Li Chao: Epidemic control moves to the right and monetary policy moves to the left

2022-04-23 0 By

Changes in overseas markets during the Spring Festival can be summarized as a main line of logic:The economic disturbance caused by the relaxation of epidemic control has decreased, the short-term focus of monetary policy on inflation has been further strengthened, the expectation of liquidity crunch has been strengthened, and asset prices have reflected this trend.Looking ahead, our liquidity outlook for the full year remains unchanged: in the short term, real inflation and inflation expectations in the US and Europe have not yet peaked and tightening expectations will intensify.But for the full year, global central banks will tighten less than expected.Financial stability will become a periodical constraint for the Fed’s easing exit. Once the Fed slows down the pace of interest rate hikes due to financial stability, the necessity of interest rate hikes or even shrinking the balance sheet will further decline after the inflation pressure drops in the second half of the year.The structure of inflation in Europe is obviously different from that in the US, and the inflationary pressure will also be significantly weakened after the fall in energy prices. The need for further tightening with interest rates is actually low.> > outbreak control relax the disturbance on the economy fell, the short-term focus on inflation momentum to further strengthen monetary policy We think the overseas market change during the Spring Festival can be summed up in a common thread logic: epidemic control relax disturbance of economic decline, short-term focus on inflation momentum to further strengthen monetary policy and liquidity crunch is expected to strengthen.In terms of epidemic control, developed countries have gradually implemented epidemic containment measures and relaxed control measures, which has gradually reduced the constraints of the epidemic on economic recovery.The biggest bright spot in U.S. employment data was a sharp repair in labor force participation this month.In terms of monetary policy, the short-term focus of monetary policy on inflation became clearer after the economic disturbance of the epidemic decreased. The Central Banks of the UK and Europe showed different degrees of hawkish turn at this month’s interest rate meeting.In addition, the lack of further escalation of the Ukraine crisis has reduced the constraints on monetary policy in the developed world (through financial stability).After the expectation of liquidity crunch intensified, asset prices in the overseas market showed a relatively consistent trend during the holiday: 10-year US bond yields rebounded to more than 1.85%, and European bond yields also rose to varying degrees.Us dollar high shock slightly down, mainly from the strengthening of European tightening expectations;U.S. stocks rebound mainly from short-term tightening expectations fully reflected after the fundamental repair expectations strengthened.In the face of the high incidence of COVID-19, Many European countries have been relaxing their containment measures since February.For the UK, from 11 February, people travelling to the UK who have received two doses of vaccine will not need to undergo nucleic acid testing before departure or upon arrival;Unvaccinated persons are also not required to self-quarantine upon arrival;Masks are no longer required in most public places except hospitals, nursing homes and public transport.Service consumption places return to normal;Restrictions on working from home have been lifted.In the European Union, Norway has been the most relaxed country, with social scenes largely restored and nucleic acid tests at the border cancelled. The few remaining controls are expected to be lifted in the coming weeks.In addition to Norway, France, Denmark and Ireland have lifted some COVID-19 controls;Italy, Switzerland and Finland are all expected to join in the future.The current relaxation of the epidemic control in Europe is not due to the improvement of the epidemic, but a fundamental change in the EU’s attitude towards epidemic management. The EU and the UK have taken measures to mitigate the pandemic despite the high transmission rate and low fatality rate.The daily number of new confirmed cases in Europe is still over 1.6 million, the highest since the outbreak.But the number of deaths has held steady without a big jump.> > the British central bank to raise interest rates table & the European central bank to turn the eagle, Europe did not face a broad-spectrum necessity actual low inflation pressure to raise interest rates UK CPI growth of 5.4% year-on-year, December 21st January 22 years in Europe to reconcile the CPI growth rate of 5.1%, is expected to Q1 still has further upward pressure, subject to the inflationary pressures, the central bank and the European central bank monetary policy stance slightly turn the eagle.The Bank of England announced an increase of 25BP at the February rate-setting meeting. Five of the nine votes supported an increase of 25BP at this meeting, while four supported an increase of 50BP at this meeting, showing a strong hawkish orientation on the whole.Money markets are currently pricing in the Boe base rate at 1.5% by year-end (currently 50BP);As well as raising interest rates, the Boe will also start shrinking its balance sheet and stop reinvesting its holdings as they mature, with about 28 