Zheng Houcheng is the chief macroeconomist of Yingda Securities
United States macroeconomy may be under pressure,
The timing of the first interest rate cut is likely to fall in the second half of the year
As the world's largest economy, the economic trend of United States affects the global economic trend to a large extent. Regarding the United States economy, there are currently two focuses of the capital market: First, is the global macro economy, including the United States, in the destocking stage or in the replenishment stage? Second, when will the Fed start the process of cutting interest rates?
In response to the first question, in terms of "soft indicators" based on subjective judgment, JPMorgan Chase Global Manufacturing PMI has been above the boom and bust line for 4 consecutive months, and the United States Markit manufacturing PMI has been in the expansion range for 5 consecutive months, and the manufacturing PMI of the euro area, Japan and United Kingdom have all shown an upward trend, especially the manufacturing PMI of Japan and United Kingdom jumped above the boom and bust line, but there are still negative factors, that is, the ISM manufacturing PMI of the United States has been below the boom and bust line for 2 consecutive months.
In terms of "hard indicators" derived from the actual operation of the economy, the final value of the annualized rate of GDP at constant prices in the first quarter of United States recorded 1.30%, 0.30 percentage points lower than the preliminary value, a new low since the third quarter of 2022, and the capacity utilization rate of the United States manufacturing industry recorded 77.05% in May, although it was 0.55 percentage points higher than the previous value, but the overall trend was volatile and downward, indicating that the United States macroeconomy may enter a recession stage.
One possible explanation for the divergence between the "soft indicators" and the "hard indicators" is that the weakening of the "hard indicators" strengthens the expectation of interest rate cuts, including by the Federal Reserve, which in turn boosts the "soft indicators". From a macro logical point of view, in the context of the United States federal funds rate target range remaining unchanged between 5.25% and 5.5%, the United States macro economy is likely to be under pressure.
In response to the second question, the Fed's interest rate policy is anchored by the United States CPI year-on-year and the United States unemployment rate. In terms of inflation, in view of the high correlation between the year-on-year trend of United States CPI and the year-on-year trend of international oil prices, the monthly average of United States WTI crude oil prices in June, July, August and September 2023 is 70.35 US dollars / barrel, 75.81 US dollars / barrel, 81.29 US dollars / barrel and 89.23 US dollars / barrel respectively, showing a steady upward trend, it is expected that the year-on-year average of the monthly average of United States WTI crude oil prices from July to September 2024 is likely to decline steadily month by month, which means that in July 2024, In August and September, United States CPI is likely to decline steadily month by month. Based on this, on the basis of the United States CPI recorded 3.30% year-on-year in May, the United States CPI year-on-year is likely to fall below 3.0% in the next four months. In terms of the unemployment rate, the United States unemployment rate recorded 4.0% in May, and the United States unemployment rate is expected to rise above 4.0% in the next four months against the backdrop of macroeconomic pressure in the United States. This judgment is supported by the fact that since December 2021, the United States unemployment rate has moved out of the "arc bottom" pattern and is now on the right half of the "arc bottom". Referring to the experience of previous cycles, the unemployment rate in United States is likely to break through the upper edge of the "arc bottom" and attack the integer mark of "6.0%" in this cycle. Finally, with inflation as the "axis", in July, August, and September, the United States CPI year-on-year probability is the lowest, the data was released in mid-October, and the subsequent Fed interest rate meeting was held on November 6-7, which means that the Fed cut interest rates for the first time in the year, most likely in November or September.
In the second half of the year, the probability of PPI turning positive year-on-year in the month is small.
The mainland's macro economy may still be in the stage of "bottoming".
The price mechanism refers to the formation and operation mechanism of market prices that are interrelated with supply and demand and mutually restricted in the process of competition. Under the effect of the supply and demand mechanism, prices change, and in turn, the change in prices has an important impact on the supply and demand mechanism and economic activity.
The PPI is the producer price index of industrial producers and is an important part of the macroeconomic price system. The PPI was in a positive range year-on-year in the month, indicating that the ex-factory prices of industrial producers were higher than those of the previous year, indicating a positive macroeconomic trend; The PPI was in negative territory year-on-year for the month, indicating that the ex-factory prices of industrial producers were lower than the previous year, indicating that the macroeconomic trend may be under pressure. In May, the mainland PPI recorded a year-on-year increase of -1.40%, which was in the negative range for 20 consecutive months. It is expected that the probability of PPI turning positive year-on-year in June-December 2024 is small. The year-on-year tail-end factors of mainland PPI from June to December have been announced, respectively, were -0.20%, 0, -0.20%, -0.60%, -0.60%, -0.30%, and 0. From the perspective of historical experience, in the context of the year-on-year tailing factor of PPI in the current month is lower than zero, the year-on-year probability of PPI in the current month is lower than the year-on-year tailing factor of PPI in the current month, that is, the probability is lower than zero. The macro logic corroborated by this is that the Fed is committed to reducing inflation to "around 2.0%", that is, on the basis of the 3.30% recorded in May, in the context of the high federal funds target rate in United States and the weakening macroeconomic situation in the United States, the United States CPI is likely to move closer to 2.0% year-on-year in the short to medium term. On the other hand, from a long-term perspective, the month-on-month trend of mainland PPI and United States CPI is convergent, and the macro logic behind it is that the core determinants of mainland PPI month-on-month and United States CPI year-on-year are global macroeconomic trends. Therefore, in the process of United States CPI moving closer from 3.30% in May to "about 2.0%" year-on-year, the mainland PPI year-on-year probability does not have a significant upward basis.
