Macroeconomic landscape under the pandemic

2022.4.11-2022.4.17, Fixed Income Research Weekly Report new!

First, last week's market review

Funding: Last week, the three national standing meetings mentioned the RRR cut, and two days later the central bank announced a comprehensive RRR cut of 0.25% as scheduled, the market liquidity is abundant, and the funding interest rate has fallen across the board.

Interest rate bonds: In the first level, the issuance scale of interest rate bonds (including local bonds) last week increased slightly by about 47.057 billion yuan from the previous week, with a total of about 319.151 billion yuan. In terms of secondary, last week, affected by the inversion of Sino-US interest rate differentials, interest rates once rose slightly, but as the MLF operation window approaching the middle of the month, the superimposed national standing will release the news of RRR cuts, the market bullish sentiment has rebounded, and finally the yield of short-end varieties has declined significantly, and the long-end has not changed much.

Credit bonds: In the first level, 286.285 billion yuan were issued last week, and the net financing of credit bonds was 46.157 billion yuan, a sharp increase from the previous month; structurally, the net financing of industrial bonds was 19.674 billion yuan, and the net financing of urban investment bonds was 26.483 billion yuan. Last week, three bonds were cancelled, with a total cancellation scale of 2.15 billion yuan. In the second level, the yield below the behavior is the main, of which the 1-year variety performs the best.

Convertible bonds: The stock index fell overall last week, the Shanghai Composite Index fell 1.25%, the Shenzhen Component Index fell 2.6%, and the ChiNext Index fell 4.3%; in terms of industry sectors, mining, food and beverage and trade and retail industries performed better, up 3%-5%, and media, electrical equipment and communications industries performed weakly, down 6%-8%. Last week, the Overall China Securities Bond-to-Bond Index fell by 0.8%, the overall valuation of the bond-to-bond swap increased, the overall premium rate of the convertible bond rose by 3.96%, the pure bond premium rate fell by 2.57%, and by category, the conversion premium rate of the parity-to-bond swap rose and fell, of which the valuation of low-priced and high-priced bond-to-bond fell more, and the valuation of balanced-to-bond was relatively stable.

II. Strategic Outlook:

In terms of macro and interest rate debt, inflation, social finance, import and export data were released last week, which slightly exceeded market expectations, but the bond market reacted flatly. In terms of inflation, overseas imported inflation affected the PPI of oil and its related middle and downstream industries to a certain extent; but the transmission of PPI to CPI is still slow, and affected by the domestic epidemic, the core CPI of the month turned from rising to falling, indicating that resident consumption is still relatively weak. In the case of insufficient domestic demand and poor transmission of PPI, the inflation pressure of CPI in the second quarter is still moderate and controllable; but in the second half of the year, as pig prices recover and oil prices continue to be high due to overseas impacts, the risk of "lard resonance" further increases, and there is pressure for CPI to continue to rise. In terms of social financing, the social financing data in March still maintained a pattern of sufficient total but general structure, and the situation of weak real estate and resident consumption did not improve significantly. However, some sub-data have improved, one is the marginal improvement of medium- and long-term loans of enterprises; the other is that with the steady issuance of government bonds, fiscal expenditure is accelerating, and wide credit is still exerting force. Under the influence of this round of large-scale epidemic, the GDP growth pressure in the first quarter is relatively large, and under the policy attitude of "sticking to the goal and not relaxing", the next stable growth policy is expected to be stronger. In terms of import and export data, in the short term, China's export resilience is still in place, one is the guarantee of a complete industrial system; the second is that the dynamic zeroing strategy can ensure the stability of production and supply; and the third is the marginal benefit of us tariff exemptions, so exports are still an important force supporting economic recovery in the short term. However, as global inflation continues to intensify, the risk of The European and American economies turning into recession in the second half of the year and next year is increasing, which is bound to affect the prospects and momentum of mainland exports. For the bond market, on the one hand, inflation in the second quarter will still not restrict the domestic loose monetary policy; on the other hand, the continuous rise in PPI is still eroding the profits of middle and lower reaches of enterprises, the recovery of enterprise production vitality also needs the support of a loose liquidity environment, the neutral loose monetary policy tone will not change, the short-term bond market is more difficult to turn bears, and the safety of short-end varieties is still high. As the support of the epidemic on the bond market gradually weakens, the effectiveness of the follow-up wide credit will become a key factor affecting the direction of the bond market.

