Last week, global capital markets generally fell due to the impact of the banking event, while the domestic market remained relatively stable. Driven by risk aversion sentiment, gold prices continued to rise, surpassing previous highs. Crude oil prices stabilized after a sharp decline, leading to a gradual drop in global non-ferrous metal prices. However, supported by China’s economic recovery, prices of bulk commodities represented by steel continued to rise, although there are policy risks for these prices.
>>>Banks (SVB, First Republic, Credit Suisse, Signature)
The contagion and panic of the financial crisis stem from information asymmetry. As investors, financial information is asymmetric, making it difficult to observe the refinancing activities of banks. There are two transmission paths for China: 1) Financial markets, spreading from US bank stocks to European bank stocks, with both emotional and fundamental support. Banks in both regions face interest rate mismatch risks brought about by central banks’ continuous rate hikes, so it is entirely reasonable for bank stocks to plummet. However, China does not have the interest rate mismatch risk of continuous rate hikes, and China’s sentiment is continuously improving, supported by economic recovery. China’s systemic financial risks mainly lie in local governments and local commercial banks closely related to local governments. 2) The real market, the “Wolf of Wall Street” moment caused by financial panic leads to a sharp contraction in global real consumption. Historical experience tells us that economic crises always occur suddenly. This point can also be confirmed by the sharp decline in crude oil prices. In the next 1-2 quarters, it will bring considerable pressure on China’s exports, but for asset prices, after 1-2 quarters, both China and the United States will enter a relatively relaxed state.
Currently, Yellen has attended congressional hearings, and she believes that the US government will not bail out all banks. The Federal Reserve will also attend congressional hearings next week. Judging from the development of these two events, the banking panic has not yet ended. The unified caliber of the Federal Reserve and the Treasury Department is that bank balance sheets are relatively healthy at present, which confines financial panic to the range of financial stocks. However, whether the judgment of the Federal Reserve and the Treasury Department is credible still requires more evidence. If their judgment is questioned, financial panic will spread from financial stocks to other stocks. Bulk commodities such as oil and non-ferrous metals will continue to decline rapidly.
>>>Rate hike next week
The US CPI in February was 6%, and the core was 5.5%. From the perspective of the Federal Reserve, it must firmly uphold the 2% inflation target. To prove this point, the Federal Reserve will choose to raise interest rates by 25 basis points, but it will express uncertainty about the future rate hike cycle, which is basically consistent with Lagarde’s statement at the press conference.
At present, after the CPI enters 6, due to the high core inflation, 6-4 should be a very slow decline interval. In a sense, the rapid decline in crude oil prices will prompt residents to shift their consumption to service consumption, making core inflation even more robust.
The Federal Reserve faces not only the long-term prospects of economic recession but also the short-term financial risks. Therefore, we have changed our previous guess of a 50 basis point rate hike next week to 25 basis points. The peak of US interest rates may drop from 5.75 to 5.25.
>>>China’s data
The investment side is relatively strong, especially infrastructure investment, which still reached a high growth rate of 9 under the high base of last year. The manufacturing growth rate has declined, real estate investment has quickly stabilized, and there is considerable room for growth. Affected by automobile consumption, overall retail sales remain weak.
Judging from the estimated GDP data, the growth rate in the first quarter is approximately 4-4.3, which is still some distance from the target of 5. It is expected that future macro-control will continue to follow a pro-cyclical adjustment. Judging from recent asset prices and policy documents, the digital economy and the Belt and Road Initiative will continue to be the main investment directions. In terms of consumption, there is still significant room for regulation in the automobile sector.
>>>Reserve requirement ratio cut
The decline in the peak of US interest rates has provided a window for China to cut the reserve requirement ratio and interest rates. Judging from the stable performance of China’s foreign exchange market, this window of opportunity does exist. From the demand side, this will be very helpful in supporting economic growth in the second quarter.