Guolian Minsheng Securities: The Fed still has room to cut interest rates this year, and the impact of oil prices does not change the overall trend of rate cuts.

Guolian Minsheng Securities released a research report stating that the weak performance of current US inflation compared to expectations is mainly due to a lack of effective support on the demand side. The current US economy is in a deep "K-shaped" differentiation pattern, although overall economic resilience still exists, the balance sheets of the vast middle and low-income groups have not been effectively repaired, which hinders the basis for sustained inflation increase and also leaves room for the Federal Reserve's future interest rate cuts. The current biggest potential risk still lies in the inflation transmission brought about by the rise in international oil prices. The firm believes that the Federal Reserve still has room for interest rate cuts this year, the impact of oil prices will mainly be reflected in the pace, and will not change the overall trend of interest rate cuts, though delayed. The main views of Guolian Minsheng Securities are as follows: The sudden geopolitical storm not only disrupted the policy rhythm of the Federal Reserve, but also put the global financial market nerves on edge again. Although as early as after the January interest rate meeting, the stabilization of the labor market combined with low inflation had made the market almost certain of the Federal Reserve's short-term wait-and-see stance. The March meeting maintaining the interest rate level was almost certain. However, the recent escalation of geopolitical risks related to Iran undoubtedly fueled the already sensitive market liquidity environment. The rapid rise in oil prices directly exacerbates the double risks of inflation rebound and economic slowdown in the United States, posing a serious challenge to the Federal Reserve's balancing act of "controlling inflation while maintaining growth," narrowing its policy margin for error. Market expectations have shifted from two interest rate cuts this year to less than one, with the timing of interest rate cuts being postponed to the fourth quarter, and the short-term liquidity environment being significantly affected. Therefore, compared to mere interest rate adjustments, the subsequent policy signals released at the March meeting are more crucial. However, in the context of high oil prices, Fed Chair Powell still maintained a cautious hawkish stance at the meeting. Three key points worth noting are: Firstly, in terms of forward guidance, the policy statement revised its assessment of the economic outlook, adding the phrase "the impact of the evolving Middle East situation on the US economy is still uncertain." Powell also continued his wait-and-see stance in his remarks after the meeting, emphasizing the uncertainty brought by the short-term Middle East situation, as well as the double risks of rising inflation and economic slowdown caused by the increase in oil prices, stating that policy decisions would need to wait for further clarification of the situation and improvements in inflation. Secondly, the dot plot basically maintained the policy guidance from December, indicating that there is still one interest rate cut planned for this year, but more voters showed a hawkish tendency, with only one dissenter at the March meeting, reflecting a reevaluation of inflation risks by Fed officials. Some officials also started discussing the possibility of rate hikes, but it is not within the basic scenario assumptions. Thirdly, economic forecasts have been revised upwards in sync with a 2.7% increase in PCE from the previous value of 2.4%, indicating deep concerns from the Federal Reserve about the rise in core inflation. However, the slight increase in economic growth suggests that "stagflation" is not the Fed's base expectation for the economy at the moment. For asset allocations, the strengthening of the Fed's policy determination in the short term may further exacerbate the risk of global liquidity tightening. If the Middle East situation does not show substantial easing, the short-term pattern of oil prices and the dollar simultaneously strengthening may be difficult to reverse. Combined with the continued delay in interest rate cuts expectations, potential liquidity tightening (possibly phased repayment of the TGA account in April, slowdown in RRP operations), global asset classes may come under further pressure. Overnight stocks, bonds, gold and other assets are already facing adjustment pressures, with liquidity issues gradually becoming more apparent. Short-term operations should still focus on cautious observation, waiting for the situation to clarify. For equity markets, high valuation technology sectors in the short term (especially AI sectors highly sensitive to discount rates and cash flow) may face valuation pressures; while defensive sectors such as energy and utilities that are resilient to inflation may be more favored by investors. It is worth noting that although gold is currently under pressure from a stronger dollar and rising interest rates in the short term, in the medium to long term, its value as a hedge against geopolitical and inflation risks will continue to attract fund allocations. With volatility returning to a reasonable range, gold is expected to see a new round of uptrend. Looking ahead, is there still room for the Fed to ease? The firm believes that there is still room for interest rate cuts this year. The core contradiction of the current weak US inflation performance compared to expectations lies in the lack of effective support on the demand side. The current US economy is in a deep "K-shaped" differentiation pattern, although overall economic resilience still exists, the balance sheets of the vast middle and low-income groups have not been effectively repaired, which hinders the basis for sustained inflation increase and also leaves room for the Federal Reserve's future interest rate cuts. Of course, the current biggest potential risk still lies in the inflation transmission brought about by the rise in international oil prices. However, compared to the oil price shocks in 2022, at that time the global economy was in the post-pandemic recovery stage, with fiscal and monetary policies in Europe and the US working together, rapid repair of consumer demand, and upstream oil price increases smoothly transmitted to finished oil products, chemical products, and consumer and service terminals. In the current relatively weak fundamental environment, the duration and extent of inflation persistence are expected to be relatively lower compared to 2022, from the current breakeven inflation rate, long-term inflation expectations still remain relatively stable and there are no clear signs of loss of control, which further supports the judgment of interest rate cuts. In conclusion, the firm believes that there is still room for the Federal Reserve to cut interest rates this year, the impact of oil prices will mainly be reflected in the pace, and will not change the overall trend of interest rate cuts, though delayed. Risk warnings: substantial changes in US trade policies; tariffs spreading more than expected, leading to a greater-than-expected slowdown in the global economy, and increased market adjustment amplitude; frequent geopolitical factors leading to increased global asset volatility; oil prices rising more than expected, leading the US into stagflation risks.