CICC: October is still a window of liquidity resonance between China and the US. A-share offers better value for investment.

Zhongjin Securities released a research report stating that the Federal Reserve will resume interest rate cuts in September, entering a new phase of the US dollar easing cycle. Due to the recent confirmation of an upturn in inflation in August, with the absolute level not being high, and the fact that the Federal Reserve can downplay inflation pressure using the "temporary" phenomenon, it is more urgent to address the risks of declining employment rather than rising inflation. Therefore, the priority of "stabilizing growth" is higher than "controlling inflation." In addition to the significant political pressure exerted by Trump, it is expected that the Federal Reserve may cut interest rates at a faster pace, possibly cutting rates 3-4 times in a row. Looking ahead, October may still be a window period for liquidity resonance, with loose trading as the market trend. In terms of overall risk-return, the price-performance ratio of A-shares and Hong Kong stocks is higher than that of US stocks. Due to the trend towards loose macro liquidity, and the damage to the independence of the Federal Reserve and the credibility of the US dollar, it is recommended to maintain an overweight position in gold. The main viewpoints of Zhongjin Securities are as follows: The pace of Federal Reserve interest rate cuts may switch between "fast-slow-fast" The Federal Reserve resumed interest rate cuts in September, entering a new phase of the US dollar easing cycle, which may have profound effects on the economic operations and asset performance in China and abroad. Zhongjin's base expectation is that the Federal Reserve's interest rate reduction cycle may be divided into three stages: "fast-slow-fast." The first stage is in Q4 of 2025, with a faster pace of interest rate cuts: Due to the recent confirmation of an upturn in inflation in August, with the absolute level not being high, and the fact that the Federal Reserve can downplay inflation pressure using the "temporary" phenomenon, and the risks of declining employment being more urgent than the risks of rising inflation, the priority of "stabilizing growth" is higher than "controlling inflation." In addition, with Trump exerting significant political pressure, it is expected that the Federal Reserve may cut interest rates at a faster pace, possibly cutting rates 3-4 times in a row. The second stage is in the first half of 2026, with a slower pace of interest rate cuts. As inflation continues to rise, the Federal Reserve may need to rebalance the risks of declining growth and rising inflation, unable to continue cutting interest rates rapidly, and may use halting "balance sheet reduction" to calm the financial markets. The third stage is in the second half of 2026, with the pace of interest rate cuts accelerating again. With Powell's tenure ending in May 2026, there is a high probability that the Trump administration will nominate a more dovish Federal Reserve chairman, and the effect of tariffs on inflation may also come to an end, prompting the Federal Reserve to accelerate the pace of interest rate cuts. In summary, the loose monetary policy of the Federal Reserve is the general trend for the next year, and loose trading is the main market trend globally, which may lead to a depreciation of the US dollar, benefiting various assets such as stocks, bonds, commodities, and gold. However, at the turning points of the Federal Reserve's loose monetary policy, such as the end of this year or the middle of 2026, there may be an impact on the global asset trend. Since the Fed's policy-making is not solely based on economic data but also influenced by the Trump administration, the independence of the Fed has suffered some blows, weakening the predictability of US monetary policy. There is also no exclusion of the possibility of the actual policy path deviating from the base predictions mentioned above in the future. Based on the current economic and market situation, the "fast-slow-fast" loose monetary policy may be the policy path with the highest probability of realization and the least resistance. The post-interest rate cut economic path of the Federal Reserve: Comprehensive tracking framework of economic indicator turning points Zhongjin believes that the current US economy is still heading towards stagflation (declining growth + rising inflation) or recession (declining growth + declining inflation), with stagflation having a higher probability than recession. However, considering that the Federal Reserve has resumed the loose monetary cycle, and the fiscal deficit may return to expansion in 2026, under policy support, the US growth will eventually turn upward at some point in the future. During the period of rising inflation, if growth turns upward, a new market scenariooverheating (rising growth + rising inflation)will emerge. If the policy supports the economy more, both growth and inflation will rise simultaneously. If the support is insufficient, growth will decline. Therefore, the probability of a recovery ("soft landing" or "golden girl," rising growth + falling inflation) is relatively low, and this article does not discuss it. Zhongjin reviewed eleven rounds of Federal Reserve interest rate cut cycles since the 1970s and found that on average, it takes 12 months from the beginning of the interest rate cut to the turning point of rising growth. The current round of Federal Reserve interest rate cuts started in September 2024, precisely 12 months ago, and the turning point of growth seems to be not far away. Hence, it is necessary to consider the possibility of the economy turning towards overheating in asset allocation. Further research shows that there is a large variance in the time intervals between the interest rate cut point and the turning point of growth. If it happens quickly, they occur simultaneously, but if it happens slowly, there is a difference of up to 30 months. Therefore, it is challenging to accurately predict the timing of the turning point of growth by simply using the historical average interval. It is recommended to predict the rough rhythm of the economy's turning point by tracking the order of key economic indicators' turning points and based on the relatively stable lead-lag relationships between different economic variables. Specifically, Zhongjin has constructed a database of turning points using 16 core economic indicators to track the turning point patterns in the past eleven rounds of rate cuts. They found that the turning point of rising growth often follows the sequence of "real estate -> surveys -> employment -> consumption -> investment -> inventory -> credit." Consumption and employment data are the most critical data to focus on, as the confirmation of their turning points generally leads to the confirmation of the turning point of economic growth. In the employment data, the unemployment rate is actually a lagging indicator, with a turning point occurring after the turning point of growth. Therefore, if the Federal Reserve overly relies on the unemployment rate turning point for decision-making, it may mislead policy direction. While bank credit should theoretically be sensitive to interest