Report guide
The recent frequent outbreaks in China have exacerbated the uncertainty of fundamentals. Last week, the national Standing Committee proposed that "we should make timely and flexible use of various monetary policy tools such as refinancing, give better play to the dual functions of aggregate and structure, and increase support for the real economy". We believe that the current monetary policy still takes steady growth as the primary goal, and there is still room for monetary policy easing. Since the beginning of April, dr007 has recorded a value below 2.1% for several days, and most days fluctuate at a low level near 1.9%. We mainly suggest that the window period for the central bank to cut interest rates is from April 15 to May 16. The central bank has a high probability of cutting interest rates. Considering the factors such as the Fed's interest rate increase, the range of interest rate reduction should not be too large, and it is expected to reduce interest rates by about 10bp. The purpose of interest rate reduction is: 1. To help enterprises to rescue and reduce the financing cost of enterprises; 2. Reducing financing costs will also stimulate the demand for loans in the real sector, and "wide money" will cooperate with "wide credit" to maintain economic fundamentals. After the central bank reduces the policy interest rate, LPR will also decline. In addition to cutting interest rates, we also judge that there is still a probability of reducing reserve requirements in the second quarter. At present, the interest rate difference between China and the United States has been upside down, but the pressure on the balance of payments is relatively controllable in the short term. We suggest that the balance of payments in the second quarter has entered the observation period. If it faces the pressure of imbalance, it may become an important consideration factor of monetary policy.
For the impact on the market, if the Central Bank cuts interest rates and the monetary policy continues the combination of "wide money + wide credit", superimposed with our judgment that the actual year-on-year growth rate of GDP in the first quarter may significantly exceed the market expectation by 5.4%, the equity market is still optimistic about the steady growth sector; It is expected that the yield of 10-year Treasury bonds will remain in the range of 2.7% - 2.9%, the peak in the second quarter will see 2.9%, and the yield curve of treasury bonds will return to steepening.
I. since April, dr007 has been operating at a low level. It is expected that the window period of interest rate reduction will be from April 15 to May 16
Since the beginning of April, dr007 has recorded a value below 2.1% for several days, and most days fluctuate at a low level near 1.9%. We mainly suggest that the window period for the central bank to cut interest rates is from April 15 to May 16. The central bank has a high probability of cutting interest rates. Considering the factors such as the Fed's interest rate increase, the range of interest rate reduction should not be too large, and it is expected to reduce interest rates by about 10bp.
We continue to emphasize that dr007 is the core forward-looking high-frequency index to track the central bank's interest rate reduction. The central bank often adjusts the policy interest rate first and then the dynamic price. That is, if the central bank takes the initiative to increase the liquidity investment, dr007 is significantly lower than the 7-day reverse repo interest rate, then the central bank has room to "follow the market" for interest rate reduction. We think it is appropriate to last for 1-2 weeks, In addition, it should be noted that the natural rhythm of liquidity in the month should be eliminated. In the week of the first working day of April, dr007 continued to be lower than the 7-day reverse repo interest rate of 2.1%, which was lower than the closing rate of 1.79% on April 2. This was partly affected by the fading of cross quarter factors, but it continued to operate at a low level on November and December. Since April, the central bank has moved down as a whole, opening a significant interest rate gap with the policy interest rate. We believe that it reflects the central bank's active liquidity regulation intention, and the probability of interest rate reduction is increasing. This is very similar to the situation in early January. Through the tracking of dr007, we accurately predicted the interest rate cut in January.
We suggest that April 15 to May 16 is the window period for the central bank to cut interest rates. The reason why it is not a specific date is that there is no clear order for the reduction of MLF and reverse repo interest rates. We have sorted out the history of the central bank's adjustment of policy interest rates since 2016. There are three cases of simultaneous adjustment of reverse repo interest rate and MLF interest rate, three cases of reverse repo interest rate before MLF interest rate adjustment, and two cases of MLF interest rate before reverse repo interest rate adjustment. The order of the two is not completely fixed, but most of them are synchronous or Omo precedes MLF. In a few cases, the central bank temporarily suspends Omo operation from the perspective of maintaining stability and liquidity, The interest rate adjustment lags behind the announcement. At present, the central bank is fixed to renew the MLF on the 15th of each month (postponed in case of holidays). We judge that the renewal date of MLF in this month and next month, that is, the time interval from April 15 to May 16, is the window for interest rate reduction.
Second, the interest rate cut is intended to help enterprises rescue, reduce financing costs and stimulate credit demand
Recently, the epidemic situation in China has occurred frequently, and the national aggregated epidemic situation has occurred frequently. It is the largest local outbreak since the epidemic in Wuhan. Under the guidance of the zeroing policy, all cities have taken strict sealing and control measures to deal with it, which has a great impact on consumption and relevant market subjects. The national standing committee meeting pointed out that "China's epidemic has occurred frequently recently, and the difficulties of market players have increased significantly" and that "we must strengthen the guarantee of relief and employment". We believe that the interest rate cut is intended to: 1. Help enterprises to bail out, reduce the financing cost of enterprises, and ensure the main body of the market is to ensure employment; 2. Reducing financing costs will also stimulate the demand for loans in the real sector, and "wide money" will cooperate with "wide credit" to effectively maintain economic fundamentals.
