Guosen Securities Co.,Ltd. has released a research report indicating that historical Fed rate hike cycles can be categorized into inflation-fighting and precautionary types, with precautionary hikes not necessarily leading to declines in A-shares, as domestic driving variables are more critical. Even if the Fed raises rates in September, the move could be precautionary in nature. Given the continued repair of domestic macro and micro fundamentals and the absence of extreme stock market sentiment, A-shares remain in the third phase of the bull market. Structurally, a second wave of opportunities in AI hardware may be brewing, alongside potential in AI applications, resource dividend plays, real estate, and consumption sectors.
Recent escalation in Middle East tensions has pushed oil prices above $100 per barrel. Against this backdrop, strong US employment data, coupled with August core CPI exceeding market expectations, has significantly increased expectations of a Fed rate hike in September. Should the Fed follow through, it could influence global asset price trends. This report analyzes how global asset prices have historically performed during rate hike cycles.
Expectations for a Fed rate hike have notably intensified. Since late August, renewed US-Iran conflicts and threats to passage through the Strait of Hormuz have driven WTI crude oil prices above $100 per barrel. The oil price rebound not only elevates inflation readings but also transmits to core inflation through transportation, production, and service costs, posing significant challenges to the current path of US inflation decline.
US inflation remains elevated, and employment is robust. August saw non-farm payrolls increase by 162,000, significantly beating the expected 56,000. The unemployment rate held at 4.1%, while labor force participation rose from 61.4% to 61.6%, indicating a resilient labor market. Energy price increases pushed the August PPI to 5.4% year-over-year, exceeding expectations, while CPI remained flat at 3.4% year-over-year, with core CPI rising 0.3% month-over-month, also surpassing forecasts. Fed Chair Warsh reiterated a hawkish stance on inflation at the global central bank symposium, and of the 12 voting members, 7 hold hawkish or conditionally hawkish positions. Following the stronger-than-expected data, market pricing now suggests an over 80% probability of a 25BP rate hike in September.
Market pricing for the hike is already evident across asset classes. The 2-year US Treasury yield has surged above 4.5%, while the 10-year yield approaches 5%, a level not seen since 2007. US stock market volatility has also increased this week.
Historical Fed rate hike cycles can be divided into two categories: inflation-fighting and precautionary. Since 1982, the Fed has shifted its monetary policy focus from quantity-based tools to price-based policies targeting the federal funds rate. Guosen Securities has identified eight rate hike cycles since 1982 and, using an anti-inflation pressure index constructed from US economic, inflation, and employment data, classified them accordingly.
Inflation-fighting cycles occurred in 1983-84, 1987-89, 1999-2000, and 2022-23. These were characterized by inflation significantly exceeding the Fed's target, with overheated employment and demand, requiring policy rates to be pushed into restrictive territory. Examples include: ①1983-84: The US economy faced stagflation, with core PCE at 5.9% year-over-year in March 1983, prompting rate hikes to maintain credibility on inflation; ②1987-89: Following the Plaza Accord and subsequent dollar depreciation, inflation rose, initiating a rate hike cycle, briefly interrupted by the 1987 stock market correction but resumed due to persistent inflation; ③1999-2000: Low unemployment, strong demand, tech stock valuation expansion, and loose financial conditions heightened inflation and financial overheating risks, leading to hikes starting in June 1999, which eventually contributed to the dot-com bubble burst; ④2022-23: With Q4 2021 GDP growth at 7% annualized, manufacturing PMI above 55%, and unemployment below 4%, while core PCE exceeded 5%, the Fed initiated a catch-up tightening cycle totaling 525BP starting March 2022.
Precautionary cycles occurred in 1994-95, 1997, 2004-06, and 2015-18. These typically featured inflation that was rising but manageable, without significant economic overheating, often representing normalization from ultra-loose policies. Examples include: ①1994-95: With core PCE at 2.25% in January 1994 but accelerating growth, the Fed hiked in February as a precaution; ②1997: PCE growth was 1.94% in March, but strong growth and employment improvements prompted a 25BP precautionary hike; ③2004-06: With PCE around 2%, the Fed gradually exited ultra-low rates as the economy recovered, normalizing policy; ④2015-18: Despite inflation below target, employment had largely recovered, prompting the Fed to exit zero interest rates and preserve future policy space.
