To The Moon

Monetary Policy Path

Cooling inflation and heating rate cut expectations

• CPI weakened further in June, coupled with Fed Chairman Jerome Powell's "dovish" statement, the market expectations for a rate cut in September rose to 90%.

• Higher U.S. bond rates in the second quarter led to tighter financial conditions and weaker economic data, pushing up expectations for a rate cut.

• U.S. inflation is expected to continue to fall in the third quarter, making it a key window for rate cuts.

  

The specificity of rate cuts

• The peculiarity of the current rate-cutting cycle is that the cost of financing and return on investment are close across sectors, and no significant rate cuts are needed to restart the credit cycle and boost demand.

• CME interest rate futures indicate that the probability of a rate cut in September is 90%, and if there are no unforeseen events, a rate cut will become a probable event.

"General" pattern of previous rate cut cycles

Limitations of historical experience

• Simple historical averages do not accurately reflect the differences between each rate cut cycle.

• Most historical rate cuts have occurred in recessionary scenarios, whereas the current cycle was a precautionary cut, making the impact on assets fundamentally different.

Comparable phases

• Rate cuts in the current environment are more similar to 1995 and 2019, when the economy slowed but did not recede, and a soft landing was achieved after a small rate cut.

• Asset performance: gold and U.S. bonds performed better before the rate cut, and narrowed after the rate cut; domestic assets rebounded in the early stage of the rate cut, but the magnitude is limited, relying more on its own fundamentals.

Unusual rate cut cycle

Cycle characteristics

• The current cycle of rate cuts is short, easing has passed the halfway point, and the market has "jumped the gun" and traded centrally in advance.

• Economic soft landing, rate cuts are limited, it is expected that only 100 basis points of rate cuts to ease the restrictive monetary policy and yield curve inversion problem.

Trading Strategy

• Initially resilient denominator logic beneficiary assets (e.g., U.S. bonds, gold, small-cap growth stocks, some growth stocks in Hong Kong), but gradually switching to numerator beneficiary assets (e.g., U.S. post-cycle, leading tech stocks, copper, etc.) after rate cuts are realized.

• Need to moderate half a step ahead of the initial easing trade, but switch to reflation trade after the rate cut is realized.

Asset performance and allocation

Overseas assets

• Initial easing trade beneficiary assets (e.g., U.S. bonds, gold) are resilient, but gradually shifted to reflationary beneficiary assets (e.g., copper, oil and other bulk resources, and U.S. cyclical sectors) after rate cuts are realized.

• After the rate cut, the asset allocation value of assets benefiting from the demand lift brought about by the lowering of financing costs and improved earnings at the molecular end rose.

Chinese assets

• Initial growth stocks or benefit, but only by the external environment space is limited, the follow-up still need to pay attention to structural opportunities.

• The Federal Reserve rate cut is expected to open the domestic interest rate reduction space to ease the current high financing costs.

• Short-term interest rate cuts can focus on liquidity-benefiting assets (such as Hong Kong stocks, semiconductors, automobiles, new energy, media and entertainment, software, biotechnology and other growth sectors).

Risk Tips

• Fed rate cut path exceeds expectations

• Financial risks or sudden recessionary pressures

• Supply-side inflationary pressures exceed expectations

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