It is expected that there will still be the probability of RRR reduction in the second quarter. The epidemic has intensified the uncertainty of fundamentals and the downward pressure on the economy. At present, the primary goal of monetary policy is still to stabilize growth, and the focus of monetary policy is still credit. Credit is the most effective means to broaden credit and an effective way to promote enterprises to expand capital expenditure and prevent financial idling, The national Standing Committee proposed that "we should make timely and flexible use of various monetary policy tools such as refinancing, give better play to the dual functions of aggregate and structure, and increase support for the real economy". Looking back, at the beginning of March this year, "expanding the scale of new loans" appeared in the government work report for the first time, reflecting the determination of the policy level to stabilize credit and credit. Therefore, we continue to emphasize that there is still the probability of RRR reduction in the second quarter.
How to judge the time point of accuracy reduction? We suggest prospective observation through three signals: 1. The national Standing Committee releases signals;
2. The financial data in the second quarter was less than expected; 3. The stock market has touched the bottom of policy again. As for the carrier of broad credit, we believe that manufacturing, real estate, infrastructure and other directions will continue to make efforts to broaden credit. The relevant logic is:
1. Under the pattern of "steady growth of new manufacturing", it is expected that manufacturing investment will replace traditional infrastructure and real estate investment and become the core driving force of the economy. It is mainly supported by the logic of strengthening the chain, supplementing the chain and rebuilding the industrial foundation, especially the new energy of industry. In this process, a large amount of incremental investment demand in the fields of equipment renewal and technological transformation will be formed. At the end of last year, the central bank created a carbon emission reduction policy tool, Provide targeted financial support in the field of carbon emission reduction. The year-on-year growth of 20.9% in manufacturing investment from January to February has been realized, and we expect the annual growth rate to reach 11.1%.
2. Real estate investment is expected to remain resilient, with an annual growth rate of 5.4%. Urban renewal contains major opportunities and is also a major market expectation; In the field of infrastructure, in 2022, the investment scale of local major projects will be increased and the pace will be ahead. The strength of the investment scale in the first half of the year will also contribute to credit release.
III. the pressure on the balance of payments is relatively controllable in the short term, but it is expected to enter the observation period in the second quarter
With the rapid rise of US bond yields, the interest rate spread between China and the United States has continued to narrow since the end of last year, falling to - 2bp on April 11, the first upside down since June 2010. The market is worried about whether internal and external imbalances will disturb China's loose monetary policy. We believe that the impact can be controlled in the short term: 1. China's monetary policy is highly likely to be "self dominated", and internal problems are often the first to be solved in case of internal and external imbalances; 2. Increasing the two-way fluctuation of RMB exchange rate can also play the role of internal and external automatic balancer, leaving room for China's policy easing; 3. As of the end of March, China's official foreign exchange reserves were 318799 billion US dollars, which is still a safety margin from the warning line of 3 trillion US dollars. From the perspective of the safety of foreign reserves, China's balance of payments remained basically balanced, and the short-term pressure was relatively controllable.
However, in the second quarter as a whole, we expect the fluctuation range of RMB exchange rate to be larger than that at present, suggesting that the balance of payments has entered the observation period in the second quarter. If a mutually reinforcing negative cycle is formed between capital outflow and RMB exchange rate depreciation, resulting in the risk of foreign reserves falling below the $3 trillion threshold, we believe that the balance of payments may become an important consideration of monetary policy and disturb policy decisions.
IV. LPR is expected to decline year-on-year, and the interest rate cut will be transmitted to the entity sector
If the central bank reduces the policy interest rate, because the one-year LPR is linked to the one-year MLF interest rate, it is expected that the LPR will be reduced accordingly. The LPR over one year and five years may decline, but the decline of LPR over five years may still be lower than that over one year. However, even if the reduction of LPR over 5 years is small, it will still be strong and good for the real estate field. The interest rate of personal mortgage loan will be reduced accordingly, which will drive the real estate sales. The interest rates of medium and long-term loans and fixed asset investment loans in the manufacturing industry also refer to the pricing of LPR over 5 years. The reduction of interest rate is also conducive to improving the willingness of enterprises to spend medium and long-term capital and stimulating fixed asset investment.
V. impact on the market: it is expected that the yield of 10-year Treasury bonds will remain in the range of 2.7% - 2.9%
If the Central Bank cuts interest rates, the monetary policy will continue the combination of "wide money + wide credit". We expect that the actual year-on-year growth rate of GDP in the first quarter may significantly exceed the market expectation by 5.4%. The equity market is still optimistic about steady growth sectors, such as finance, real estate, construction, building materials, etc; For the fixed income market, under the above logic, it is expected that the yield of 10-year Treasury bonds will fluctuate in the range of 2.7% - 2.9%, and the peak in the second quarter will see 2.9%. The interest rate cut will have a greater traction on the short-term interest rate, that is, the short-term interest rate will fall more sharply. It is expected that the Treasury bond yield curve will return to steepening. In particular, if LPR cuts interest rates asymmetrically between different periods, it will also increase the steepening process of the yield curve.
Risk tip: the international balance of payments entered the observation period in the second quarter. If the interest rate difference between China and the United States is further reversed sharply, it will trigger a negative cycle of large-scale capital outflow and exchange rate depreciation. Monetary policy may focus on the balance of payments.
