news

Text｜Huang Wentao Zhu Linning Source: CITIC Securities Research

Since August, some overseas markets such as the United States and Japan have been turbulent. The background is that major countries and regions in the world are experiencing economic growth,inflationThere has been a divergence in trends and expectations in areas such as policy paths and asset prices. These divergences and changes are bringing about a series of certain and uncertain impacts on the asset structure.

The more certain impacts mainly include: depreciation of the US dollar and appreciation of the Japanese yen, interest rate cuts in Hong Kong, interest rate cuts in my country and a long bull market in interest rates, and investment opportunities in U.S. Treasuries and gold.

The impact of uncertainty mainly includes: future scenarios of global differentiation, the path of impact on my country, whether a fiscal crisis may occur in the United States, and its potential paths and impacts.

Chapter 1: The polarization of global growth.Real output growth in the global economy is in a state of differentiation.How global growth could recover:More depends on whether globalization can be restored. The essential driving force behind the growth differentiation is the attempt of a few economies to reverse globalization, which has brought varying degrees of drag on various economies.

Chapter 2: Differentiation of global inflation.Inflation levels in the global economy are also diverging.How global inflation can stabilize:The important signal is how the high interest rates and inverted interest rate spreads in the United States will end. After that, we need to observe how the United States, as the world's largest economy, will experience recession, stagflation or recovery.The current inversion of the U.S. term spread has entered a record 25 months, exceeding the previous historical record of 23 months before the Great Depression.

Chapter 3: Global policy differentiation.Monetary Policy：worldwideCentral BankThe monetary policies of the central banks are differentiated in two ways: first, the changes in the target interest rate levels of the central banks are different; second, the changes in the size of the central banks' total assets are different.Fiscal policy:The fiscal policies of governments around the world are differentiated. First, the changes in the rhythm of fiscal spending are different, and second, the changes in the fiscal scale and space are different.

Chapter 4: Certainty and uncertainty in the global market. Relatively certain:The depreciation of the US dollar and the appreciation of the Japanese yen, the interest rate cut in Hong Kong, my country, the interest rate cut in my country and the long bull market in interest rates, and investment opportunities in US bonds and gold.Uncertainty:What is the impact path on China and the US fiscal crisis?

In August 2024, some overseas markets such as the United States and Japan experienced turbulence. The background is that since 2024, major countries and regions in the world have seen divergent trends and expectations in areas such as economic growth, inflation, policy paths, and asset prices. These divergences and changes are bringing a series of certain and uncertain impacts to the asset landscape, and this article conducts investment research on this.

I. The divergence of global growth

Real output growth in the global economy is in a state of differentiation.As shown in Figure 1, from the perspective of some major economies in the world, when the monetary inflation factor is removed, my country's actualGDPGrowth is at a high level in the world, at about 4.7%. Real GDP growth in the United States is at a median decline level, at about 3.1%. Real GDP growth in Europe and Japan is both hovering at low levels, and output is under pressure.

Looking ahead, whether global growth can be restored depends largely on whether globalization can be restored. The essential driving force behind the growth differentiation is the anti-globalization attempts by a few economies, which have had varying degrees of drag on various economies.As shown in Figures 2 and 3, global economic growth and trade development have been significantly affected by anti-globalization and industrial chain disruptions. China has a good industrial foundation and the impact is relatively controllable because it has insisted on expanding opening up and deepening reforms since the 20th National Congress of the Communist Party of my country.

2. Global Inflation Divergence

The inflation level in the global economy is also in a differentiated state.As shown in Chart 4, as President Pan Gongsheng said, "the inflation level of developed economies has dropped from the tenth floor to the third floor, and China has dropped from the second floor to the first floor." This is the overall change in the global inflation level. Due to the high-interest rate anti-inflation operations of major overseas central banks in the early stage, the overall global inflation level has fallen from the highs in 2022 and early 2023. During the same period, my country's inflation fell to around 0%.

Currently, from the United States, Japan andEurozoneJudging from the marginal momentum of inflation changes, there are differences in the trends of the main weighted sub-items, indicating that there is still an expectation of a decline in inflation in the United States, while Japan and the eurozone may temporarily turn to sticky shocks, waiting for further developments in influencing factors such as exchange rates and the Olympics.As shown in Figure 5, judging from the marginal changes of the recent comprehensive CPI, core CPI and major weighted sub-items of CPI - in the United States, the decline in CPI is a comprehensive decline in the prices of energy, commodities and services. The previous major inflation items such as automobiles, housing, transportation and medical care have all fallen back to 0.2% or below on a month-on-month basis; in Japan, CPI temporarily turned to volatility after rising to around 2%-3% year-on-year. First, factors such as the high base effect have suppressed the further upward trend of inflation in the short term. Second, factors such as imported inflation and energy prices are still maintaining inflationary pressure. In the euro area, after the year-on-year declines of the comprehensive CPI and core CPI to 2.6% and 2.9% respectively, first, the impact of the previous high base has come to an end. Second, the sub-items of food, energy and commodities are temporarily at 0.2% or below on a month-on-month basis. Third, the CPI of the service industry is still about 0.6% on a month-on-month basis. When the subsequent service industry inflation will fall back may require further observation after the end of the Paris Olympics.

