Us inflation in March was 8.5 per cent year-on-year, up from 7.9 per cent in February and once again breaking a nearly 40-year high. But the strange thing is that US bond yields fell instead of rising, and US stocks rose instead of falling before the market (Pre). Why? Is inflation at its peak?
Us bond yields fell as high inflation hit a 40-year high in MarchMarket trading logic from previous trading "inflation panic" to trading "inflation peaking"」。Although US inflation rose sharply by 8.5 per cent in March from a year earlier, the highest level in 40 years, core inflation excluding energy and food inflation increased by 0.3241 per cent in real terms, lower than the expected 0.5 per cent. If US core inflation remains around 0.3% month-on-month in the second half of 2022 (the average month-on-month growth in the second half of 2021 is higher than 0.3%) Well, in the second half of 2022, core inflation in the United States will fall from the same period last year, and assuming that crude oil prices remain unchanged, then overall inflation is likely to fall in the second half of 2022.。
Figure 1: sub-contribution of high inflation in the United States, with energy, transportation and food and beverage among the top gainers
Figure 2: us inflation and core inflation trends (8.54% and 6.47%, respectively, year-on-year in March)
Figure 3: month-on-month growth in core inflation (excluding crude oil and food) in March was weaker than expected (actual 0.3241%, survey 0.5%)
4:10 yields on US Treasuries fell sharply after the inflation announcement, 10bps
It will be hard to trade in 2022: a continuing epidemic, a continuing property storm, the war between Russia and Ukraine, the highest inflation in 40 years and the Fed's tightening of global dollar liquidity. The author sorts out the trend and analysis of large categories of assets under the current high inflation:
(1) the performance of US bond yield is opposite to that of high inflation, but it does not change the Fed's path of raising interest rates quickly.
Although US bond yields are contrary to high inflation, they should not change the path of the Fed's rapid rate hike. The central question is whether, as analyzed above, inflation peaked in March, whether the trading logic of US bond yields will move from trading inflation to peaking, or even a possible future recession (or Trade flatten), which should be too early.
(2) High inflation in the United States hit a 40-year high, but may peak in the first half of the year.
Since the high inflation triggered by the crude oil crisis in the 1970s and 1980s, inflation in the United States has begun a long period of moderation to deflation. The recent high inflation has not been experienced by the market in nearly 40 years. After the era of great detente in the United States, the world is facing a period of low growth and low inflation after the 2008 financial crisis. The Sino-US trade and the global epidemic outbreak from 2018 to 2022, and then to the war between Russia and Ukraine, gradually changed the global supply chain shortage and low inflation pattern, and the supply-side shortage led to a sharp rise in global inflation.
Although US inflation rose sharply by 8.5% in March from a year earlier, except for energy and food inflation, core inflation rose 0.3241% from the real value, lower than the expected 0.5%. If US core inflation remains about 0.3% month-on-month in the second half of 2022 (the average month-on-month growth in the second half of 2021 is higher than 0.3%), then core inflation will fall in the second half of 2022 compared with the same period last year. And suppose that if the price of crude oil remains the same, inflation may also fall.
(3) the Fed has a large behind the curve/market in this cycle of raising interest rates.
Although the Fed has experienced the stage of fiscal deficit in wartime and the crisis of crude oil inflation in the last century, it has not experienced high inflation for a long time or even prevented the Fed from taking "timely" action in 2021, resulting in a large behind the curve. The Fed's rate-raising cycle in 2022 is likely to significantly exceed the magnitude and intensity of the previous rate-raising cycle (2015-2019). In the last cycle of rate hikes, the Fed raised interest rates once in 2015 and 2016 respectively, but also because inflation was below 2 per cent most of the time.
Although the Fed raised interest rates by only 25 basis points in March, US bond yields have Price the Fed by 200bp in the short term. Recently, local Fed officials recently made a big move of raising interest rates by 50 basis points + shrinking the table by nearly $100 billion in May. Us stocks are afraid of liquidity contraction (the scars of the liquidity crisis in March 2020 are still there), but the market is not satisfied. Some traders even think that the Fed may raise interest rates more aggressively. Can the Fed raise interest rates by 100bp at once in May?
