Source: Reading by Qin Gengyu
Authors: Huaxin Securities Tan Qian and Yang Qinqin

The recent turmoil in overseas financial markets has continued, and the Federal Reserve's trend has attracted much attention. Facing the trifecta of fighting inflation, preventing risks, and trusting the economy, market expectations are constantly being repeated between imposing interest rate hikes and rapid interest rate cuts. Instead of following the market and going with the flow, we want to find a more definitive macro anchor point by judging the fundamentals and expectations of the current economy, so as to obtain a relatively clear asset investment logic.

1. Economic fundamentals: gradual clarification, gradual consensus

Combining data such as PMI, retail, inflation, and employment in February, the US macroeconomic fundamentals became more and more clear, and consensus on the economic situation, employment conditions, and inflation trends was gradually formed. The general conclusion was that the economy is slowing but not in recession, employment is tight but moderated, inflation is declining but resilience remains, and expectations of the Fed's interest rate hike have cooled somewhat.

1.1 The economy is slowing but not in recession

After entering 2023, the US economy began to weaken, but it did not actually begin to enter a recession cycle. The initial year-on-month discount rate of GDP for the fourth quarter was 2.9%, lower than the previous value of 3.2%, but it is still in the growth range, which is better than market expectations.

Looking at the whole year, the real GDP growth rate of the US was 2.1% in 2022, down 3.8% from 2022. The economic slowdown was basically confirmed. Judging from the PMI, the US manufacturing and service sector continued to diverge. Among them, the manufacturing PMI continued to be weak and was below the boom-and-bust line for 4 consecutive months, recording 47.7%; the service sector PMI maintained a strong trend and recorded a high of 55.1%.

Retail sales data also weakened somewhat. Retail sales in the US fell from 3.2% to -0.4% month-on-month in February. Major expenses all declined to varying degrees. Only electronic appliances, food and beverages, and daily necessities items maintained positive month-on-month growth, while automobiles, which accounted for the largest share of retail data, fell 1.8% month-on-month in February, and marginal consumer consumption slowed down. Although retail sales data turned negative month-on-month, it remained high at 5.58% year on year, far higher than the level during the subprime mortgage crisis (-7.4%) and the internet bubble (2.8%), and there is still some resilience.

From the perspective of economic forecast data, there is strong consistency between the weekly economic forecast index and the growth rate of the US economy. Currently, although the weekly economic index continues its downward trend, it has not yet turned negative; the GDPNow model predicts that the economy will remain in a positive growth range (0.7%-2.8%) in the first quarter, showing that although the US economy is slowing down, it is not yet in recession.

1.2 Employment is tight but has abated

Non-farm workers in the US added 311,000 new jobs in February, far exceeding market expectations of 205,000 people. The service industry remains the main source of employment, particularly 105,000 (leisure hotels), 45,000 (professional services), and 44,000 (healthcare).

However, there are also hidden concerns about employment that exceeds expectations. Hourly wages increased 4.6%. Although they are still at a relatively high level, the month-on-month growth rate slowed to only 0.2%, down from 0.3% in January, and concerns about the wage-inflation spiral abated slightly. The unemployment rate rose slightly, from 3.4% to 3.6%, indicating a slight improvement in the unbalanced pattern of the job market.

Judging from the employment structure, service employment is still the main employment support. The initial employment value in the private sector in February was 265,000 people, of which 245,000 were employed in the service sector, and only 20,000 new jobs were added in commodity production. Among them, manufacturing employment declined for the first time since April 2021. Employment in the manufacturing industry declined for the first time since April 2021. The employment of 4,000 people fell that month, mainly dragged down by non-durable goods manufacturing.

The continued differentiation of goods and service employment is in line with our previous judgment on the US job market. The root cause is the misalignment of the pace of US consumption of goods and services after the pandemic. It is also an important observation indicator for currently judging the Fed's interest rate hike and decline.

The slowdown in employment in the service sector is, on the one hand, a slowdown in service consumption, and on the other hand, support for wage growth will also weaken. Both are important directions for easing inflation.However, employment itself cannot be used as a qualified observation indicator. Due to the lagging nature of the employment data itself in economic data, and the speed of updates is also relatively slow, JOLTS often lags behind two months in job vacancy reports, which can better show the current level of tension in the US job market. Therefore, we need some alternative metrics to hedge against time lags in the data.