Looking ahead, whether global inflation can stabilize depends on how the high interest rates and inverted interest rate spreads in the United States will end. The subsequent inflation trend will require observing whether the United States, the world's largest economy, will enter a recession, stagflation, or start a recovery.As shown in Figure 6,The current inversion of the U.S. term spread has entered a record-breaking 25 months.It exceeds the original historical record of 23 months before the Great Depression. According to the experience of the entire historical data of the United States, there is no exception so far. When the interest rate inversion ends, the US market and economy will first experience different degrees of slowdown or recession, lasting from several months to three years. During the same period, monetary policy will start to loosen. The subsequent inflation trend will depend on whether the economy enters stagflation from the initial recession or starts to recover.

3. Global Policy Divergence

3.1 Monetary Policy

There is differentiation in the monetary policies of central banks around the world, reflecting differences in policy orientation and pace. First, the changes in the target interest rate levels of major central banks are different, and second, the changes in the total asset size of major central banks are different.As shown in Figures 7 and 8, from the perspective of benchmark interest rates, the eurozone and the UK have already started to cut interest rates, the US is expected to have to wait until around the September meeting, and Japan is attempting its first interest rate hike since 2008; from the perspective of total asset size, the balance sheet reduction of the US and European Central Banks is slowing down, the asset size of the Bank of England and the Bank of Japan is basically stable, and after the marginal balance sheet reduction in January-April, the asset size of the People's Bank of my country rebounded in May-June.

3.2 Fiscal policy

There is differentiation in the fiscal policies of governments around the world, reflecting differences in policy orientations and paces. First, the changes in the pace of fiscal spending are different, and second, the changes in the fiscal scale space are different.As shown in Figures 9 and 10, from the rolling year-on-year growth of fiscal expenditure in the past 12 months, my country's fiscal expenditure was relatively stable at about 4.0%, slightly lower than the GDP level. The United States was affected by the high base, at about -5.6%, and the base effect will begin to fade from August. Japan, Germany and the United Kingdom continued to hover at low levels. From the perspective of the ratio of government debt to GDP, Japan exceeds 250%, the United States exceeds 120%, the United Kingdom exceeds 100%, Germany is restricted by its domestic and EU laws at about 64%, my country is about 55%, and if government bonds are included, it will be about 74%.

4. Global Certainty and Uncertainty

4.1 More deterministic

Looking ahead to the future market, against the backdrop of the above-mentioned divergence in global growth, inflation and policies, we can still identify relatively certain opportunities, mainly including: depreciation of the US dollar and appreciation of the Japanese yen, interest rate cuts in Hong Kong, interest rate cuts in my country and a long bull market in interest rates, investment opportunities in US Treasuries and gold, etc.

4.1.1 Depreciation of the US dollar and appreciation of the Japanese yen

The first relatively certain thing is the depreciation of the US dollar and the appreciation of the Japanese yen.As shown in Figures 11 and 12, the euro accounts for about 58% of the weight of the US dollar index and the pound accounts for about 12%. Currently, Europe and the UK have started to cut interest rates ahead of the United States. When the Federal Reserve starts to cut interest rates, the US dollar index will have a higher depreciation expectation.

As for the yen, Japan is the only major economy in the world that has started a cycle of interest rate hikes, and the yen-dollar exchange rate is at a nearly 30-year low of about 150. As the dollar is likely to enter a depreciation range, the yen may have a certain degree of recovery and appreciation expectations.However, it should be noted that on August 7, Shinichi Uchida, Deputy Governor of the Bank of Japan, said that if the market turmoil caused by Japan's interest rate hike affects the outlook, the interest rate path will be changed. The Bank of Japan will not continue to raise interest rates when the market is unstable, and it is still necessary to firmly implement an easy monetary policy.

4.1.2 Interest rate cuts in Hong Kong

The second relatively certain thing is the interest rate cut in Hong Kong, my country, and the corresponding interest rate investment opportunities.As shown in Figures 13 and 14, due to monetary policy arrangements such as the linked exchange rate system in Hong Kong, my country, the policy interest rate in Hong Kong is highly correlated with the Federal Reserve's target interest rate, and the corresponding bond interest rate trends are also highly correlated. When the Federal Reserve is close to starting a rate cut cycle, data experience over the past two decades shows that interest rates in Hong Kong, my country may also decline.

4.1.3 my country’s interest rate cuts and long-term interest rate bull market

The third relatively certain thing is the potential interest rate cut in my country and the medium- and long-term bull market expectations for interest rates.As shown in Figures 15 and 16, in the short term, with the end of the US interest rate hike cycle and the approach of the interest rate cut cycle, US Treasury bond yields have fallen and the interest rate gap between China and the United States has narrowed. The pressure on my country's central bank to stabilize the exchange rate has been reduced, and it has gained more room for interest rate operations; in the medium and long term, during the transformation and upgrading stage of my country's economy, the cultivation and growth of new industries, new business formats and new momentum will still require long-term efforts, and the medium- and long-term bull market pattern of the interest rate market will remain relatively stable.

