Zhongjin: Risks of "stagflation" in the United States continue to escalate.

Zhongjin released a research report stating that in the 2026 macro outlook report, the biggest risk facing the US economy is "stagflation." Recent developments indicate that this assessment is gradually being confirmed and further strengthened. On one hand, the US-Iran conflict has pushed up oil prices, coupled with inflation drivers leaning more towards structural factors, making inflation stickiness likely to continue to strengthen. On the other hand, the substitution effect of AI on white-collar positions is becoming evident, restraining employment expansion momentum. At the same time, private credit risks are heating up, and once the industry enters a clearance stage, financial conditions may tighten, thus dragging on economic growth. At the policy level, the Federal Reserve faces a dilemma, with Zhongjin believing that the timing of rate cuts may be postponed until the second half of the year; the stimulus effect of tax cuts is somewhat offset by tariff increases and rising household saving intentions, with the actual boost expected to be lower than anticipated. Against this backdrop, Zhongjin expects the US economic growth to slow down, with the risk premium in capital markets tending to rise, and the logic of fund allocation shifting from a focus on yield chasing to a greater emphasis on risk aversion. Zhongjin's main points are as follows: 1. Inflationary factors: US-Iran conflict pushing up oil prices, non-cyclical inflation on the rise The recent escalation of the US-Iran geopolitical conflict has disrupted shipping in the Strait of Hormuz, rapidly raising international oil prices to over $110, a 70% increase from the beginning of the year. Oil price increases not only directly raise energy prices in the CPI, but also transmit to a wider range of goods and services prices through transportation and manufacturing costs. Historical experience shows that for every 10% increase in oil prices, US CPI inflation is typically pushed up by 0.25 percentage points. Zhongjin estimates that if the average oil price for 2026 rises from last year's $67 to $80, CPI inflation may rise by an additional 0.5 percentage points, from the baseline of 2.8% to 3.3%; if oil prices rise to $100, CPI could rise by an additional 1.2 percentage points to 4.0%; if oil prices rise to $120, CPI could rise by an additional 2.0 percentage points to 4.8%. In terms of GDP impact, a 10% rise in oil prices in the first year could drag down GDP growth by around 0.05 percentage points. Zhongjin estimates that if the average oil price for 2026 rises to $80, GDP growth could decrease from the baseline of 1.7% to 1.6%; if oil prices rise to $100, GDP growth could decline to 1.5%; if oil prices rise to $120, GDP growth could decline to 1.3%. It is worth noting that if the sharp rise in oil prices caused by the US-Iran conflict triggers widespread financial turmoil, the combination of high oil prices and tightened financial conditions could pose more stringent, even nonlinear downside risks to the US economic fundamentals. Additionally, some signs indicate that the driving force behind rising US inflation is increasingly coming from deeper structural factors. Research by the Federal Reserve Bank of San Francisco shows that when core PCE is broken down into the cyclical components sensitive to the economic cycle and the non-cyclical components driven by industry-specific factors, the marginal slowdown in the labor market and the easing rent growth inhibits inflation from cyclic drivers, but structural factors continue to push up overall prices, with low sensitivity to unemployment and economic cycles, such as the cost-inflation pressure from tariffs and the lagging housing and healthcare inflation. Since monetary policy mainly affects cyclical demand, its impact on these structural pressures is limited, making this type of inflation likely to persist in the medium to long term, forming stubborn stickiness. 2. Stagnation factors: potential impact of AI on employment, rising private credit risks Since the beginning of 2026, the US job market has continued to show low growth trends. Data shows that after strong growth in January, non-farm employment decreased by 92,000 in February, significantly lower than the expected increase of 50,000. Although this soft data was influenced by disruptions such as strikes in the healthcare sector and weather factors, even after adjusting for these disturbances, employment in most other industries showed a contracting trend. Over the past three months, the average net new non-farm employment was only about 6,000, showing no substantial improvement from the second half of last year. At the same time, concerns are growing about the potential impact of AI on employment, especially in white-collar positions. While the rapid development of AI was once widely seen as an important engine for productivity enhancement, at present, its substitution effect on employment may be more pronounced than previously expected. Positions in some industries