Indeed is a comprehensive recruitment website that sets the overall recruitment situation in January 2020 as a benchmark of 100, and updates new job recruitment and total job demand on a daily basis. Therefore, compared with JLOTS data, Indeed's job data can show us the US labor market situation in a timely manner.

In addition to timeliness, another reason for selecting the Indeed indicator is that the current round of labor market rebalancing mostly starts from the demand side. The root cause of the imbalance in the US labor market after the pandemic is that supply is in short supply due to insufficient supply: under the combined effects of factors such as the pandemic, transfers, immigration policies, and an aging population, labor supply is likely to recover in the short term.

According to the Beveridge curve, the Federal Reserve's anti-inflation target will surely impact the labor market, bringing v/u (job vacancy/unemployment rate) back to a low level. Therefore, this round of labor market adjustments will probably start from the demand side of the labor market, and high-frequency Indeed data can help us track this change very well.

Based on our past reports, after the Federal Reserve's rapid interest rate hike, zombie companies that relied on a low interest rate environment in the past are under pressure and may become the starting point for this round of rising unemployment. It is also in line with our judgment that the labor market will improve from the demand side. Judging from the latest Indeed recruitment index, there have been signs of a marginal decline, which is basically consistent with the number of job vacancies.

1.3 Inflation is declining but it is still resilient

US inflation has entered a downward channel, but the pace of decline fell short of expectations: total US inflation continued to fall slightly in February, and the structure is still supported. CPI increased 6% year on year, falling for the 8th month in a row, setting a new low growth rate since September 2021. Inflation pressure has abated marginally, but the downward pace fell short of expectations. The core CPI grew 0.5% month-on-month, higher than market expectations of 0.4%.

Looking at the breakdown, housing inflation continued to run at a high level, with a year-on-year growth rate of 8.2%, the same as last month. The month-on-month growth rate declined slightly from 1% in January and recorded 0.5%. Service inflation without rent recorded 6.9%, falling below 7% for the first time since July 2022. Food and energy prices continued their downward trend. Among them, the food program ended three consecutive quarters of running a high of more than 10% and falling to 9.5%. There was a clear decline in energy inflation. The year-on-year growth rate fell back to 5.2%. The month-on-month growth rate fell rapidly from 3.1% in January, and recorded negative growth of -0.6%. Used car prices continued to fall sharply, recording -13.6% year on year and 2.8% month on month, the main reason for the decline in inflation.

Looking back, inflation is expected to continue to decline, but last-mile resilience is still worth watching out for. Strong housing support for inflation is expected to begin to weaken after the second quarter, causing overall inflation to enter a phase of accelerated decline. However, the decline in food and energy inflation is limited. From a food perspective, the USDA expects food inflation to be around 7% for the whole year, the high base effect of energy inflation is expected to begin to dissipate in June, and energy inflation is expected to re-establish support in the second half of the year. The superimposed labor market is still in a relatively tight position. Although the wage-inflation spiral is slowing down, it is still supported. Inflation resilience is worth paying attention to.

2. Market expectations: fluctuating back and forth, chaos over and over

Compared with the relatively clear fundamentals of the economy, market expectations are quite chaotic and repetitive: the market has repeatedly fluttered amidst imposing interest rate hikes and rapid interest rate cuts; the Federal Reserve and the market's expectations of a recession are also clearly divided: Powell still insists on a soft landing, and the market's judgment on the economy has moved from a brief recession to crisis panic.

This gave birth to expectations of interest rate cuts: the market began to anticipate interest rate cuts in 2023 in advance, and it is expected that interest rate cuts will begin in June at the earliest. In a situation where market expectations are repeated and uncertain, we should look for certainty from a longer-term perspective and a higher perspective, and use this as an anchor to more clearly judge future asset, policy, and economic trends.

2.1 A horizontal jump in recession expectations

Officials and markets clearly disagree on recession expectations: from the perspective of the Federal Reserve, Powell did not give up on the soft landing statement in his speech to Congress. From a market perspective, recession trading strengthened as austerity trading receded, so even after the market adjusted the expectations for the peak of the Federal Reserve's interest rate hike (6%), US debt still failed to break through the previous high: 10-year US bonds fell after a brief 4% surge. Recently, under the impact of the SVB incident, recession trading has regained the upper hand, 10-year US bond yields have declined rapidly, and expectations of interest rate cuts have risen rapidly.