On the capital side, although the RRR cut was less than expected, the central bank once again stated that "the current liquidity has been at a reasonable and sufficient level". It is expected that although the funding surface will have a tax payment impact in April, it will remain stable overall.

In terms of credit debt, the regulatory tone has stabilized growth, and the credit environment is relatively relaxed. (1) In terms of urban investment bonds, the current urban investment strategy has shifted from beating returns to risk prevention, and it is necessary to pay attention to the tail risks of urban investment, and it is recommended to choose the direction of bonds: (1) give priority to the allocation of county-level public welfare small and medium-sized platforms in districts with better economic and financial resources; (2) areas where investment policy support is clear, the peak of debt repayment pressure has entered the end or has passed, and market confidence has improved; (3) weak qualification platforms with strong guarantees; (4) resale opportunities for strong districts and counties after the newly tightened district and county platforms. (2) Industrial debt, real estate, although the policy bottom has been out, but the industry bottom is unknown, the private real estate primary market bond issuance is exhausted, the secondary market valuation fluctuations are very large, it is difficult to grasp, it is recommended to remain cautious; coal, coal prices fell last week but still remain high, the current coal enterprise fundamentals are not weak, financing capacity is strong, so for the debt structure improvement of coal enterprises can consider appropriate long-term; banks, secondary capital bond yields have declined in the past three weeks, the current point in time to maintain a wait-and-see, not recommended to chase up.

In terms of debt conversion, the overall decline in the upper working capital bond, the transfer premium rate was passively pulled up by the decline in the stock market, and the corresponding conversion premium rate of each parity rose and fell. Specifically, we can pay attention to the following configuration directions: (1) Under the stable growth, some traditional industries continue to look for rebound opportunities, focusing on building materials, light industry and home, construction machinery, large finance and other sectors. (2) Under the conflict between Russia and Ukraine, upstream raw material companies that benefit from the contraction of supply and bring about price increases and profitability increases. (3) High-end manufacturing such as electric vehicle industry chain, photovoltaics, and electronic semiconductors still has investment value in the medium and long term dimensions.

3. Key messages

1. China's financial data in March exceeded market expectations across the board. According to central bank data, China's social financing increased by 4.65 trillion yuan in March, 1.28 trillion yuan more than the same period last year; the increase in social financing in the first quarter totaled 12.06 trillion yuan, a record high in a single quarter, 1.77 trillion yuan more than the same period last year. In March, M2 growth accelerated to 9.7% year-on-year, M1 growth was flat at 4.7%, and net cash injection in the first quarter was 431.7 billion yuan. New RMB loans increased by RMB3.13 trillion yuan in March, an increase of 395.1 billion yuan year-on-year; RMB loans increased by 8.34 trillion yuan in the first quarter, a record high of 663.6 billion yuan year-on-year.

2. Under the pressure of global inflation, China's prices continue to operate smoothly. According to data released by the National Bureau of Statistics, the national CPI rose by 1.5% year-on-year in March, an increase of 0.6 percentage points over the previous month; it turned flat from 0.6% higher than the previous month. Food prices fell 1.5 percent in March, with pork prices falling 41.4 percent and fresh vegetable prices up 17.2 percent. In March, the PPI rose 1.1% month-on-month, an increase of 0.6 percentage points from the previous month; an increase of 8.3% year-on-year, an increase of 0.5 percentage points from the previous month, mainly due to the higher base of the same period last year. According to expert analysis, the increase in CPI in 2022 may be wider than last year, but it will still be in a reasonable range.

3. The central bank's RRR cut arrived as expected but the magnitude was less than expected, and the expectation of interest rate cut was disappointed. The central bank decided to cut the RRR by 0.25 percentage points on April 25, and at the same time to reduce the RRR by an additional 0.25 percentage points for eligible urban commercial banks and rural commercial banks. The RRR cut is a comprehensive RRR cut, releasing a total of about 530 billion yuan of long-term funds.

4. U.S. inflation continues to spike, and expectations for a 50 basis point rate hike by the Federal Reserve in April are enhanced. U.S. CPI rose 8.5 percent year-on-year in March, continuing to hit a new 40-year high and rising faster than market expectations, while March CPI rose 1.2 percent month-on-month, flat above expectations and highest since October 2005, U.S. Labor Department data showed. Core CPI, which does not contain food and energy, rose 6.5% year-over-year, less than expected 6.6%, and rose 0.3% sequentially, continuing to reach a new low since September 2021. U.S. real income fell 1.1% month-on-month in March, down more than expected, the 12th consecutive month of decline.

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