summary
Key takeaways:
1. The capital supply curve and the financing demand curve explain the direction and magnitude of interest rates, which is still based on the financing demand curve as the main starting point, and the nominal economic growth rate of the economy is an important core variable, which includes two factors: "quantity" and "price".
2. Since the second half of 2023, the representative indicators of the "volume" factor, such as industrial added value, fixed asset investment, real GDP, etc., have shown signs of stabilization and improvement.
3. The core representative of the "price" indicator is PPI. In the 15 months so far in 2023, there have been as many as 10 negative month-on-month PPI months, and although the year-on-year fluctuations are subject to base effects, there is no doubt that the absolute price level is all the way down.
4. The rebound of "volume" is still continuing, which is gratifying, if the "price" can be significantly improved, it will make the growth rate of corporate revenue out of the platform to accelerate the upward movement, which will accelerate its transmission to residents' income, so that consumption can be further boosted.
5. The bond bull market based on pessimistic expectations for the economy should now enter an observation period, and the improvement of the "volume" indicator has lasted for more than half a year.
6. Whether the bond bull stops is missing only the last link - the stabilization and rebound of the "price" index, of which the month-on-month turn is more critical, investors may wish to pay more attention to this link, we believe that it is not far from this point in time.
First, the debt cow is only missing the last link
So far in 2023, the bond market has come out of a rare bull market, with the 10-year Treasury rate falling by only 60 basis points, but hitting a record low. As we all know, when interest rates hit record lows, no matter what kind of (vertical, horizontal) relative value comparisons (bonds vs. stocks, bonds vs. real returns, bonds vs. loans, etc.) are made, the result is that bonds are expensive. Therefore, when dealing with the trend of the bond market, we should focus more on the direction and trend rather than the magnitude.
In the article "Supply and Demand Framework for Interest Rate Determination", we proposed the capital supply curve and the financing demand curve to explain the direction and magnitude of interest rates, in which the financing demand curve is still the main starting point, and the nominal economic growth rate of the economy is an important core variable, which includes two factors: "quantity" and "price".
Since the second half of 2023, the representative indicators of the "volume" factor, such as industrial added value, fixed asset investment, real GDP, etc., have shown signs of stabilization and improvement. Therefore, from the perspective of "quantity", the bottoming improvement has continued, and until the first quarter of this year, this trend has not reversed.
However, the "price" indicator is still sluggish, which is a very important part of affecting market expectations and residents' feelings, and people feel more deeply about the "price" indicator than the "volume" indicator.
The core representative of the "price" indicator is the PPI. In the 15 months so far in 2023, there have been as many as 10 negative month-on-month PPI months, and although the year-on-year fluctuations are subject to base effects, there is no doubt that the absolute price level is all the way down. The improvement in "volume" since the second half of last year has been hedged by the drag down of "price", and the nominal economic growth rate has only struggled to stabilize.
From the perspective of the principle of economic transmission, price is a lag indicator of real economic growth, and when there is a turning point in price, it is generally the beginning or end of a cycle that is confirmed by lag. Therefore, in the past, investors in the bond market were more accustomed to looking at the "volume" indicator forward, because they believed that "volume is ahead of price", but the difficulties and repetitions since the second half of last year have also caused many investors to lose confidence. In the process of customer visits, there are many investors who said that adopting the previous "forward-looking" approach hurt a lot, and simply lag behind and wait for the price lag to be confirmed to avoid the risk of volatility.
Judging from the views of market investors on the economy this year, the core focus is consumption, and they are more worried about the decline in consumption due to concerns about the instability of income expectations. First, consumption and income are co-variables, and raising income is synonymous with increasing consumption and even economic growth. Residents' income is composed of four categories: wage income, operating income, property income and transfer income, of which wage income accounts for more than 60% (the proportion of property income that has been hotly discussed in the market is only around 10%). Therefore, the fundamental way to increase income is to increase wage income, which depends on the change in the company's revenue. When the growth rate of corporate revenue improves and rebounds, from the perspective of historical cycle comparison, the lag will be transmitted to the improvement and rebound of residents' wage income, and consumption will also rebound in the same period.
The revenue of enterprises is a combination of "volume" and "price", and it is also facing the mutual hedging of "volume" and "price". Although the monthly growth rate of corporate revenue hit a low point in June last year and stabilized, it has basically remained in a platform trend since September and has not shown an obvious direction, which is mainly the result of hedging between the rise of "volume" and the fall of "price".
If the "price" can be significantly improved, it will make the growth rate of corporate revenue out of the platform to accelerate upward, which will accelerate its transmission to residents' income, so that consumption can be further boosted.
Therefore, the transmission process of a complete improvement in economic expectations still needs the assistance of "price". According to the traditional chain of "investment (production)-PPI-enterprise revenue-household income (consumption or economy)", the stabilization of corporate revenue since June last year still needs the PPI index to fill the "fire" in order to be smoother.
The crux of the question now is whether the improvement in "quantity" can be transmitted to the improvement in "price" and whether inflation is a lagging indicator of economic growth? We still believe it.
Economic principles tell us that inflation is a lagging indicator of economic growth. In the classification of the Bureau of Statistics, prices are also an indicator of the lag confirmation of the economic cycle. In addition, judging from the data of previous cycles, we can also see the leading role of industrial added value in PPI and the leading role of real GDP in relation to GDP deflator.
Therefore, for a year, based on pessimistic expectations of the economy caused by the bond bull market, should now enter an observation period, the "volume" indicator has continued to improve for more than half a year, from the fourth quarter of last year, the "price" indicator - PPI month-on-month growth rate has also shown good signs of narrowing, in March its month-on-month decline was -0.1%. If this trend continues, we will see the "price" indicator stabilize and rebound, not only in the sense of year-on-year recovery, but more importantly, in the sense of month-on-month correction.
Whether the bond bull stops is missing only the last link - the stabilization and rebound of the "price" indicator, of which the month-on-month turn positive is more critical, investors may wish to pay more attention to this link, we believe that it is not far from this point in time.
The author of this article: Dong Dezhi S0980513100001, source: Guosen Macro Fixed Income Team, original title: "Guosen Macro Fixed Income] Macroeconomic Special Research: Debt Cattle Stop Only Missing the Last Link"
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