Expectations of a recession have experienced repeated switching between soft landing - no landing - hard landing, and we believe that the fulfillment of the current US recession is still a probable event.First of all, judging from the NBER's judgment criteria, as the official US recession indicators, indicators such as industrial production, wholesale and retail, personal income, consumption expenditure, non-farm employment, and household employment have all weakened to a certain extent, but they are all still in a relatively healthy state. In particular, employment-related indicators have remained relatively strong. Only industrial production has weakened significantly. Furthermore, the NBER's defined recession cycle is often accompanied by the weakening and turning negative of at least 3 indicators. In addition, the NBER's indicators are often lagging indicators, so the current official indicators do not provide us with clear guidance.

 But inflation and the unemployment gap suggest that a recession is inevitable.After 1980, the Philip curve gradually failed under the globalization of the supply chain. Inflation was at a long-term low level, and the relationship with unemployment gradually decoupled, but in the post-pandemic period, anti-globalization, aging, and supply chain obstruction caused the Philip curve to return again.

From the perspective of the actual economy, although wages have slowed month-on-month and concerns about the wage inflation spiral have abated somewhat, the year-on-year increase in overall wages has remained above 4%, far higher than the average increase of 2.5% before the pandemic. The support of wage increases for inflation has also caused the Philip curve to reappear.

Based on this, we believe that the inflation and unemployment gap is still a relatively useful indicator for judging the arrival of a recession. In the past, the inflation unemployment gap exceeded 5% or more four times, respectively in 1948, 1951, 1974, and 1979. Each time the unemployment inflation gap exceeded 5%, the US economy experienced a recession. Apart from the wartime economic policies of the 1950s that dragged the economic crisis to the aftermath of the Korean War, the inflation unemployment gap is often a simultaneous indicator of economic recession, which also validates the inevitability of a recession.

At the same time, the economic support for consumer resilience is weakening.Consumption has always been the main support for the US economy. There are two main characteristics of post-pandemic consumption: first, transfer payments caused US consumption to quickly bottomed out; second, along with the improvement of the epidemic and the reduction of restrictions on consumption scenarios, US consumption as a whole experienced a shift from goods to services. However, at the present point, the support for consumption from excess savings under the influence of transfer payments is gradually weakening.

According to the Federal Reserve's research, most of the excess savings are concentrated in the hands of the top 50% of households, which themselves have a weak marginal contribution to consumption, while the remaining 50% of households themselves consume their excess savings very quickly. Therefore, although current transfers remain above historical trends, support for consumption has begun to weaken.

Judging from the income situation, the sustainability of American household consumption. The household debt ratio has returned to the level before the pandemic, and the personal savings rate is far below the average before the pandemic. This all verifies from the side that most American households have now lost the support of excess savings.

Judging from the delinquency rate of consumer loans, although the current overall consumer loan delinquency rate in the US is still at a historically low level and has not yet returned to pre-epidemic levels, there has been an upward trend. Judging from historical experience, the rise in the delinquency rate of consumer loans is often accompanied by a decline in consumption. In the 2008 period, the delinquency rate of consumer loans rose to a position of nearly 5%, causing the overall consumption growth rate to decline to a minimum of -2.17%. Therefore, the current rise in the delinquency rate of consumer loans also verifies the fact that US consumer resilience is gradually weakening from the side.

The delinquency rate of consumer loans is often very consistent with the trend of the unemployment rate. As the Federal Reserve continues to suppress inflation to suppress demand, it is expected that there is still room for the delinquency rate of consumer loans to continue to rise in the future. However, the debt situation of US residents has been cleared through transfers after the pandemic. Currently, the consumer loan delinquency rate is still at an all-time low of 2%, and the household debt ratio is also far lower than the level of the 2008 period. A healthier debt structure will reduce the impact of the recession on consumption, which is in line with our judgment on the shallow recession in the US economy.

A deep reversal in US interest spreads indicates a risk of recession.From the perspective of interest rate spread reversal, in this round of ultra-hawkish interest rate hikes, the depth of the reversal of long and short interest rate spreads in the US has reached a historic depth. However, every time interest spreads reached this depth in the past, there has been a recession, and there has been no soft landing.

Taken together, the certainty of the US recession is a strong event, but to an extent, the removal of economic risks during the pandemic period (residents' leverage, zombie enterprises) made the current recession likely to be a brief recession, which is expected to be realized at the end of the second quarter and the beginning of the third quarter.

