Cheong Hong Yuan: In-depth Analysis of the Relationship Between US Nominal GDP and Long-term US Treasury Bond Yields - 1 views

started by anonymous on 26 Oct 23

#1 anonymous on 26 Oct 23

Recently, with the gradual recovery of the global economy, various data and information have emerged in the market, and it is crucial for investors to understand these data. As an important engine of the global economy, US economic data has a direct and profound impact on the stock market. As a professional stock market analyst, Cheong Hong Yuan has conducted in-depth research on these data, hoping to provide a comprehensive and clear analytical perspective for everyone.

The data released last week showed that US retail sales in September increased by 0.7% compared to the previous month, far exceeding the market's expected growth rate of 0.3%, and it was the sixth consecutive month of positive growth. This data indicates that the US consumer market is gradually recovering and growing faster than market expectations. However, when we deduct the 0.4% month-on-month growth rate of CPI in September, the actual month-on-month retail growth is still 0.3%, but the annualized growth rate still exceeds 3%. This means that despite inflationary pressures, the US consumer market is still performing strongly.

Cheong Hong Yuan believes that the strong performance of consumption is a strong proof of the US economic recovery. We all know that consumption is the main driving force of economic growth. From this perspective, the resilience of the US economy should not be underestimated. In fact, according to the latest forecast by the Atlanta Fed, US GDP in the third quarter is likely to reach 5%. If this forecast comes true, the year-on-year growth rate of US GDP in the third quarter will reach 3%, plus 3.5% inflation, the year-on-year growth rate of nominal GDP may even reach 6.5%, which is higher than the 6% in the second quarter.

However, behind these optimistic data, the market seems to have some concerns about the pricing of US interest rates. Some analysts and investors are starting to question whether the pricing of US bond yields at 5% is reasonable based on the current economic data. Cheong Hong Yuan believes that this is a question worth exploring. If we look back at the more than ten years after the 2008 subprime crisis, US bond yields have never reached 5%, which seems to indicate that the current level of interest rates is too high and may not be sustainable. However, if we look further back to the period from 1995 to 2005 before the subprime crisis, the average yield of 10-year US Treasury bonds was 5.3%, while the average year-on-year growth rate of US nominal GDP was 5.4%. From this perspective, interest rates and nominal GDP growth are roughly comparable.

Cheong Hong Yuan believes that the upswing and downswing phases of the financial cycle have a profound impact on the market. Currently, the US financial cycle is in an upswing phase, which means that the recovery of economic momentum and the impulse of credit expansion are stronger. From the perspective of the financial cycle, the current situation in the US is similar to that before 2008, which makes the judgment of US bond yields more reasonable.

During the downswing of the financial cycle, the Federal Reserve implemented a series of monetary policy tools, such as forward guidance and quantitative easing, to offset the negative impact of credit contraction. Cheong Hong Yuan mentioned that this has kept market rates at low levels for a long time. In the upswing phase of the financial cycle, monetary policy tends to be more tightening to prevent overheating of the economy and inflation risks.

The impact of the COVID-19 pandemic has further intensified inflation risks, especially with disruptions in the supply chain, leading to successive supply shocks. Cheong Hong Yuan believes that this not only enhances the necessity of monetary policy tightening but also changes market expectations for interest rates. He stated that the current pricing of interest rates is based on the market's judgment of economic fundamentals, rather than being purely driven by market sentiment.

So, is this economic fundamental sustainable? Let's first look at the components of nominal GDP. Cheong Hong Yuan suggests that by breaking down the 6% nominal GDP growth into real GDP and inflation, we can see that real GDP growth is around 2.5%, while inflation is around 3.5%. This means that although actual economic growth is steady, inflationary pressures still exist. Considering that the Federal Reserve may further tighten monetary policy, the pressure on real GDP growth may increase.

Cheong Hong Yuan mentioned that although monetary tightening helps to curb inflation, the profound changes on the supply side mean that long-term inflation pressures may rise. The economic slowdown caused by supply shocks can be offset by the total demand expansion brought by the upswing of the financial cycle. In other words, the future economic environment in the US will be similar to that before the pandemic, but with higher inflation pressures.