Under the premise that the probability of the mainland's PPI turning positive year-on-year from June to December is low, a general judgment is that the mainland's macroeconomic growth rate in the second half of the year may not have the basis for a significant upward trend. The following is an analysis from the perspective of the macroeconomic "troika".
In the second half of the year, the probability of a sharp upward trend in mainland export growth is low. The global macroeconomic situation is the core determinant of the mainland's export growth. As the core consumer of the world, United States accounts for about 17% of the global macroeconomy. In the context of the high federal funds target interest rate in United States, the composite indicator of "total United States sales year-on-year + total United States inventory year-on-year", which characterizes United States demand and production, is likely to be under pressure, which will reduce the demand for mainland consumer goods and capital goods, and then form a certain negative for the growth rate of mainland exports. From another point of view, in the context of the small year-on-year probability of the mainland PPI turning positive in the month from June to December, the export growth rate, as a nominal variable, lacks strong support from the price side. To sum up, the probability of a sharp rise in the growth rate of mainland exports in the second half of the year is small. It is worth pointing out that given the small base of mainland exports in the second half of 2023, the month-on-year growth of mainland exports in the second half of 2024 may not have the basis for a significant decline.
Consumption growth in the second half of the year may still face certain constraints. From February to December 2023, the cumulative individual income tax revenue of the mainland continued to record negative year-on-year growth, and on this basis, the cumulative individual income tax revenue from February to April 2024 recorded -15.90%, -4.50% and -7.0% year-on-year respectively, indicating that residents' income will continue to be under pressure in 2023 and 2024. Correspondingly, the consumer confidence index recorded 88.20 in April, a new low in nearly four months, and has continued to be below the boom and bust line of 100 since April 2022, and the probability of significant improvement in the short to medium term is small. Finally, in the context of the difficulty of turning positive PPI month-on-year in the current month, the year-on-year growth of the core CPI in the second half of the year and the year-on-year growth of the CPI of transportation fuels are likely to not have a significant upward basis, especially in the third quarter, it is expected that the year-on-year growth of the mainland CPI in the second half of the year will be difficult to be significantly higher than that of the first half of the year, and the probability of strong support for consumption growth in the second half of the year is small.
Real estate investment growth is likely to remain under pressure until October. In the first half of the year, the real estate market continued to implement heavy policies, but the real estate market did not improve significantly, which is reflected in two points: first, the national housing prosperity index was below the boom and bust line of 100 for 29 consecutive months, recording 92.01 in May, continuing to hit a new low since data were recorded in March 1995; second, the price index of newly built commercial housing in 70 large and medium-sized cities was in the negative range for 26 consecutive months, recording -4.30% in May, a new low since August 2015. On May 17, the central bank canceled the lower limit of the commercial personal housing loan interest rate policy for the first and second houses at the national level, lowered the interest rate of personal housing provident fund loans and the minimum down payment ratio of commercial personal housing loans, but from February to May, the cumulative sales area of commercial housing recorded a deep negative growth year-on-year, and the cumulative area of commercial housing for sale continued to be at a high level year-on-year.
There is a 75% probability that the annual infrastructure investment growth rate will be lower than the 7.78% in April. On March 5, the "Government Work Report" proposed that "starting from this year, it is planned to issue ultra-long-term special treasury bonds for several consecutive years, which will be specially used for the implementation of major national strategies and security capacity building in key areas". Ultra-long-term special government bonds are mainly focused on infrastructure construction, which will play a supporting role in infrastructure investment. However, it should be noted that in the current context of the mainland's fiscal revenue and expenditure under pressure, the issuance of ultra-long-term special treasury bonds is mainly "to systematically solve the financial problems of the construction of some major projects in the process of building a strong country and national rejuvenation", so infrastructure investment is still facing great pressure in terms of funding sources. In addition, in the past 20 years, the annual growth rate of infrastructure investment has been lower than that of January-April for 15 years, accounting for 75%. From January to April 2024, the cumulative amount of infrastructure construction investment completed was 7.78% year-on-year, and if the empirical law is true, there is a 75% probability that the growth rate of infrastructure investment in 2024 will be lower than 7.78%.
The growth rate of manufacturing investment is likely to decline on the basis of 9.60% in May. On February 23, the fourth meeting of the Central Financial and Economic Commission proposed to "promote a new round of large-scale equipment renewal and consumer goods trade-in, and effectively reduce the logistics cost of the whole society". On March 7, the State Council issued the "Action Plan for Promoting Large-scale Equipment Renewal and Trade-in of Consumer Goods", proposing to implement equipment renewal actions. In the context of promoting a new round of large-scale equipment renewal, the growth rate of manufacturing investment from February to March recorded 9.40% and 9.90% respectively, a new high since October 2022. In April and May, they recorded 9.70% and 9.60% respectively, showing a slight decline. Will the second half of the year be able to revive the previous strong upward trend? In the first quarter, the mainland's industrial capacity utilization rate and manufacturing capacity utilization rate recorded 73.60% and 73.76% respectively, down 2.30 and 2.24 percentage points respectively from the previous value, both hitting a new low since the second quarter of 2020, indicating that the industry and manufacturing industry are facing certain pressure, and considering that the PPI in the second half of the year is likely to be in the negative range year-on-year, it is expected that the growth rate of manufacturing investment will decline on the basis of 9.60% in May.
The RMB exchange rate and A-shares are in the stage of "gathering momentum".
In the second half of the year, it was difficult for the international gold price to fall sharply
The prices of stocks, bonds, foreign exchange, business and other major assets are highly correlated with the macroeconomy, and the RMB exchange rate itself is one of the important components of the macroeconomy. In the process of "movement" of major macroeconomic indicators, large types of assets show different but strongly correlated "movement trajectories".
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Source: The full version was published in the 20th issue of Peking University Financial Review