2.2 The fear of financial risk

The SVB incident raised market concerns about the financial crisis, but the current round of banking turmoil was handled relatively quickly. Coupled with sufficient liquidity support provided by BTFP, it was more of an impact on the market than a crisis. In the context of easing concerns about the financial crisis, more attention should be paid to the wave of bankruptcies triggered by the tightening of financial conditions in the real economy, which may be the starting point of this round of recession.

The root cause of the SVB crisis was accompanied by the Federal Reserve's aggressive interest rate hike,US bonds, which were high-quality assets in the past, began to be less high-quality, causing damage to the bank's asset side, which eventually led to the loss of both assets and liabilities, and liquidity risks.This round of banking turmoil will not turn into an all-round financial crisis. There are three main reasons:

First, the Basel III agreement established by the US after 2008 has kept interbank capital in a sufficient state, and will not trigger a similar situation in 2008.

Second, the banks that experienced this round of crisis were of a different nature.A series of PEVC banks, such as SVB, hold more high-quality assets such as MBS and US bonds, and do not have too many financial derivatives, so they also have the same destructive power as Lehman Brothers.

Third, the Federal Reserve's quick handling has also made this round of crisis insufficient to ferment.With a quick response (48-hour FDIC processing) and sufficient liquidity support (BTFP), the Federal Reserve currently expects to have nearly 3 trillion US dollars in reserves, so the market speculates that the size of BTFP will reach 2 trillion US dollars, and market confidence has once again increased. At the same time, the banking market itself has begun to bailout each other, and the major banks of the United States have also begun injecting capital into banks in crisis. A number of large banks injected 30 billion US dollars into First Republic Bank on March 16. Taken together, therefore, the current Bank of America liquidity crisis is in a manageable state for the time being.

There was also a recent Credit Suisse incident in the European financial market. Credit Suisse became a hot topic of market attention due to financial reports revealing internal control flaws and the statement of Saudi Bank, the majority shareholder, that it would not increase funding to get out of trouble. Unlike SVB Bank, Credit Suisse is more like Lehman in 2008, both in terms of scale and asset attributes, and is more in line with the definition of being big and undefeated, thus triggering a stronger crisis fear in the market.

Currently, Credit Suisse has reached a loan of 50 billion Swiss francs with the Swiss central bank and about 3 billion Swiss francs in cash to buy back senior debt securities. However, the central bank's bailout has not allayed market concerns. Credit Suisse continued its downward trend after opening on Friday, March 17. On March 20, the Credit Suisse incident finally ended with the UBS acquisition. The Swiss central bank will provide UBS with 100 billion Swiss francs in liquidity aid; at the same time, the Swiss government will provide 9 billion Swiss francs to guarantee the potential loss of UBS to take over Credit Suisse's assets, and the market's panic will be completely reduced.

However, the current round of the liquidity crisis is not over yet. The impact of financial austerity will be transmitted from monetary policy to the financial sector and eventually to the real economy. We expect that banks will still experience liquidity crises in the future, but it is more of a relatively manageable peer-to-peer outbreak under various liquidity support policies, which will not cause the overall economy to face systemic financial risks on a peer-to-peer basis.

What we need to be wary of next is the impact of aggressive interest rate hikes on physical enterprises and commodity prices. In the past, the low interest rate environment spawned a large number of zombie companies, and as the US interest rate hike process progresses, these companies may begin to lay off employees and push the unemployment rate up to around 4.5% to 5%. The estimate of a 5% unemployment rate also validates our judgment on a shallow recession.

2.3 Fluctuations in interest rate hike expectations

The banking crisis caused the market to cut interest rates ahead of schedule.Goldman Sachs expects the Fed not to raise interest rates again at the FOMC meeting in March, while Nomura Securities believes that the Fed will cut interest rates by 25 basis points at the March FOMC meeting and end this round of QT. However, judging from CME statistics, the market expects interest rates to still rise to 5.25% in 2023. Interest rate cuts will begin as early as July, and interest rates will be cut 3 times in 2023 for a total of 75 BP. This anticipation of an advance interest rate cut is essentially an excessive fear of the banking crisis. We believe that the current market interest rate cut expectations will still be falsified once again, and the Federal Reserve has not yet reached the point where it is time to cut interest rates.

The ECB's policy signal for a tough 50 BP rate hike.The ECB continued to raise interest rates by 50 BP after the Credit Suisse crisis, and there were some changes in the ECB's attitude. First, it once again emphasized that inflation had remained at an excessive level for too long, showing its determination to fight inflation.