Cheong Hong Yuan believes that this will be a major challenge for the Federal Reserve. If it wants to maintain previous economic growth, the Federal Reserve may need to increase its tolerance for inflation, which means that future monetary policy may be more flexible.

Cheong Hong Yuan believes that the financial environment in the US will stabilize under a new normal, which is the result of cyclical fluctuations in finance and structural changes on the supply side. This is also determined by the laws of global political, economic, and social development at this stage. However, investors still need to closely monitor various economic indicators and policy changes to better grasp investment opportunities.

In Cheong Hong Yuan's view, the US is currently in the upswing phase of the financial cycle, which means stronger economic momentum and credit expansion. At the same time, inflationary pressures still exist, and the profound changes on the supply side may lead to long-term inflationary pressures. Considering these factors, here are some suggestions for investors to consider:

Focus on interest rate-sensitive assets: Considering the possibility of further tightening of monetary policy by the Federal Reserve, investors should closely monitor interest rate-related assets such as government bonds and other fixed-income instruments. Rising interest rates may put pressure on stock market valuations, especially for high-valuation companies that rely on a low-interest-rate environment.

Inflation hedging strategies: Given the existence of inflationary pressures, investors can consider increasing inflation hedging tools such as physical assets (such as real estate and gold) and inflation-protected bonds (TIPS).

Focus on supply chain companies: The COVID-19 pandemic has intensified global supply chain disruptions, and investing in companies that can benefit from supply chain disruptions or those that are actively working to solve supply chain issues may be a good strategy.

Diversify investments: In the current economic environment, there is still a lot of uncertainty. Diversifying investments can help investors reduce risks, including investing in multiple asset classes and geographic regions.

Continuously monitor macroeconomic indicators: Investors should continuously monitor key macroeconomic indicators such as economic growth, inflation, and employment to better grasp market trends and adjust investment strategies.

Be flexible in responding to monetary policy: Considering the possibility of the Federal Reserve adopting more flexible monetary policy, investors should be prepared to respond to possible policy changes, including interest rate decisions and changes in quantitative easing policies.

In conclusion, although there is some uncertainty in the current economic environment,