billion pounds of bonds maturing between March and the end of the year.The ECB left its February rate-setting meeting on hold, but there was a marginal change in Lagarde’s tone.This meeting no longer emphasizes “no rate hike in 2022”;On inflation, Lagarde said that “inflationary pressures have been higher than previously thought and we still expect inflation to ease this year, but the ECB stands ready to adjust all its instruments as appropriate.”Ms Lagarde’s tone was a marginal softening from her previous firm stance of not raising rates in 2022.Overall, we believe that the marginal shift in the ECB’s attitude is also largely due to expectations management of inflation, with the need for an actual rate hike remaining low, mainly because Europe is not facing broad-based upward pressure, which will diminish rapidly once energy prices fall.From the perspective of the differences in CPI structure, the CPI pressure in the eurozone is mainly caused by energy prices. Although THE CPI growth rate is high, the core CPI growth rate of 2.6% year-on-year is still controllable.The US faces broader inflationary pressures, with core CPI growth hitting 5.5 per cent year-on-year.The difference in the structure of inflation pressure in Europe and the United States is mainly due to the difference in the path of fiscal stimulus. In the United States, the scale of fiscal stimulus is larger and the proportion of fiscal stimulus directly directed to residents is higher (35.1%), which enables residents to maintain high demand without employment and enlarge the gap between supply and demand.Europe’s fiscal stimulus is small in scale and directly directed to residents (18.5% and 8.5% respectively in the UK and Germany), and the supply-demand contradiction is relatively small, and it faces relatively little broad-spectrum inflationary pressure.It is also easy to see from the ranking of inflationary pressures in various countries that the more money distributed to residents, the greater the inflationary pressure.We believe that the need to raise interest rates is low when Europe is not facing broad spectrum inflationary pressure. In addition, the debt problems of European countries will also become the constraint for the ECB to raise interest rates (please refer to the previous report “Will The Central Banks of Developed Countries raise interest rates?).The us added 467,000 jobs in January and the unemployment rate edged up to 4.0% from the previous month. The core reason for the divergence was a sharp improvement in the Labour force participation rate.In January, the US labor force participation rate repaired 0.3% month-on-month to 62.2%, the highest level of repair since 2021, confirming our previous view.We have pointed out in the “First To Establish, Then to Break, Industrial Breakthrough” that the core constraint of the last “kilometer” of employment restoration in the United States is the epidemic. After the gradual effect of Omicron, residents’ willingness to work has increased significantly, and it is expected to further repair and alleviate the contradiction between employment supply and demand and the pressure of rising wages.By sector, the entertainment and hotel industry added 151,000 new jobs this month, making it the most resilient sub-sector, in line with the characteristics of industries affected by the pandemic.In terms of wages, hourly wages rose 0.7% month-on-month, higher than the previous month, but the subsequent upward pressure is expected to ease gradually with the improvement of labor participation rate.Overall, the steady healing of the U.S. labor market will further reduce the constraint on Fed tightening and strengthen expectations for rate hikes.The situation in Ukraine remained basically stable and short-term risk assets are no longer expected to price the risk of escalation of the conflict.This is expected to continue in the future, with short-term risk assets no longer pricing this risk.On the American side, there have been lots of small gestures but no concrete measures.The White House met with Wall Street to inform them of the possibility of financial sanctions against Russia;The Senate is also exploring a bill to impose financial sanctions on Russia;Mr Biden also pledged to supply Gas to Europe (which depends on Russia for about 40% of its supplies) if tensions flared;Separately, the United States is sending 1,700 more troops to Poland in Europe but a Pentagon spokesman said no troops will be sent to Ukraine.The Russian side will actively visit China without further action.President Putin has started a visit to China during the Winter Olympics, and has repeatedly stated that Ukraine has no plans to invade.The Russian and Chinese foreign ministers also held talks during the Spring Festival.In Europe, the attitude of the leaders of major countries to mediate conflicts is obvious.French President Emmanuel Macron actively spoke with Putin and scheduled a diplomatic visit to Russia and Ukraine next week.German Chancellor Martin Schulz also plans to visit Russia;In Britain, Prime Minister Boris Johnson spoke with President Putin and agreed to seek a peaceful solution.