rates, the turning point is also quite lagging and may not provide timely forward-looking signals. Real estate data is a clear forward-looking indicator, but there is considerable variance in the time lag between the turning points of real estate and economic growth. For example, in the 1984 and 2000 rate cut cycles, the turning point of growth appeared 1-2 years after the turning point of real estate. Therefore, although there are signs of a rebound in new home sales in the US recently, without corroborating data, it is not possible to conclude that the turning point of economic growth is close. Based on the above indicator system, it is recommended to adopt the following strategies: engage in loose trading or stagflation trading before the confirmation of an upward turning point in consumption and employment data; consider switching to overheating trading after the turning points in consumption and employment. How does the Federal Reserve interest rate cut affect the market? October is still a window period for Sino-US liquidity resonance, with loose trading as the market trend In the report released in August, due to the trend of loose liquidity in the US and China, and with some time remaining before the next deadline for Sino-US negotiations in November, September-October may be a window period for loose liquidity trading, providing a relatively favorable macro environment for major asset classes such as domestic and foreign stocks, gold, and US bonds. It is expected that domestic and foreign stocks will not continue to oscillate sideways in September, but will continue to rise. The Hang Seng Index rose by 5%, the Shanghai and Shenzhen stock markets rose by 3%, the Growth Enterprise Market rose by 9%, and Hengqiang Technology rose by 10%, while gold rose by 10%, confirming Zhongjin's analysis. Looking ahead, October may still be a window period for liquidity resonance, with loose trading as the market trend. However, attention should also be paid to the sustainability of the market and the risks of market volatility: if there is no incremental policy, the pace of government bond issuance in China may slow down, leading to a downturn in M2 and social financing growth rates. If macro liquidity tightens, it may affect market liquidity and risk preferences in the near future. In a market driven by liquidity, risk assets such as stocks have already experienced a visible uptrend, and asset volatility may also increase, with risks and opportunities coexisting. Looking at overseas markets, leading indicators show that there is upward pressure on inflation in the US. If inflation pushes up quicker than expected, leading the Federal Reserve's interest rate cut cycle to shift from the first stage to the second stage sooner than expected, it would be unfavorable to the loose environment and could also lead to market volatility. Asset allocation recommendations: Continue to overweight A-shares, Hong Kong stocks, and gold in October, optimistic about the Growth Enterprise Market and Hengqiang Technology, maintain a standard allocation of Chinese and US bonds, and adjust positions flexibly based on policy and liquidity changes. Expect the continuation of Sino-US liquidity resonance from September to October and the US dollar in a downward cycle, forming a favoring environment for various assets (stocks, bonds, gold, commodities). Similar to the market situation in September, October may still be a relatively favorable period macroeconomically, and it is advisable to maintain a relatively high risk preference, overweight Chinese stocks. The dynamic P/E ratio of the Shanghai and Shenzhen 300 Index is close to the historical average, showing a potential for expansion compared to the high point of the previous bull market. From a fund perspective, there is relocation of deposits from residents, a process in which individual investors are still entering the market, and active foreign capital allocation to Chinese stocks remains insufficient. A positive feedback loop between profitability and capital inflows is likely to support the performance of Chinese stocks. Considering the significant increase in the stock market in recent times, and the economic fundamentals still need to improve, stock volatility may increase, and it is more favorable to allocate to Growth Enterprise Boards, which have a relatively low percentile valuation and a relatively high technology content. During the phase of the Federal Reserve's rapid interest rate cuts, maintain a standard allocation of US stocks. In historical periods of a downward cycle in the US dollar, US stocks have often underperformed non-US markets when accounting for losses due to the US dollar exchange rate. This year, US stocks have underperformed Chinese stocks, following the historical pattern of a declining US dollar era. From a valuation perspective, US stocks still remain relatively expensive compared to US bonds and non-US stock markets, with the risk premium on the S&P 500 Index approaching 0%, reflecting an overly optimistic outlook by investors on the prospects of the US economy and technological revolution. Additionally, the volatility of US stocks is too low, mismatching the interest rate environment, which may pose potential risks. Therefore, considering the comprehensive risk-return, the price-performance ratio of A-shares and Hong Kong stocks is higher than that of US stocks. Due to the trend of loose macro liquidity and the damage to the independence of the Federal Reserve and the reputation of the US dollar, it is recommended to maintain an overweight position in gold. Gold has risen rapidly since the beginning of the year, exceeding the level commensurate with the underlying fundamentals, with a recent rapid rise posing increased short-term correction risks. It is advised to reduce the trading value of gold in the short term and focus on long-term allocation value, adding positions during corrections. Moreover, Chinese interest rates have fallen too rapidly relative to the economic fundamentals over the past two years, valuations remain relatively high, and the seesaw effect between stocks and bonds is apparent when risk preferences increase. Interest rates may face temporary upward pressure, converging towards the economic fundamentals. However, in the latter stages of the credit cycle, with growth and inflation moving downwards, the midpoint of interest rates may also struggle to rise significantly. Taking into account multiple factors, it is advisable to maintain a standard allocation of Chinese bonds. Although there is minimal pressure on US bonds supply this year, it is not ruled out the possibility of the 10-year US bond yield falling below 4%. However, inflation risks and the pressure from US bond issuances may gradually rise in 1-2 quarters, increasing market uncertainty, thus maintaining a standard allocation of US bonds. The benchmark assumption for the above allocation suggestions is the maintenance of loose liquidity, but as mentioned earlier, the sustainability of the liquidity window depends on the policy path. It is also recommended for investors to closely monitor the changes in Sino-US policies from October to November, adopt effective position management, and adjust asset allocation in a timely manner if the liquidity window changes.