Research Results

Conclusions

The current data shows the U.S. economy is expanding moderately: personal income increased sharply in January, personal consumption expenditure and retail sales increased steadily; employment increased in February, unemployment rate declined slightly in U3, manufacturing and service industry activities continued to expand; GDP is expected to continue to grow in the first quarter. However, the future economy is still facing huge uncertainties: the situation of pandemic prevention and control remiains hazy; consumer confidence continue to decline; commodity prices in the manufacturing and service industries continue to rise, and the delivery speed prolongs; the job market still faces many challenges. Federal Reserve officials’ recent speeches lacked new thoughts, repeating the emphasis on maintaining the speed of bond purchases until progress is made to ensure that monetary policy will continue to provide support for the economy "until the economic recovery completes."

The newly approved fiscal stimulus plan and market concerns about the U.S. federal government’s debt have driven the recent surge in of the U.S. T-bonds, causing stock market volatility and gently pushing up the 30-year mortgage interest rate. The mainstream view of the market yet believes that if the rate of yield rise is controllable and the rise is accompanied by an improvement in economic conditions, the stock market can absorb the negative impact of rising interest rates.

From a global perspective, the global economy is gradually recovering. Manufacturing activities in major countries continue to expand. The service industry hit by the pandemic at the beginning of the year has slightly recovered. The world economy may slow down in early 2021, but the growth in the second quarter is supposed to gain momentum. The International Monetary Fund predicts that the world economy will grow by 5.5% and 4.2% in 2021 and 2022, respectively.

Real economy

According to the latest data released by the Department of Commerce, the U.S. GDP growth rate in the fourth quarter of 2020 was estimated at 4.1% for the second time, up by 0.1% from the first estimate. Specifically, the contribution of non-residential investment to GDP exceeded personal consumption, reaching to 1.76%, and personal consumption contributed 1.61%. Besides, residential investment and private inventory investment also made positive contributions to GDP, driving 1.37 and 1.11 percentage points respectively. However, net exports, government consumption expenditure and investment negatively affected GDP by 1.55% and 0.19%.

Financial market

Discussions on the U.S. bond market have been relatively popular recently, the yields of 5-year, 10-year and 20-year treasury bonds are rising rapidly. The reason behind it is that the mainstream in market views include growth-driven, policy-driven and transaction-driven.

The growth drive should be the main reason, and the statement of Federal Reserve officials also pointed out that the driving force of the recent rise in interest rates is the improvement of economic fundamentals. The fast-launched vaccine, the U.S.$1.9 trillion pandemic aid bill carried out by the House of Representatives, the Federal Reserve’s loose monetary policy, and pending consumer demand and savings, generally provide a foundation for the future recovery of the U.S. economy. The demand-side recovery is expected to be faster than the supply-side in the short term, pushing up prices; with the increase in energy costs--including crude oil prices, natural gas prices, and coal prices, all have risen to varying degrees, the market's expectations for future inflation have also increased. In addition, we also mentioned in last December's report that the recent significant increase in the U.S. labor output rate is a highlight in the U.S. economy, which will change the situation that the low growth rate of the U.S. labor output rate in the past 10 years which had led to a low growth rate of potential output, thereby pushing up interest rates. As a result, most of the views in the market believe that there is no need to worry too much about the current rise in yields, and the Federal Reserve has not shown any attempt to curb the rise in yields.

World economy

The World Economic Outlook updated by the International Monetary Fund in January pointed out that the rollout of vaccines and additional policy measures of countries (especially the U.S. and Japan) will boost global economic activities in the next two years. Although the pandemic’s resurge and related restrictive measures has weakened the growth momentum in early 2021, it is still expected that the growth will gain momentum in the second quarter, and the global economy is expected to grow by 5.5% and 4.2% in 2021 and 2022, respectively. We can also see from the figure that the manufacturing activities of the world’s major economies are in a state of expansion, and the service industry is more affected by the pandemic. At the beginning of this year, the pandemic’s resurge caused a certain degree of impact on the service industries of all countries. The world’s major economies The PMI of the physical service industry is hovering below 50 and is expected to improve in the second quarter.

Policy outlook

At present, the U.S. economy is still expanding moderately and recovering continuously, but employment and inflation are far from meeting the targets set by the Federal Reserve, and the economy still has a long way to reach to the normal pace. Federal Reserve officials have also emphasized in many public speeches the importance of maintaining an easing environment to ensure a stable economic recovery. Chairman Powell has also repeatedly said that the current easing policy will remain until the economic recovery is completed. Therefore, we believe that the Federal Reserve will keep the federal funds rate unchanged at its March meeting.

Translation: Yifei

Proofreading: Fiona, Claire