>> Replenished is the core driving force of THE Q4 US economy, Q1 replenished continues to be strong after the completion of the quarterly economic slowdown holiday released the US Q4GDP data sequential discount annual growth rate of 6.9%, year-on-year growth rate of 5.5%, slightly exceeding market expectations.In terms of items, capital expenditure driven by Treasury replenishment is still the core driving force of economic growth;At the consumer end, the consumer demand for commodities is gradually weakened after being substantially overdrawn;The weak recovery in demand for services is entirely consistent with our previous assessment of the structure of the US economy.75% of Q4 growth was contributed by private investment, 71% of which was contributed by replenishment;Consumption accounted for about 33% of GDP growth in the quarter (with government spending making a negative contribution to the rest), with services contributing 31% and goods only 2%.On the whole, the QUARTER-on-quarter GDP growth in THE US in Q4 was significantly higher than that in Q3, which was mainly caused by the recurrence of THE DELTA virus in THE US in Q3, which temporarily slowed the process of restocking and delayed the recovery process.Q4 After the epidemic gradually subsided in the United States, the impact of the epidemic on the economy declined significantly.Looking ahead, we maintain our previous view on the US economy: the replenishment will continue to be the core driving force of economic recovery in Q1, and the economic recovery will be weak after the end of the replenishment in Q2. In 2022, the US economy will show a quarter-on-quarter downward trend.Looking ahead, our liquidity outlook for the whole year still maintains the previous view: in the short term, real inflation and inflation expectations in the US and Europe have not yet peaked, and tightening expectations will further strengthen.However, the tightening intensity of global central banks throughout the year will be less than expected: on the one hand, after the first us interest rate hike in March, the US stock market may undergo a sharp correction due to the double pressure of valuation and profitability under the background of linear tightening expectations and increasing downward economic pressure. Financial stability will become a constraint for the Fed to continue tightening., on the other hand, in the second half of the global inflationary pressures will be significantly reduced, once the fed rates to slow the pace and due to the financial stability in the second half of the inflationary pressure dropped to raise interest rates even shrink table will fall further, the necessity of U.S. stocks will raise interest rates expected falsified continues to rebound after choose, help the Democrats to see the fed raising interest rates expected to have a time throughout the year, and is difficult to see table.In Britain and the European Central Bank, the intensity of tightening is also expected to be much less than expected after inflation pressure falls back.Year – by – quarter economy will be the same quarter – by – quarter downward trend.>> US stocks are wary of a correction in March, us Treasury yields still have short-term upside space, the DOLLAR tends to decline after the shock of the high US stock market, we believe that the US stock market in January-February still has upward momentum driven by earnings,After the first interest rate hike in March, the US stock market may undergo a sharp correction due to the double pressure of valuation and earnings under the background of linearly enhanced tightening expectations and increasing downward pressure on the economy (please refer to the previous report “Only when Inflation Expectations Fall can the Fed stop the Eagle”).U.S. debt, Q1 we think the 10-year Treasury yields under the drive of tightening expectations is still upward momentum (the us and European central bank’s yield upward trend may reinforce each other, under the background of short-term inflation has not yet peaked, the fed may through shrink the margin of time table and raise interest rates further transfer hawks driven attitude and Treasury yields, high may hit 2%,The peak is expected in March (validation period for further tightening expectations);Since then, when the intensity of interest rate hike is not as strong as expected, the constraint of policy interest rate will be reduced. The US bond yield will reflect the expectation of both inflation and fundamentals falling, showing a former high and then low throughout the year, and the central downward trend.In terms of structure, the trend of upward real interest rate and downward inflation expectation is presented as a whole (it is expected that the upward stage of real interest rate is mainly concentrated in the first half of the year, and it also turns downward in the second half of the year and is favorable to the trend of gold price).On the DOLLAR, we maintain our previous judgment that short-term tightening expectations are likely to drive the DOLLAR index to remain high and volatile;The intensity of us interest rate hike in 2022 is not as strong as expected (the divergence degree of European and American monetary policies will converge in 2022, and the European Central Bank will be difficult to tighten, please refer to the previous report “Whether The Central Banks of Developed Countries will raise interest rates tide” for details) and the European replenisations will lag behind the start of the US, the DOLLAR index is expected to return to the downward channel and fall to 90.Risk warning: The outbreak exceeds expectations, leading to the extension of the easing cycle;Inflation faster than expected leads to rapid tightening of global central bank cooperation