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Last week, the A** field index continued to oscillate to the downside. At present, the New Year's Eve time window is approaching, and the short-term ** uncertainty is large, so investors are advised to operate cautiously before the holiday. In the medium and long term, in the context of the implementation of the incremental and stable growth policy, the domestic economic fundamentals will provide a decisive driver for the valuation repair of the A** field.
Since December, the bond market has continued to strengthen due to the failure to fulfill strong policy expectations, economic data continues to confirm the moderate recovery of the economy, the central bank's MLF excess continues to hedge the issuance of treasury bonds, and the banking system continues to loosen the pattern of funds. In addition, the third cut in the deposit rate this year has raised market expectations for interest rate cuts again, boosting the futures bond market to a new high.
Risk appetite in the equity market is low, and risk aversion supports the strength of the bond market. In the fourth quarter of this year, although the domestic and foreign policies were relatively "friendly" to the equity market, including the easing of overseas monetary policy, the easing of RMB depreciation pressure, the continuous introduction of domestic real estate stabilization policies, and the emergence of a "policy bottom", the domestic equity market has not improved significantly. The main reason is that China's economy is still facing the contradiction of insufficient domestic demand, and the willingness to stimulate strongly at the policy level is not strong, and the direct assistance of existing policies to the residential sector is relatively low. Although the bailout of local governments and enterprises can help them maintain their cash flow and balance sheets without systemic risks, it is difficult for the funds used by these localities and enterprises to repair their balance sheets to be transmitted to the household sector, so that their incomes can improve, and the problem of insufficient demand is not really effectively solved. As a result, sentiment in the domestic equity market has not improved significantly, while risk aversion has supported the strength of the bond market.
Deposit rates were unexpectedly lowered, and expectations for interest rate cuts rose again. On December 22, 2023, the five major banks of industry, agriculture, China, construction and communications, as well as China Merchants Bank, announced the reduction of the listed interest rate of fixed deposits and the optimal interest rate of large certificates of deposit. For fixed deposits, the tenors of 1 year and below, 2 years, 3 years and 5 years were reduced by one basis point respectivelyIn terms of large-denomination certificates of deposit, the maximum interest rate for one-year and below was lowered by 10 basis points, and the two-year and three-year tenors were lowered by one basis point respectively, which was a relatively large reduction. Since 2022, the listed deposit interest rate has been lowered several times, and this round of deposit interest rate reduction is the fourth round of voluntary adjustment made by commercial banks according to their own operating conditions and market situation after the establishment of the market-oriented adjustment mechanism for deposit interest rates.
The scope and magnitude of this round of deposit interest rate adjustment are larger, which is conducive to strengthening the coordination of interest rate policies, reducing the impact of bank interest margins, expanding space for banks to further make profits, lowering loan interest rates, alleviating the trend of fixed-term and long-term deposits, and then promoting the transformation of savings into investment and consumption, as well as avoiding idling arbitrage of funds, and improving the efficiency of capital operation, etc., and at the same time has a certain degree of bullish support for the wealth management market and the bond market.
The treasury bond ** market is pricing interest rate cuts in advance, and subsequent RRR cuts may be implemented simultaneously. In fact, the basis and curve structure of Treasury bonds have reflected the more obvious bullish steep or interest rate cut expectations. According to the conversion, the premium of the main 2403 contract of the two-year treasury bond ** is about 10 basis points, that is, the implied yield of the short-end treasury bond ** is about 10 basis points lower than the yield of the spot bond, that is, the treasury bond ** market is already pricing in the central bank's interest rate cut before March next year. The main contract corresponding to the 10-year bond has only a premium of 2 basis points, and the 30-year bond is less than 1 basis point, indicating that the long-end expectation is not strong, and the pricing curve structure is steepened. Therefore, another cut in the deposit rate may allow the commodity market to continue the logic of interest rate cut expectations in the off-season. The support for the bond market will continue, and the RRR cut may also be implemented simultaneously. At present, the balance of MLF has reached 7,075 billion yuan, constantly refreshing the record high. Historical law shows that when the MLF balance exceeds 5 trillion yuan, in order to optimize the capital structure of the banking system, enhance the soundness of bank operations, and reduce the pressure of the central bank's rolling operation, the probability of RRR reduction will increase accordingly.
Overseas easing expectations continue to strengthen. Although after the interest rate meeting, the decision-making executives led by New York Fed President Williams were forced to shout and warn that interest rate cuts may not come soon, and hawkish signals continue to be released, but the latest data shows that U.S. inflation is further under control, incomes continue to increase, consumer confidence has been strengthened, and the expectation of a soft landing in the economy has strengthened again, U.S. stocks have continued to be strong, and the U.S. Treasury yield curve has moved downward as a whole. The latest core PCE inflation in the United States for November was 01%, and the October data was also revised downwards to 01%, both below market expectations. If the core PCE number is taken annually, the Fed's most important price gauge has fallen back to 19% (below the 2% policy target). Therefore, the market believes that this is a milestone for US inflation to return to normal, and the Fed will therefore be ready to start the journey of cutting interest rates.
The current divergence between the Fed and the market is mainly on whether interest rates will fall quickly after a soft landing. The market believes that after the policy target is achieved, interest rates will fall rapidly to ease tight financial conditions and stop the economy from entering a recession, while the Fed believes that there is little risk of the economy entering a recession quickly. The author believes that the Fed will definitely enter a cycle of interest rate cuts in 2024, but the shift will not be too obvious or too fast, because the interest rate will fall too quickly and easily cause a second time in inflation. In addition, because the current U.S. economy is still relatively resilient, the probability of a soft landing next year is still large, especially in the first half of the year, considering the short-term re-emergence of U.S. housing prices, rigid constraints on labor supply, and the switch of the U.S. inventory cycle (the active replenishment cycle of the manufacturing inventory cycle may be opened), it may be difficult for the inflation center to stabilize in the 2% target range next year, and the timing and magnitude of interest rate cuts will also be limited. Therefore, the author believes that there is still great uncertainty about the timing and extent of the Fed's interest rate cuts in the future, and the current market expectations are too optimistic, and it is still necessary to be vigilant against market fluctuations caused by the revision of expectations in the future. In addition, investors should also pay attention to whether the "Red Sea event" will continue to ferment, if the commodity market continues to strengthen, it may trigger a rise in US inflation expectations, which in turn will affect the Fed's latest decision.
To sum up, in the short term, the follow-up bond market will continue to be strong under the support of the continuation of moderate recovery of domestic economic fundamentals, the continued easing expectations at the end of the year, and the possibility of RRR cuts. (Author's Affiliation: Xinhu**).