4.1.4 US Treasury Bonds and Gold Investment Opportunities

The fourth relatively certainty is the short-term decline in U.S. Treasury bond yields and the expected upward trend in gold prices.As shown in Figures 17 and 18, the current US CPI has fallen back to 3.0% year-on-year, but the US target interest rate, 1Y Treasury bond rate and 10Y Treasury bond rate are still at approximately 5.5%, 4.4% and 3.9% respectively. The real interest rate is already at a high level in recent years. In a high-interest environment, the annualized fiscal interest expenditure growth rate has reached approximately 25% - if we do not consider factors such as medium- and long-term secondary inflation or exchange rate changes, the US Treasury bond interest rate needs to fall at least during the next three interest rate meetings from September to December.

In terms of gold, the upward price trend has at least two main supports. One is the downward expectation of real interest rates. More importantly, the second is the continuous increase in gold holdings by central banks of some major economies in the world since 2018.As shown in Figures 18 and 19, in addition to my country's central bank increasing its gold holdings, many central banks including Russia, Japan, India, Brazil, Qatar, and the UAE are gradually increasing their gold holdings. From 2018 to 2024, the proportion of gold in the foreign exchange reserves of major sample countries increased by an average of about 4 percentage points to 18.6%, but it is still far lower than the 70% level of some developed Western European countries such as Germany and France.

4.2 Uncertainty

Looking ahead, against the backdrop of the above-mentioned divergence in global growth, inflation and policies, we are also paying attention to uncertainties, including the impact on my country and the possibility of a fiscal crisis in the United States.

4.2.1 Impact path on China

The first uncertainty is the future scenario of global differentiation and the way it will affect our country.As shown in Figures 20 to 25, on the one hand, the expectation of US interest rate cuts and dollar depreciation will help narrow the interest rate gap between China and the United States, reduce funding pressure, maintain a stable exchange rate, and thus increase my country's monetary policy space and enhance the independence of my country's monetary policy, which will help boost domestic and foreign demand and my country's economy. But on the other hand, the subsequent pace of recession, stagflation or recovery in the United States is still uncertain. Although my country's reciprocal trade with countries along the Belt and Road continues to grow, the overall situation of global external demand remains unclear.

In addition, as pointed out in the report of the 20th CPC National Congress and the Third Plenary Session of the 18th CPC Central Committee, a new round of industrial revolution is accelerating, the global balance of industrial power is undergoing profound adjustments, and the international situation is complex and complicated.Although my country is still stepping up its efforts to expand opening up, its future global development may still face uncertain disturbances from the counter-current of anti-globalization at any time.

4.2.2 The US fiscal crisis?

The second uncertainty is whether a fiscal crisis may occur in the United States, and its potential path and impact.As shown in Figures 26 to 29, first, the rigid proportion of welfare, medical care and interest in US fiscal expenditures has continued to rise, rising to about 33%, 31% and 12%, respectively, squeezing out economic, R&D and defense expenditures. Second, the total size of the US government debt has reached about 35 trillion US dollars, with a year-on-year growth rate of about 10%. The current interest rate of major-term Treasury bonds is about 3.8%-5.3%. The annualized year-on-year growth rate of fiscal interest expenditures is about 25%, and the interest expenditure accounts for about 4% of GDP, which is close to the annualized GDP current price growth expectation of about 4.6% during the same period.

Finally, when the expected interest rate cut begins, although fiscal interest pressure may be relieved, the record 25-month interest rate inversion will most likely end. As we discussed in Figure 6 in Chapter 2, after the significant interest rate inversion in U.S. history ends, the economy and market trends will usher in a period of higher volatility and uncertainty.As shown in Figures 29 and 30, the current U.S. Treasury financing structure is more focused on rolling short-term financing than in previous years to avoid excessive high-interest long-term financing costs. When the target interest rate goes down, short-term interest rates go down, the financing structure recovers and the interest rate inversion ends, historical data shows that GDP growth, year-on-year stock indexes and key-term Treasury interest rates may all decline in the short term, but the subsequent medium- and long-term trends will face higher uncertainty risks.

The current global industrial development and economic situation are complex and changeable, and we need to pay attention to the potential risks and possible impacts of uncertain factors such as potential overseas economic fluctuations, financial stability, and geopolitical situations. Since 2021, some major developed economies have been facing high inflation pressures, economic growth has continued to slow down, and monetary and other economic policies are facing a dilemma. Since 2022, some central banks in developed economies have continued to raise interest rates to fight inflation, further increasing global economic and debt pressures. Most emerging and developing economies are facing pressures such as slowing growth, capital outflows, and imported inflation. From 2023 and 2024 to date, uncertain factors such as global economic and trade and industrial chain fluctuations, geopolitical situations, and debt risks still exist. The global economy continues to face supply-side disturbances such as food, energy, and supply chains. Coupled with the sticky inflation that still exists in some developed economies after the previous high monetary injection and subsidy policies, it further increases the uncertainty risks of the global economy in the next stage in areas such as total growth, structural adjustment, and development prospects.