Shenwan Hongyuan Group: Opportunities and Risks of Rate Cuts from Medium-term Perspective.

Shenwan Hongyuan Group released a research report stating that there is a lag in the transmission of monetary policy to the real economy, and the sensitivity of the real economy to interest rates has long been declining. Therefore, it is believed that the interest rate cut in September will not immediately reverse the trend of the weakening U.S. economy. In the first half of this year, the decline in U.S. real estate sales under the influence of high interest rates will drag down China's exports to the U.S. (furniture, household appliances, decoration materials) in the second half of the year. In the near term, a significant decrease in interest rates will help stimulate U.S. real estate sales, thereby boosting exports of related goods from China next year. If the interest rate cut boosts corporate capital expenditure willingness, it may stimulate China's exports of intermediate and capital goods to the U.S. The main viewpoints of Shenwan Hongyuan Group are as follows: Historically, under the context of the Federal Reserve interest rate cut, interest rate-sensitive sectors such as real estate and manufacturing may benefit, and this may radiate to Chinese exports of furniture, household appliances, decoration materials as well as processed metal products and industrial machinery. Is this time different? The transmission of interest rate cuts may be fragile, such as the slowdown of the U.S. economic growth, weakening profitability of small businesses, elections, and policy uncertainties. How will the Federal Reserve interest rate cut affect the real economy and China's exports? Interest rate-sensitive sectors are the core focus. There is a lag in the transmission of monetary policy to the real economy, and the sensitivity of the real economy to interest rates has long been declining. Therefore, it is believed that the interest rate cut in September will not immediately reverse the trend of the weakening U.S. economy. However, based on quantitative calculations, after the Federal Reserve interest rate cut takes effect, there will be a boost in interest rate-sensitive areas such as consumer spending, housing sales, and fixed asset investments. Real estate: closely related to U.S. bond rates, paying attention to real estate-related goods exports. In the first half of this year, the decline in U.S. real estate sales under the influence of high interest rates will drag down China's exports to the U.S. (furniture, household appliances, decoration materials) in the second half of the year. In the near term, a significant decrease in interest rates will help stimulate U.S. real estate sales, thereby boosting exports of related goods from CHINAPROPERTIES next year. Durable goods consumption: car consumption is affected by interest rates, but has weak relationship with China's exports. Among U.S. consumer spending, durable goods are the most sensitive to interest rates compared to services and non-durable goods, and within durable goods, vehicles are the most sensitive to interest rates. The recent decline in U.S. bond rates is expected to boost vehicle sales, but the relationship between U.S. car consumption and China's exports to the U.S. is weak. Manufacturing investment: Equipment investment with "heavy capital" attributes is also sensitive to interest rates. If the Federal Reserve cuts interest rates and bank credit is loosened, U.S. equipment investment is expected to continue to rise. Processed metal products and industrial machinery related to manufacturing relocation and upstream industries in the real estate chain are worth paying attention to. If the interest rate cut boosts corporate capital expenditure willingness, it may stimulate China's exports of intermediate and capital goods to the U.S. Under the background of interest rate cuts, which industries have more inventory space? Trend: U.S. inventory replenishment started in the first half of the year, but the expectations for replenishment have weakened since mid-year. In the first half of the year, the U.S. started inventory replenishment, reflected in the acceleration of the gap between U.S. consumption, industrial production growth rates, and import growth rates in the first half of 2024. However, since the middle of the year, concerns about U.S. economic recession have deepened, global manufacturing PMI has weakened, the CCFI comprehensive index has peaked and fallen back, and there are downward risks in China's exports. Structure: Industries related to real estate and non-durable goods have stronger inventory replenishment this year. From the perspective of the three major inventory channels in the U.S., industries related to real estate and non-durable goods have significantly stronger inventory replenishment, the former mainly due to the prosperity of the U.S. real estate chain in the first half of the year, and the latter mainly due to the lower inventory levels (compared to durable goods) available previously, especially for non-durable goods such as textiles and clothing, we can also observe the relationship between U.S. textile shipments, sales, and China's exports to the U.S. Space: Which industries may have more inventory space? Industries related to real estate such as furniture, household appliances, building decoration goods, as well as upstream manufacturers (processed metal products, machinery, etc.) have relatively low inventory levels. In addition, industries such as electrical equipment, basic chemicals, and rubber and plastic products manufacturers also have low inventory levels. If considering potential tariff impacts, intermediate and capital goods may be more resilient than consumer goods. Is there a risk in the logic of "interest rate cut - inventory replenishment"? In the short term, there is a risk of a rebound in U.S. bond rates. Historically, after the first interest rate cut, the 10-year U.S. bond rate may experience a short-term rebound, which could impact real estate sales. However, in the medium term, the 10-year U.S. bond rate is still trending downwards, the core focus of the Federal Reserve's policy has shifted from "fighting inflation" to "maximizing employment", and the labor market is gradually easing. If there are tail risks in the economy and finance, the risk of destocking should not be ignored. Low-income groups in the U.S. not only have higher expectations of unemployment, but also deplete their excess savings earlier, leading to an increase in credit card default rates. If employment and consumer spending weaken beyond expectations, leading to an economic recession, the U.S. may enter a destocking phase. Credit card default rates for small and medium-sized banks in the U.S. are significantly higher, and commercial real estate loans are more concentrated in small and medium-sized banks. If a Silicon Valley Bank-like event similar to 2023 erupts, it could impact expectations for the real economy. Weak profitability of small businesses and external effects in China may potentially hinder equipment investment. Although the overall profitability level of non-financial enterprises in the U.S. is still acceptable, the deterioration of profitability for small and medium-sized enterprises is approaching the level of 2009, which may become a constraint on future equipment investment and capital expenditure in the U.S. According to historical relationships, Chinese credit impulses have a leading guiding effect on the U.S. manufacturing PMI, but this relationship has weakened against the backdrop of Sino-U.S. "decoupling". Risk Warning: Escalation of geopolitical conflicts; the Federal Reserve turning hawkish again; acceleration of financial conditions tightening.