Referring to the Credit Suisse crisis, Lagarde said that the ECB has sufficient policy tools to fully provide liquidity support to the Eurozone financial system when needed. Therefore, Lagarde said that the ECB did not balance price stability with financial stability (no trade-off); the primary goal was still to curb high inflation and return inflation to 2%.

The ECB's hawkish attitude stems from its continued high level of inflation. Europe's core HICP continued to rise in January (5.3%) and February (5.6%) of 2023, so under the premise that subsequent financial risks are relatively manageable, the ECB will continue to raise interest rates in May.

The Fed's interest rate hike and expansion went hand in hand.The current inflation path of the US and the EU is different. The EU's current core inflation is still rising, while US inflation is a more sticky problem, so considering the path of subsequent interest rate hikes by the Federal Reserve cannot simply copy the EU. At the same time, the current round of the Federal Reserve is experiencing a rare combination of tight currency (continued interest rate hikes) and broad finance (BTFP).In terms of its nature,The nature of BTFP is different from fiscal QE in the 2020 period. As a liquidity reserve fund, it does not have a direct impact on individuals and households, which makes its impact on inflation independent and neutral.

In terms of its effects,With the introduction of BTFP, banks' liquidity problems were underpinned by the Fed's rapid interest rate hike, and the possibility of a full-blown crisis was contained in a quick settlement, enabling the Federal Reserve to achieve its goal of maintaining the relative stability of the financial system. Under the influence of lesser harm between the two powers, inflation will once again become the main object of consideration in the Federal Reserve's monetary policy.

However, BTFP also has its side effects. The Fed's downsizing process has lagged behind schedule. Downsizing and interest rate hikes work together as a means to reduce financial conditions.When the effect of downsizing is limited, the Federal Reserve will rely more on monetary policy to achieve the goal of fighting inflation. This does not mean that the Federal Reserve will once again speed up the pace of interest rate hikes, or that it will be the pinnacle of another rate hike; rather, it will be more careful about choosing to cut interest rates.In a situation where the liquidity problem is manageable, the Federal Reserve is in no hurry to quickly switch to interest rate cuts. It can wait for real interest rates to correct and inflation to officially decline before making a decision. Therefore, it is expected that the March interest rate meeting will continue to raise interest rates by 25BP to the range of 5%-5.25% in accordance with the guidelines of the December FOMC meeting.

The Federal Reserve is facing a triple choice.The Federal Reserve will face a brief recession, high inflation, and low unemployment in this round of interest rate cuts.

Judging from the resilience of inflation,Inflationary resilience will further support the Federal Reserve in suspending high interest rates. PCE rebounded beyond expectations in January, and sticky inflation in the Atlanta Fed also rose again to a high of 6.8%, so it is expected that the Federal Reserve will raise inflation expectations in the March economic outlook (PCE 3.1% in December, 3.5% for the core PCE), making it less likely that inflation will trigger interest rate cuts in 2023.

Judging from the pressure of unemployment,The current imbalance between supply and demand in the labor market has not been resolved, and the rate of increase in the unemployment rate is expected to be slow. The Federal Reserve expects the unemployment rate to reach 4.6% in 2023 in December, which is lower than the average interest rate cut in the past.

Judging from the depth of the recession,This round is likely to be a shallow recession. The economic slowdown during the 2019 period could push the Federal Reserve to cut interest rates in an environment of low inflation and low unemployment, but the light recession in the current environment of high inflation and high viscosity is not enough to push the Fed to cut interest rates rapidly.

Judging from the triggering factors,The Federal Reserve often has to balance inflation and employment. Judging from the wave of six interest rate cuts since 1984, inflation is often in a relatively manageable position. PCE was around 2.8% year-on-year during the average interest rate cut period. From the perspective of the unemployment rate, the average unemployment rate at the beginning of the six interest rate cuts was 5.05%.

However, it is worth noting that when interest rates were cut in 2019, the Federal Reserve cut interest rates more due to the slowdown in economic growth. At the time, inflation and unemployment were in a relatively healthy position, which increased the importance of economic growth and prompted interest rate cuts: when the first interest rate cut began in July 2019, the US PCE was only 1.55% year-on-year. The unemployment rate, on the other hand, has experienced a continuous decline for nearly ten years and is at a low of 3.7%. However, after excluding the situation in 2019, the PCE for the Federal Reserve's average interest rate cut was around 3.04% year on year, the core PCE was 2.92% year on year, and the average unemployment was 5.34% year on year. Currently, there is still a certain gap.