Figure 5: current May futures show 1.93 times (25 basis points / time)
(4) the 10-year interest rate spread between China and the United States is upside down for the first time since 2010, and there is room for arbitrage in Sino-US interest rates.
Do you still remember that in March, I talked to a domestic banking institution about the market and asked whether Sino-US interest rates would be upside down? At that time, I replied: maybe we will soon see interest rates between China and the United States hang upside down, which may be unthinkable for nearly a decade.
The upside down of interest rates between China and the United States is mainly due to the non-synchronization of the economic and monetary policy cycles of China and the United States in 2022. China's epidemic prevention pressure intensified in the first half of 2022, and the economic downturn is expected to be obvious. The current economic downturn in China is expected to reach that of the epidemic in March 2020 (but data such as TJJ social integration are falsified again), and expectations of future monetary policy easing are also high, although the focus is still on epidemic prevention.
In the last 10 years, the world has faced a period of low growth and low inflation. The Sino-US trade, the global epidemic outbreak in 2018-2022, and then the war between Russia and Ukraine gradually changed the global supply chain. Supply-side imbalances led to a sharp rise in global inflation. The current scenario may be high inflation (trade inflation) that this generation of traders have never seen before. Non-farm payrolls data for March maintained good growth, inflation remained high as oil prices remained high, and several local Fed officials expressed rapid interest rate increases to combat inflation. Even when the March FOMC meeting stressed that it might start shrinking by up to $95 billion in May, US bond yields soared.
Figure 6: the 10-year spread between China and the United States is upside down for the first time in 2010 (April 11)
Figure 7: Sino-US interest rate curve (where the blue is the RMB Treasury yield curve and the green line is the U.S. Treasury yield curve, April 11)
Although the interest rate difference between China and the United States is upside down, the FX Swap Points between China and the United States is not upside down. from the formula of interest rate parity, there is a lot of room for arbitrage at present. (Sell/Buy USD/CNY (USD/CNH). At present, the suitable transaction is to raise RMB on the liability side, invest in US dollar assets on the asset side, and arbitrage through swaps.
Figure 8:FX SWAP Points (USD/CNH and USD/CNY)
(5) US stocks have shown a good resilience in this radical interest rate hike cycle, and the US economic recession and liquidity tightening (contraction table) are the biggest risks for US stocks.
The recent sharp rise in US bond yields has led to a sharp correction in high-valued chip stocks (such as Qualcomm Inc, NVIDIA Corp and Intel Corp), while technology stock valuations are still sensitive and responsive to interest rates. Us stocks are likely to show pressure in the short term before the Fed raises interest rates and shrinks in May, but liquidity indicators show little chance of a sharp fall in US stocks.
(6) it should be difficult for RMB to maintain the strong appreciation trend of 2020-2021 in 2022.
The interest rate spread between China and the United States is upside down under the reverse driving of the Sino-US economic cycle and monetary policy cycle, which is also the first time that the interest rate spread between China and the United States has been reversed in 10 years since 2010. China's monetary policy may be subject to the influence of US debt interest rates and capital outflows, but the complexity of the domestic economic environment will also make China more likely to focus on its own economic growth. one factor that may be considered by monetary policy is Sino-US interest rates and capital outflows, but it should be the Chinese economy that is more important. The monetary policy of China and the United States should be reversed in 2022.
China's trade surplus from 2020 to 2021 was 533.8 billion US dollars and 676.4 billion US dollars respectively, maintaining a very high growth rate, which also benefited from the effective implementation of China's epidemic prevention policy in the previous two years. However, the service-oriented expenditure on overseas tourism and education should be reduced in the past two years. The RMB should still be supported by fundamentals in the short term, and the inaccurate factor is the outflow of foreign exchange capital under the capital account, including the stock outflow of stocks or bonds, but it will be difficult for the RMB to maintain the strong appreciation trend of the previous two years in 2022.
Figure 9: China's trade surplus in goods is gradually increasing (2020-2021)
Figure 10: China's trade deficit in services shrinks
Figure 11: there is a decreasing trend for foreign institutions to hold Chinese bond assets
