The last blow! Two major inflection points appeared at the same time, and the most difficult period passed

Author: Shi Chenchen

The economy is a cycle, and we are about to get through the most difficult of these.

From an international macro point of view, the most difficult stage is the Fed's interest rate hike cycle, global capital flows back to the United States, US bond yields soar, and global risk assets are under great pressure.

For China, the problem is compounded by the constraints of the international environment, the domestic monetary policy is also a mouse, and exchange rate pressures further complicate the problem. Coupled with the previous debt gray rhinoceros, as well as financing difficulties, the macro environment is also relatively difficult.

Now the situation has changed, not only the international macro has begun to turn, but the domestic macro has also begun to show an inflection point, and the most friendly macro era is coming.

01 Complete the final blow, the Federal Reserve's logic is adjusted!

The world has suffered for a long time!

In previous Fed interest rate hike cycles, the global financial market has been nervous, and emerging market countries may even break out into financial crises.

This time, the United States first expanded its monetary and fiscal policies like never before, and then began to tighten policy more than a year ago.

On November 14, the U.S. inflation data completed the final blow, the Fed's logic was about to be adjusted, and the global macro was about to turn a corner.

According to data from the U.S. Department of Labor, the U.S. non-seasonally adjusted CPI rose 3.2% year-on-year in October, the lowest since July this year, and the expected increase was 3.3%, and the seasonally adjusted CPI was flat month-on-month, the lowest since July last year, with an expected increase of 0.1%.

More critically, the non-seasonally adjusted core CPI in the United States rose 4% year-on-year in October, the lowest since September 2021, with an expected increase of 4.1% and a previous increase of 4.1%, and a core CPI increase of 0.2% month-on-month, the lowest since July this year, with an expected increase of 0.3% and a previous increase of 0.3%.

This conveys two implications:

First, inflation in the United States is declining;

Second, U.S. inflation has fallen faster than market expectations.

Today, inflation in the United States has fallen from a high of 9% to around 3%, one step away from the long-term average of 2%. What does this mean? The Fed's inflation is less terrible, and there is less urgency to control it.

More critically, the rebound in inflation that began in June this year proved to be only temporary, and investors can breathe a sigh of relief. And judging from the current situation, it is unlikely that US inflation will rebound sharply in the future.

This is a very important signal.

Another important signal is that the US employment data for October fell more than expected.

On November 3, data from the U.S. Department of Labor showed that the U.S. added 150,000 new non-farm payrolls in October, lower than market expectations of 180,000 and the previous value of 297,000.

In addition, the number of new non-farm payrolls in August and September was revised down by 101,000, and the private sector added 99,000, down significantly from the monthly average of 168,000 in the previous three months.

Previously, the United States implemented unprecedented monetary and fiscal stimulus policies, as well as various coercion and inducements to enterprises in order to return manufacturing to the United States, and the American economy has indeed soared and flourished in the world.

Finally, the fiery economy of the United States is beginning to calm down.

Why focus on inflation and employment? Because whether the Fed raises interest rates or not depends on two main factors, one is inflation and the other is employment.

These two factors are somewhat mutually reinforcing, for example, policymakers want high employment and are therefore more inclined to ease monetary policy, but if monetary policy stimulus is too strong, inflation will rise again, so they have to find a balance.

Over the past year or so, the main logic of the global macro has been that in order to curb high inflation in the United States, the Federal Reserve has to raise interest rates, but it cannot raise interest rates too sharply, because it will hurt American employment.

Now, when these two signals are combined, the global macro inflection point is coming.

On the one hand, inflationary pressures in the United States have really turned downward and are about to reach the target range, and on the other hand, the employment data in the United States is not so strong, and recession talk is starting to rise.

This means that the Fed can end its interest rate hikes, and at the same time, market expectations for Fed rate cuts are starting to rise.

In the previous Fed interest rate hike cycle, the Fed's strategy has always been "stick + turnip", that is, every time interest rate is raised, the market will be substantially hit by a hammer, and then Fed officials will quickly appease the market, issue a "dovish" speech, and give a radish to eat.

Now, judging from the economic logic and data, the Fed's strategy will turn to "radish + stick", that is, it will not raise interest rates substantially, and may even cut interest rates, and at the same time the Fed will release some "hawkish" speeches to remind the market not to be too anxious.

Next, let's look at this inflection point from a market perspective.

In August last year, the inflection point of inflation in the United States appeared, turning downward from a high of 9%. The time of its announcement was in September, which directly led to an inflection point in the dollar index, turning down from 115 to the lowest to the 100 mark.

In other words, when there is an inflection point in U.S. inflation, the inflection point of the dollar index actually appears.

In the global financial market, while the U.S. dollar index is an important reference, the more important reference is the 10-year U.S. Treasury rate. It is the foundation of all assets in the world and is negatively correlated with risk assets.