A Fed rate hike does not necessarily trigger an A-share decline; the nature of the hike and domestic variables matter more. Fed hikes influence stocks, bonds, currencies, and commodities through risk-free rates, financial conditions, and dollar liquidity. For US stocks, precautionary hikes typically lead to an initial decline followed by a recovery. The S&P 500 averaged a -3.7% return 30 days after hiking commenced, but recovered to 1.0% and 6.5% at 90 and 180 days, respectively, as markets priced in a soft landing. In inflation-fighting cycles, US stocks may not fall initially due to earnings support, but can experience significant declines as tightening pressures build, as seen with S&P 500 drops of 35.9%, 50.5%, and 27.5% in the 1987, 1999, and 2022 cycles. For A-shares, the impact of Fed hikes is less consistent, with domestic factors playing a dominant role. When Fed tightening coincides with domestic macro weakening, A-shares tend to underperform, as in 2018 and 2022. However, if the hike is precautionary and domestic fundamentals remain intact, A-shares can show resilience. During the 2004-06 hiking cycle, the Wind All-A index rose 25%, and following the 1997 precautionary hike, A-shares gained 12.3% within a month.
In bond markets, short-term US Treasury yields rise significantly during Fed hiking cycles, but Chinese bonds do not necessarily follow. In precautionary cycles, 2-year Treasury yields rose by an average of 12BP, 22BP, and 28BP at 30, 90, and 180 days, respectively, while 10-year yields initially rose then fell as markets priced in growth slowdown and potential policy shifts. In inflation-fighting cycles, yield increases were larger, with 2-year and 10-year yields rising by 238BP and 154BP on average. Chinese bond performance depends on whether monetary policy cycles are synchronized. During the 2004-06 and 2022-23 Fed hiking cycles, China maintained an accommodative stance, with 2-year and 10-year CGB yields falling by 104BP and 18BP, and 120BP and 15BP, respectively.
In commodities, inflation-fighting hikes are bearish for gold, which declined an average of 4.7% in such cycles, while rising 16.2% in precautionary cycles, as rapidly rising real rates weighed on the precious metal. Oil prices have shown divergent performance across rate cycles, influenced by supply shocks, geopolitical risks, and global inventory cycles. In currencies, the dollar tends to strengthen during inflation-fighting cycles, averaging a 6.3% gain, while declining an average of 3.5% in precautionary cycles, supported by higher rates for longer and safe-haven demand in high-inflation environments.
The bull market structure remains intact, with a second wave of tech opportunities potentially brewing. Following Friday's US inflation data, expectations for a September Fed hike surged. Guosen Securities believes that even if the Fed raises rates in September, the move would likely be precautionary. With midterm elections approaching, Middle East tensions potentially easing, and oil prices likely to retreat, inflation pressures could subside, making rapid or aggressive tightening unlikely. Friday's rally in US stocks suggests markets are pricing in the positive scenario of a precautionary hike, signaling that bad news is out of the way.
For A-shares, the domestic policy environment remains supportive, with fiscal efforts accelerating and the economy in a repair trend. August manufacturing PMI rose 0.6 percentage points to 49.8%, and exports maintained a strong 25% growth rate. In Q2, the cumulative year-over-year growth of aggregate net profit attributable to shareholders of all A-share companies recovered to 18.6%, indicating continued improvement in corporate profitability. Historically, A-share bull markets have turned bearish during periods of overheated sentiment, sustained liquidity tightening, and significant macro deterioration. The current bull market's valuation and sentiment remain below historical peaks, with macro and micro fundamentals gradually improving, placing A-shares in the third phase of the bull market.
Structurally, a second wave of opportunities in tech growth is brewing, alongside the resource dividend sector. ① The second tech wave is taking shape. Crowding and excess returns in AI hardware are converging, while domestic policy and liquidity conditions remain accommodative. Should a precautionary Fed hike occur, and overseas cloud providers sustain high AI revenue growth, the AI computing chain could experience a second wave around Q4, forming an M-shaped top. Attention may also shift to lower-positioned sectors within tech, such as AI applications with fundamental prospects. ② Resource dividend sectors, including non-ferrous metals, coal, and utilities, deserve attention. Supported by tight supply-demand dynamics and rising geopolitical premiums, the fundamentals for resource products, particularly non-ferrous metals, are expected to maintain momentum. ③ Real estate and domestic demand sectors could benefit from additional policy measures promoting consumption and stabilizing the property market.
Risks include a larger-than-expected Fed tightening and fluctuations in domestic economic recovery.
Comments