are gradually being replaced by technology, and traditional business models such as software services and intermediary services are facing challenges, while new jobs created in emerging fields have not yet reached a scale sufficient to absorb the displaced workforce. In other words, at this stage, AI is more like a labor-saving technology, mainly replacing existing positions rather than synchronously creating a large number of new job opportunities. From a micro perspective, some companies have begun to apply AI for cost reduction and job substitution. For example, the financial technology company Block recently announced the layoff of 4,000 employees, citing AI replacing certain positions; earlier, companies like Amazon and UPS also announced plans for further layoffs. Looking at macro data, with the accelerated adoption of generative AI, professions with a high exposure to AI - such as programmers, salespeople, and administrative clerks - have seen weaker employment growth compared to industries with lower exposure. Although the causal relationship and extent of impact still need further research, this partly reflects the adjustment pressure that technological substitution is bringing to the employment structure. Another potential factor hampering economic growth is the rising credit risk and tightening financial conditions. Since the beginning of the year, risks have emerged successively in the private credit sector. The private credit market has rapidly expanded over the past decade in a low-interest rate environment, accumulating certain risks. With AI technology impacting the business models and valuation systems of certain underlying assets, in addition to the macro shift from loose to marginally tight liquidity environment, the private credit sector is facing greater redemption pressure, with the likelihood of entering a clearance stage increasing. If private credit risks further escalate and transmit to banks or other financial institutions, it could lead to passive tightening of financial conditions. The refinancing ability of some companies will be limited, thereby restraining capital expenditure and hiring demand. It is worth noting that the capital expenditure of some AI-related companies also depends on private credit and external financing. If private credit or broader credit market volatility intensifies, this investment cycle may cool off prematurely, thereby dragging on overall economic growth. 3. Postponement of rate cuts by the Federal Reserve, fiscal stimulus effects may be lower than expected Against the backdrop of a slowdown in employment and persistent inflation, the Federal Reserve is facing a typical policy dilemma. On one hand, the downward risks in the job market, coupled with the continuing high-interest-rate environment intensifying residents' affordability pressures and putting pressure on interest-rate-sensitive industries like real estate, call for a marginal shift in monetary policy towards easing to prevent further weakening of economic momentum. However, on the other hand, the stickiness of inflation and the upward trend in energy prices constrain the space for rate cuts, making it difficult for policy to swiftly pivot. Zhongjin expects that in the foreseeable future, the Federal Reserve will continue to weigh between stabilizing employment and controlling inflation. In the short term, the Federal Reserve may be more inclined to maintain a wait-and-see approach before resuming rate cuts, which could potentially wait until the second half of the year. On the fiscal side, the market had previously expected the tax cuts from the "Great American Law" to boost economic growth, but as of now, this effect has not been clearly manifested. In fact, Zhongjin believes that the extent to which this round of tax cuts can boost the economy may be lower than the market's initial expectations. On one hand, the process of this round of tax cuts has come with tariff increases, and the two have a certain offsetting effect at the fiscal level, weakening the actual extent of overall fiscal expansion. On the other hand, given the uncertain job prospects, residents may not immediately increase consumption even if they receive additional refunds, but may choose to increase savings instead to cope with potential unemployment risks or uncertainties. The US personal savings rate has already dropped to a low of 3.6% since the epidemic, indicating that consumers' available savings space has been depleted in a high-price environment. In this context, Zhongjin expects that the momentum of US economic growth will continue to slow down, and the risk premium in capital markets will gradually rise. Compared to Zhongjin's baseline scenario, investors' previously optimistic expectations for the US economic and market performance in 2026 face the risk of being reassessed. With the adjustment of expectations, the logic of fund allocation may also change. One potential direction is a shift from chasing high returns and high elasticity assets towards a preference for safe assets and defensive sectors.