<div class="cArrow"> </div><div class="cContentInner">Recently, with the gradual recovery of the global economy, various data and information have emerged in the market, and it is crucial for investors to understand these data. As an important engine of the global economy, US economic data has a direct and profound impact on the stock market. As a professional stock market analyst, Cheong Hong Yuan has conducted in-depth research on these data, hoping to provide a comprehensive and clear analytical perspective for everyone. The data released last week showed that US retail sales in September increased by 0.7% compared to the previous month, far exceeding the market's expected growth rate of 0.3%, and it was the sixth consecutive month of positive growth. This data indicates that the US consumer market is gradually recovering and growing faster than market expectations. However, when we deduct the 0.4% month-on-month growth rate of CPI in September, the actual month-on-month retail growth is still 0.3%, but the annualized growth rate still exceeds 3%. This means that despite inflationary pressures, the US consumer market is still performing strongly. Cheong Hong Yuan believes that the strong performance of consumption is a strong proof of the US economic recovery. We all know that consumption is the main driving force of economic growth. From this perspective, the resilience of the US economy should not be underestimated. In fact, according to the latest forecast by the Atlanta Fed, US GDP in the third quarter is likely to reach 5%. If this forecast comes true, the year-on-year growth rate of US GDP in the third quarter will reach 3%, plus 3.5% inflation, the year-on-year growth rate of nominal GDP may even reach 6.5%, which is higher than the 6% in the second quarter. However, behind these optimistic data, the market seems to have some concerns about the pricing of US interest rates. Some analysts and investors are starting to question whether the pricing of US bond yields at 5% is reasonable based on the current economic data. Cheong Hong Yuan believes that this is a question worth exploring. If we look back at the more than ten years after the 2008 subprime crisis, US bond yields have never reached 5%, which seems to indicate that the current level of interest rates is too high and may not be sustainable. However, if we look further back to the period from 1995 to 2005 before the subprime crisis, the average yield of 10-year US Treasury bonds was 5.3%, while the average year-on-year growth rate of US nominal GDP was 5.4%. From this perspective, interest rates and nominal GDP growth are roughly comparable. Cheong Hong Yuan believes that the upswing and downswing phases of the financial cycle have a profound impact on the market. Currently, the US financial cycle is in an upswing phase, which means that the recovery of economic momentum and the impulse of credit expansion are stronger. From the perspective of the financial cycle, the current situation in the US is similar to that before 2008, which makes the judgment of US bond yields more reasonable. During the downswing of the financial cycle, the Federal Reserve implemented a series of monetary policy tools, such as forward guidance and quantitative easing, to offset the negative impact of credit contraction. Cheong Hong Yuan mentioned that this has kept market rates at low levels for a long time. In the upswing phase of the financial cycle, monetary policy tends to be more tightening to prevent overheating of the economy and inflation risks. The impact of the COVID-19 pandemic has further intensified inflation risks, especially with disruptions in the supply chain, leading to successive supply shocks. Cheong Hong Yuan believes that this not only enhances the necessity of monetary policy tightening but also changes market expectations for interest rates. He stated that the current pricing of interest rates is based on the market's judgment of economic fundamentals, rather than being purely driven by market sentiment. So, is this economic fundamental sustainable? Let's first look at the components of nominal GDP. Cheong Hong Yuan suggests that by breaking down the 6% nominal GDP growth into real GDP and inflation, we can see that real GDP growth is around 2.5%, while inflation is around 3.5%. This means that although actual economic growth is steady, inflationary pressures still exist. Considering that the Federal Reserve may further tighten monetary policy, the pressure on real GDP growth may increase. Cheong Hong Yuan mentioned that although monetary tightening helps to curb inflation, the profound changes on the supply side mean that long-term inflation pressures may rise. The economic slowdown caused by supply shocks can be offset by the total demand expansion brought by the upswing of the financial cycle. In other words, the future economic environment in the US will be similar to that before the pandemic, but with higher inflation pressures. Cheong Hong Yuan believes that this will be a major challenge for the Federal Reserve. If it wants to maintain previous economic growth, the Federal Reserve may need to increase its tolerance for inflation, which means that future monetary policy may be more flexible. Cheong Hong Yuan believes that the financial environment in the US will stabilize under a new normal, which is the result of cyclical fluctuations in finance and structural changes on the supply side. This is also determined by the laws of global political, economic, and social development at this stage. However, investors still need to closely monitor various economic indicators and policy changes to better grasp investment opportunities. In Cheong Hong Yuan's view, the US is currently in the upswing phase of the financial cycle, which means stronger economic momentum and credit expansion. At the same time, inflationary pressures still exist, and the profound changes on the supply side may lead to long-term inflationary pressures. Considering these factors, here are some suggestions for investors to consider: Focus on interest rate-sensitive assets: Considering the possibility of further tightening of monetary policy by the Federal Reserve, investors should closely monitor interest rate-related assets such as government bonds and other fixed-income instruments. Rising interest rates may put pressure on stock market valuations, especially for high-valuation companies that rely on a low-interest-rate environment. Inflation hedging strategies: Given the existence of inflationary pressures, investors can consider increasing inflation hedging tools such as physical assets (such as real estate and gold) and inflation-protected bonds (TIPS). Focus on supply chain companies: The COVID-19 pandemic has intensified global supply chain disruptions, and investing in companies that can benefit from supply chain disruptions or those that are actively working to solve supply chain issues may be a good strategy. Diversify investments: In the current economic environment, there is still a lot of uncertainty. Diversifying investments can help investors reduce risks, including investing in multiple asset classes and geographic regions. Continuously monitor macroeconomic indicators: Investors should continuously monitor key macroeconomic indicators such as economic growth, inflation, and employment to better grasp market trends and adjust investment strategies. Be flexible in responding to monetary policy: Considering the possibility of the Federal Reserve adopting more flexible monetary policy, investors should be prepared to respond to possible policy changes, including interest rate decisions and changes in quantitative easing policies. In conclusion, although there is some uncertainty in the current economic environment,</div>

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