Hello everyone, and happy May Day in advance! As we approach the May Day holiday, there will be three global trading days, while domestic trading will come to a halt. It remains uncertain how everyone plans to navigate this particular risk. Since last week (April 15th), global markets have undergone a significant adjustment. This week (April 22nd-25th), as discussed in our previous report (“Who Will Bear the Brunt of the Iran-Israel Conflict?”), we’ve observed trading around support levels. Despite fluctuations, there haven’t been major data releases recently to disrupt this trend. However, timely profit-taking remains our recommended course of action. Looking ahead, April’s CPI figures in the United States may not meet expectations. As April draws to a close, expectations regarding CPI will gradually materialize, warranting close attention. In extreme scenarios, such as expectations falling below 3.5%, initiating long positions on the left side may prove to be a profitable strategy.
Since the release of the March CPI in the United States, a hot topic of discussion has been the notion that “good news is bad news for Wall Street, and bad news is good news.” This week, the disclosure of the U.S. first-quarter GDP revealed a year-on-year growth rate of 1.6%, significantly slower than the expected 2.5%. At the same time, the core PCE price index on an annualized seasonally adjusted basis exceeded expectations, rising to 3.7%, sparking concerns in the market about stagflation in the U.S. economy.
According to the standard stagflation trading model, stock values should decline. Here, we need to analyze the critically important U.S. GDP data indicator. Prior to the release of the U.S. first-quarter GDP, we were very bullish on the fundamental strength of the U.S. economy. In mid-month, the IMF revised the U.S. economic growth rate to 2.7%, so the first-quarter GDP data alone is insufficient to completely change everyone’s view of the U.S. economy. In 2023, U.S. GDP data initially showed low growth rates, but gradually accelerated and revised to 3.9% in the fourth quarter. From the perspective of GDP calculation, it is influenced by the U.S. trade deficit and inventory levels. A high trade deficit and strong willingness of enterprises to replenish inventory will both suppress GDP readings. The key here may lie in the trade deficit, or it may be the core issue of global hotspots this week.
Apart from GDP readings, data from the U.S. labor market has been consistently strong. If the unemployment rate is very low and the GDP reading is also very low, leading to a judgment of future economic stagnation, it is not a wise choice. This week, the Nasdaq index closed higher, indicating that the “bad news” of GDP data did not scare Wall Street. In fact, the key issue lies in the substitution relationship between GDP and the unemployment rate. With low GDP data, traders instead believe that the market’s expectations for a Fed rate cut may be postponed until December, or even expectations for a Fed rate hike exceeding 20%. This is to some extent influenced by the first-quarter PCE data. Looking at the length of the next 1-2 quarters, the risk of stagflation in the U.S. economy still appears relatively low.Now let’s turn to the most crucial trade-related topics. As we mentioned in previous reports, the strength of the U.S. dollar index is also an important reference indicator for the Federal Reserve. An overly strong U.S. dollar index is detrimental to the U.S. economy, as evidenced in the first-quarter U.S. GDP data. The logic is quite simple: an excessively strong U.S. dollar index undermines the competitiveness of U.S. products in foreign markets, and the U.S. dollar index is linked to expectations of Fed rate cuts. If you’ve been following international news, you’ll notice intense discussions this week about Asian exchange rates and expectations of rate cuts in the Eurozone. This is closely related to the foreign exchange market, and various high-ranking U.S. officials have also expressed their views. Biden recently stated that there would be rate cuts this year, Trump this week mentioned that the U.S. dollar index is excessively strong, which is detrimental to U.S. exports, and Yellen commented on the yen exchange rate in an interview, expressing a basic stance not against Japanese intervention in the currency market but advocating coordination with the United States.
Indonesia raised interest rates by 25 basis points this week to counter the rapid depreciation of its currency. Following its monetary policy meeting on the 26th, the Bank of Japan indicated that although it kept policy rates unchanged in April, it would consider the pace of bond purchases in the coming period, hinting at easing quantitative tightening expectations to stabilize the yen exchange rate by stabilizing future yen yields. Governor Kuroda explicitly stated at the press conference that the exchange rate would be one of the important reference factors for the Bank of Japan.
Observing the foreign exchange market, we notice that the U.S. dollar index stopped rising after touching 106. Even with crude oil prices above 85 and the key point of U.S. two-year Treasury yields exceeding 5%, the U.S. dollar index remained stable during this period. This indicates that traders are guided by expectations from the United States. Even as U.S. Treasury yields continue to climb, the U.S. dollar index is expected to remain stable, which is somewhat beneficial for global stock markets outside the United States because exchange rate risks are decreasing. Moreover, in the long run, as the U.S. dollar enters a depreciation cycle, U.S. GDP may rise, explaining the rapid ascent of the Hong Kong capital market to some extent. The Hang Seng Index hovered around 17,000 for a while, finally breaking through 17,000 and trading with expectations of reaching 18,000. Buying into the Hang Seng on the left side is still a very profitable move. A-shares also traded at 3050 points this week, and if they break through 3100 next week, buying on the left side would also be a good opportunity. When considering buying on the left side, everyone should refer to PMI data. If April’s PMI exceeds expectations and improves, buying on the left side can yield returns, but profits should be taken in a timely manner because risks in China remain complex.
After experiencing a debt crisis in the real estate sector in April, the capital markets have stabilized, with China’s Ping An, the focal point of public opinion, showing some rebound. However, everyone should remain vigilant about risks.
Looking at broader issues starting from the foreign exchange market, this week saw the visit of Blinken to China, reminiscent of Yellen’s previous visit. The United States has once again raised concerns about China’s overcapacity in production to the world. In reality, few countries care whether China has overcapacity in production. This may be a bargaining chip for the United States in negotiations. Before Blinken’s visit to China, the U.S. also floated the news of partially excluding some Chinese banks from the SWIFT system, which is the consistent extreme pressure tactic of the United States in negotiations. China’s export index has indeed dropped significantly year-on-year, with year-on-year growth slowing to a new low. The container price index has also seen a substantial decline, indicating that China’s trade surplus will significantly expand in the coming period. A large portion of this trade surplus, possibly up to 70%, is settled in U.S. dollars, which is a nightmare for the U.S. Treasury Department.
Currently, the yields on U.S. Treasury bonds, both two-year and ten-year terms, are already high. If China has such a large trade surplus and does not purchase U.S. Treasury bonds, this will accelerate the rise in U.S. Treasury yields. Moreover, the issuance volume of U.S. Treasury bonds in the coming period is enormous. The U.S. dollar index may not be able to withstand excessively high U.S. Treasury yields. Verbal interventions by the United States regarding the U.S. dollar index may lose their significance, which will accelerate the downward revision of U.S. GDP data. Perhaps this is the core contradiction that the United States has been discussing with China regarding overcapacity.
During Blinken’s visit to China, five consensuses were reached, as stated in the press release: China and the United States exchanged views on the Ukraine issue, the Israeli-Palestinian conflict, as well as North Korea and Myanmar issues. On the 26th, during Blinken’s visit to China, Hamas and Fatah from Palestine also held talks in Beijing. According to the news from Hamas, they are willing to cease the Israeli-Palestinian conflict and jointly establish a state with Fatah, transforming their armed forces into a national army. On the same day, there were reports of Russia planning a visit to China, which reflects China’s firm diplomatic stance. Although our capital markets have been battered by the real estate crisis, there are always people trying to patch things up.