3. Allocation Strategy: Overseas safe haven, cash is king

Taken together, the current Federal Reserve's interest rate hike process is not over yet, and the QE+QT combination will also cause interest rate cuts to arrive later. The certainty of the recession is strong, and due to the release of risks during the 2020 pandemic, a slight recession is more likely. Based on this, there is limited room for decline in US debt after a rapid fall, and the optimal allocation window has passed; US stocks still face the double challenges of valuation and performance. Dollar deposits are currently a great safe haven option for funding. Driven by a combination of the three factors of crisis, recession, and interest rate cuts, the allocation window on the right side of gold is getting closer and closer. A-shares, on the other hand, have benefited from the certainty of economic recovery and the limited transmission of risk have also become a gathering place for safe haven funds.

USD: Cash is king.At a time when international bank liquidity risks continue to explode, the global market has once again entered a panic situation. The safe-haven nature of the US dollar has once again taken the upper hand and is expected to remain above 100. The current interest rate hike process is not over. In the period of overall capital market turmoil and unease, the cost performance ratio of dollar deposits of big banks is prominent, and the yield is generally above 4%, which is the main choice for current capital. Even if the subsequent US recession is realized, the Federal Reserve will not cut interest rates quickly. Therefore, although the US dollar index returns to the downward channel in the future, the overall interest rate remains high, and the safe haven advantage still exists.

Gold: The crisis, recession, and interest rate cuts all contributed to the opening of the right-hand window period.Catalyzed by recent risk events, the price of gold rose rapidly. COMEX gold prices rose from the lowest of 1,889 US dollars/oz on March 15 to a price of more than 2,000 US dollars/oz, rising more than 100 US dollars. This round of gold price increases was mainly driven by risk aversion. Considering that the current overseas banking incident has not subsided, the First Republic Bank issue has not been properly resolved. Liquidity risk still needs to be vigilant. Combined with the fulfillment of the US recession and the subsequent Fed's easing expectations, the three factors that will help the price of gold go up OK, the price of gold is already at the beginning of a new cycle.

US debt: There is limited downside after a rapid decline, and the optimal allocation window has passed.Along with the bank liquidity crisis and the weakening of the economy, the inflation trading economy of US bonds began to weaken, and the center of yield declined sharply, while safe-haven transactions and recessionary transactions caused by the panic are currently the main factors affecting US bond yields. US bonds are currently in a volatile state of peak (interest rate hikes, crisis mitigation, expected to be around 3.8%) and bottoming out (crisis fears have resurfaced, the economy weakens, and is expected to weaken at around 3.3%).

US stocks: Still facing both valuation and performance challenges, waiting for the allocation window to restart.US stocks have recently experienced wide fluctuations amid the bank turmoil and the Federal Reserve's interest rate hike, but they have not yet bottomed out: US stocks still have to face the impact of the reversal of the recession and the double impact of performance valuation. The bottoming out of US stocks in 2023 is worth looking forward to. From a point-in-time perspective, after interest rate hikes are completed in the second half of 2023, the market and the Federal Reserve will once again play a game over interest rate cut expectations. The change in the Fed's tone is expected to be the starting point for the current round of US stocks bottoming out.

A-shares: Stabilization is imminent, and the certainty of economic recovery and limited risk transmission highlight the safe haven nature.In addition to dollar deposits and gold, A-shares have the properties of a safe haven at the current point in history.

First, from the perspective of A-shares, the transmission of this round of overseas banking turmoil to the country is limited. The 2023 Financial Stability Conference pointed out that China's banking financial institutions are generally operating steadily, and that the ratings of large banks have always been excellent, which is the “ballast stone” of China's financial system. From an asset perspective, domestic banks hold fewer derivatives, and the space for financial risk to expand and transfer is also limited.

At the same time, domestic monetary policy has maintained its relative independence. The central bank announced a downgrade on March 17, sending a positive signal. In the future, it will continue to use structural monetary policy tools to accurately support the economy. The high certainty of domestic economic recovery combined with the limited transmission of risk overseas has highlighted the safe haven nature of A-shares. The expected cooling of overseas interest rate hikes is compounded by an overall domestic downgrade. Positive signals are gradually accumulating, and the gradual return of the macro-turbulence of rising and falling from east to west may help stabilize the market.

Risk warning:

(1) The tightening of global financial conditions exceeded expectations; (2) the rapid shift in the monetary policy of the Federal Reserve; (3) the resurgence of geopolitical risks.

Editor/Somer