prices has come to an end, and even most of the world's broad-spectrum risk assets have stabilized and rebounded after March 8-9.
However, it is also noted that all relevant bulk varieties have not fallen back to the price level before the war. At present, we have observed that some non sanctions factors are playing a role and continue to distort the supply and demand pattern of the global commodity market. These factors may exist in the medium and long term, making it difficult for commodity prices to fall smoothly - the rise in the prices of resource products and raw materials may become a difficult problem that we need to deal with continuously in the future. Whether the oil and gas of the United States is supplied to Europe by sea or the Eastern market is considering transferring redundant bulk commodities to Europe, the whole bulk market will be affected by geopolitics, showing a pattern of supply-demand mismatch, rising commodity supply costs and declining market efficiency, which explains that up to now, although the commodity price surge stage in Russia and Ukraine has ended, the prices of major related commodity categories have not smoothly fallen back to the pre war level, Especially oil and gas. The new construction and structural adjustment of transport capacity will take at least several years, which means that the impact of commodity prices caused by this supply shock cannot be dissipated in the short term.
Disappeared fed put: the pace of policy tightening has been revised up, and the risk of stagflation has increased
According to the assumption of new energy price scenario, update the inflation outlook: when WTI oil price operates at the center of USD 110 / barrel in the year, it will be difficult to see an inflection point in the growth of us CPI and core CPI in the year; When WTI oil price operates at the center of US $120 / barrel this year, US inflation growth is not only difficult to see an inflection point, but also more likely to maintain an upward trend during the year.
Under more severe inflationary pressure, monetary policy began to release signals of further tightening. At present, the two-year yield of US bonds (about 2.4%) is roughly equivalent to the interest rate increase path of FFR of about 2.5% by the end of this year and about 3% by the end of 2023. It has priced at least two 50bp interest rate increases in 2022, which is significantly steeper than the expected path before the war.
Under the influence of the two dimensions of high inflation and tight currency, the recession warning signal provided by the corresponding leading indicators of the U.S. economy is clear and the trend is predictable. We need to be vigilant about the recession risk that may come:
1) consumer demand pressure caused by high inflation: consumer demand is the cornerstone of the U.S. economy. Regardless of the consumption of goods and services, consumer confidence is the leading indicator of good consumer demand. From the perspective of the impact of inflation, high inflation suppresses consumer expectations, which is usually opposite to consumer confidence. The University of Michigan consumer confidence index read 59 in March, which is the low level in recent 10 years, suggesting that consumer demand may face pressure from high inflation in the future.
2) economic recession risk caused by tight currency: the term spread of US bond interest rate is essentially a comparison between the conditions of spot monetary policy and the intensity of economic activity. The term spread is one of the best leading indicators to warn of recession in the past. At present, 5s30s has been upside down, and 2s10s has been touched upside down for many times. The too steep tightening path of monetary policy has played a great role in narrowing the term interest spread of this round. Judging from the pricing of interest rate futures market and our model calculation, the yield structure of US bonds in this round may have a deep inversion with a large range: in the curve structure of one-year forward, the inversion range of 2s10s reaches about 25bp. In terms of our interest rate pricing model, the end point of this round of interest rate increase cycle is 2s10s upside down or about 55bp. In front of the deep upside down curve, the possibility of long-term recession needs to be taken into account.
Risk tips
The calculation results of the model depend on the input conditions and scenario assumptions; There is uncertainty about the direction of geopolitical events.