As long as the interest rate on the 10-year Treasury bond is still rising, and the world's capital continues to flow back to the United States, all emerging market countries are still nervous. At the same time, global risk assets have been suppressed, and investors are afraid to go long.

So, we see that even if US inflation turns down, even if the dollar index turns down, the performance of global risk assets is still unsatisfactory.

Because, behind the interest rate of US bonds, it not only reflects the level of inflation in the United States, but also reflects the level of the US economy, that is, the real interest rate. For it to have an inflection point, it needs a wider range of factors, and the inflection point appears relatively late.

Now that the inflection point in the 10-year Treasury yield has been established, it is the inflation data that has completed the final blow.

Looking at the chart above, the first agitation in the 10-year Treasury yield was when the US employment data was released in early November, when the market thought that the US economy might not be able to afford another rate hike.

This time the agitation is that the inflation data in October turned "low" downward, and the market believes that the Fed has no need to raise interest rates again.

To sum up, this time the inflation data is a "low" U-turn and is about to enter a "reasonable range", and the US employment data is no longer so strong, which means that there is no need for the Fed to raise interest rates.

And from the perspective of the market, this inflation data belongs to the final blow, and the inflection point of the 10-year US Treasury yield is officially established. Since then, the U.S. dollar index and U.S. Treasury yields have both turned to an inflection point.

The most macro-friendly era in the world is coming.

02 The inflection point of China's macro opportunities has emerged

While the global macro has entered an inflection point, China's macro has also seen an inflection point.

There are two related to the international environment, one is Sino-US relations, and the other is monetary policy and exchange rate.

Judging from the signals released in the past few days, Sino-US relations are indeed warming up, and although we cannot expect a turning point in the economic and trade relations between the two countries to appear, the relaxation of relations between the two countries has indeed provided a more friendly international environment.

Let's take a look at the mainland's monetary policy and exchange rate.

In the current economic and financial system, easing monetary policy can solve many problems, but there are also two key constraints: inflation as a domestic constraint and exchange rates as an international constraint.

The reality of the past was that inflationary pressures did not exist, and even deflationary pressures existed, meaning that domestic constraints to ease money did not exist.

However, the biggest constraint is the international factor, that is, the pressure of the depreciation of the RMB exchange rate.

Due to the strong pressure of RMB depreciation, it in turn affects China's financial markets, such as A-shares. Every time the RMB exchange rate weakens, the A-share market falls.

Especially since July, as US inflation rebounded again, the dollar index rose from 100 to 107, which further put pressure on the RMB exchange rate.

Now there is an inflection point in the market.

The U.S. dollar index fell sharply in early November, falling from 107 to the 105 mark after the release of larger-than-expected jobs data in the United States. After yesterday's US inflation data, the dollar index fell further, from 106 to the 104 mark.

Correspondingly, the RMB exchange rate also fell from the 7.34 mark all the way to the 7.25 mark, with an appreciation of nearly 900 points.

In particular, the U.S. bond interest rate has also begun to turn downward, the U.S. dollar index has turned downward again, and the inflection point of the RMB exchange rate is looming.

As a result, market expectations are self-fulfilling.

What is now certain is that the dollar index has returned to a downward cycle, and the pressure on the depreciation of the RMB exchange rate has been temporarily eased.

Before the arrival of a new shock, the constraints of monetary policy began to be relaxed, and the big problem of exchange rate depreciation was temporarily solved.

The second is the domestic macro inflection point.

Why has market confidence not been able to rise before, there are two main economic fundamental issues:

First of all, everyone has seen the gray rhinoceros of local debt rushing wildly, but they are helpless.

Second, they all talk about stimulating economic growth, fiscal stimulus, and infrastructure, but there is no money on the account.

Now these two major problems have been solved; on the one hand, a package of debt packages has been introduced, and on the other hand, the central government has borrowed 1 trillion yuan of special treasury bonds to build infrastructure.

New debts are being exchanged for old debts, and local government debts have been delayed again. The issuance of a new 1 trillion yuan of special treasury bonds will guarantee economic growth this year and even in the first quarter of next year.

At present, 10 trillion yuan of government bonds are issued every year, of which 5-6 trillion yuan will replace the previous national bonds, and the remaining 4-5 trillion yuan will be used for fiscal stimulus to stimulate economic growth.

Most critically, access to financing is also unblocked, and the constraints of monetary easing are disappearing.

Therefore, from China's point of view, the pressure on the RMB exchange rate has begun to ease, the space for debt and infrastructure has suddenly opened, the constraints on monetary easing are also disappearing, and the most friendly stage is beginning to come.

On the whole, the most difficult stage of the international macro is about to pass, and the most friendly stage of the macro will also be ushered in at home.

We've survived another economic cycle.