March 12, 2023
This week, there has been significant volatility in asset prices, with the US dollar index rising, US bond yields rising, and potentially continuing to rise. Global equity markets have fallen, crude oil prices have slowly declined, and gold has risen after a decline. Here, we will discuss our own views and analysis on global macro, domestic macro, and macroeconomic regulation.
Global Macro: Debt Crisis and Stagflation
During the congressional hearing on the 7th, Powell reiterated that the Fed’s 2% inflation target would remain unchanged. This can be divided into two levels: 1) First, in terms of expectations, Powell’s firm remarks were to suppress the market’s idea that the Fed can tolerate an inflation target of more than 2%. However, based on the current situation, when inflation falls to 3-4, the Fed may stop raising interest rates. Therefore, this statement is more of a warning to the financial market not to expand credit too quickly. At the same time, once the Fed abandons its inflation target, the two-year Treasury yield will continue to rise. 2) Secondly, in terms of actual action, the market’s original expectation for the Fed’s rate hike pace was 25BP and 25BP. After inflation gradually fell, there may be a rate cut in the middle of the year. After Powell’s speech, the market’s expectations changed to 50BP, 50BP, and 25BP, and the terminal interest rate rose to 5.6, an increase of 0.6 percentage points from the previous expectation. In this context, the possibility of a debt crisis continues to increase. For banks, the balance between assets and liabilities may be broken. For household savings, if the bank’s asset side cannot match the short-term asset yield of 5.6, the household sector will withdraw money. (Recently, Silicon Valley Bank is a typical example. Its balance sheet sold a large number of assets to cope with a run. Among them, a large number of assets are tech company shares, and the sharp drop in tech company stocks should be reasonable. Overall, it is still a problem of liquidity) Not only that, continued rate hikes are also a blow to US Treasuries. The rapid increase in financing rates has led to high national budget costs. At present, Congress has passed a budget bill requiring an increase in the debt ceiling, which is the only way. The Fed will not prepare for other ways and can only achieve the goal by reducing the fiscal deficit.
In the face of the current crisis, former US Treasury Secretary Summers referred to it as the “Wile E. Coyote” moment, which means that when residents suddenly find that the situation has changed, the household sector will instantly contract consumption, leading to a large-scale economic contraction, which may be the problem that the future US economy will face.
Macroeconomic Situation in China: Liquidity Trap
The domestic economy is currently caught in a liquidity trap. According to Fisher’s “debt-deflation” theory, if there is too much debt in the economy, it will fall into a self-deflationary cycle. If the debt cycle is interrupted (such as when enterprises and residents need to repay debt at the same time), it will lead to an overall contraction in demand, which in turn will increase debt pressure and ultimately lead to greater deflationary pressure. Currently, this is being decided by the real estate sector. Last year, the pandemic prevented this phenomenon from appearing in the economy, but now that the pandemic has disappeared, the theory of deflation is becoming more and more apparent. According to Gu Chaoming’s theory, early repayment of debt by households is a typical balance sheet recession. Specifically, this is reflected in the continuous increase in household savings rates and early repayment of debt.
Looking at recent data, CPI and core CPI continue to decline (demand-driven). The rise in M2 is mainly driven by household deposits. The increase in social financing relies on policies (infrastructure), combined with the expansion of corporate balance sheets, that is, the government issues debt and uses it as project capital or for interest subsidies, forcibly expanding investment to achieve the leverage effect of finance.
In terms of macroeconomic control, the deficit ratio, special bonds, and GDP growth target mentioned in the two sessions have been fully discussed in the previous article and will not be repeated here. Observing the international situation again, the recent joint declaration of China, Saudi Arabia, and Iran, as well as the upcoming trilateral meeting of the US, UK, and Australia, may pose challenges to the global situation, coupled with the Dutch chip bill and the Russia-Ukraine conflict, global relations are becoming increasingly tense. It is expected that asset price volatility will continue to intensify next week.