ICBC expects to raise interest rates by 2 times in the second half of the year, or weaken

Since the beginning of 2018, under the guidance of “fast interest rate hike”, the positive cycle of endogenous growth in the United States has been initially constructed, injecting continuous momentum into the main engine of consumption. We maintain the previous pre-judgment. In 2018, the Fed will maintain the policy mix of “fast interest rate increase + slow contraction”. The number of interest rate increases will reach 4 times in the whole year. The last two interest rate hikes will occur in September and December. . The annual growth rate of the US economy is expected to rise to more than 3%, and with the steady boost of core inflation, the pattern of US stocks stronger than debt will not waver.

US policy position is moderately moderate

From the supply side, the “fast rate hike” opens the tax reform “Reagan model.” In the February 2017 report, we pointed out that the flow of funds will be the deciding factor for the success or failure of the Trump tax reform. If the disposable income of residents with increased tax reform enters the real economy and expands reproduction, the Reagan model will be formed and a better long-term stimulus effect will be achieved. On the other hand, if the incremental funds released by the tax reform flow into the real estate market, the “small Bush mode” will be formed, resulting in weakening of the stimulus effect.

It is worth noting that the Fed’s “fast rate hike” is not the same as excessive tightening. In general, it maintains a “tight and moderate” policy stance. Although the Fed accelerated the process of raising interest rates, its contraction process was slower than the original plan, forming a policy mix of “fast interest rate increase + slow contraction”. At the same time as the interest rate policy tightened, the domestic liquidity remained relatively abundant due to the slowdown in the expansion of international capital, which provided a cushion for the uncertainty of economic recovery. This is in line with China’s current monetary policy orientation of “stable neutrality + reasonable liquidity”, which not only highlights the endogenous links between the economies of China and the United States, but also verifies that the above policy mix is ​​under the current complex international economic situation. The inevitable choice.

US dollar may fall in the second half of the year

The flattening of the yield curve is not enough. Compared with mid-June, the current spread between the US 10-year Treasury bond and 2-year Treasury yields has further narrowed, indicating that the flattening of the yield curve is enhanced, in line with our June 14 report. In the previous report, we emphasized that the policy mix of the Fed’s “fast rate hike + slow contraction” is the main reason for the flattening of the current yield curve. Therefore, unlike historical experience, the current flattening yield curve is not a signal of economic recession, but a necessary path for the normalization of US monetary policy. It is not worth worrying about.

The Fed’s “tightness” will continue. We believe that the following deterministic trends are worthy of attention. First, the US economy will remain strong during the year. With the formation of a positive cycle of endogenous growth, the US economic recovery trend is stable, although the quarterly growth rate may not be able to maintain above 4%, but the annual growth rate will increase to a high probability of more than 3%. Second, US inflation will rise steadily. The strong economic recovery, combined with imported friction caused by trade friction, will support the US core PCE growth rate to reach the Fed’s expected target. Affected by this, the pattern of US market stocks stronger than debt will not waver, but the US stock market needs to be alert to the phased adjustment caused by external shocks.

Third, the Fed is expected to raise interest rates four times a year. Considering the current monetary policy’s role in promoting economic recovery, the Fed will maintain a policy mix of “fast interest rate increase and slow contraction” during the year. The number of interest rate increases will reach 4 times throughout the year. The next two interest rate hikes will occur at a high probability. September and December. Fourth, the trend of the US dollar index is waiting for a turning point. The expected rate hike from 3 to 4 is the main driving force behind the current round of the US dollar index.

With the clear signal of the Fed’s interest rate hike, the expected change has also been exhausted by the market. Therefore, the US dollar index may exhaust the upward momentum at any time in the second half of the year and gradually shift to the downtrend channel. Emerging market currencies are expected to welcome back and forth after continuing to withstand pressure for some time.