Guotai Haitong: The U.S. Q1 economy is showing an upward K-shaped pattern with "inflation without stagnation", and the threshold of interest rate sensitivity has increased, causing a bottom upshift in U.S. bond yields.

Guotai Haitong released a research report stating that a vivid description of the U.S. economy in the first quarter is: "the 'K' shape slightly expands, but the 'K' shape as a whole moves upward, showing the characteristics of 'inflation without stagnation'. The surprise is that: the sensitivity threshold of the U.S. economic recovery to interest rates has increased, which means that the bottom of U.S. bond yields has also risen. Guotai Haitong's main points are as follows: Q1 2026 U.S. Economy: "Ignoring" High Oil Prices In Q1 2026, the U.S. real GDP grew at an annualized rate of 2.0% (previously 0.5%), showing strong resilience under high oil prices: on one hand, AI investment continued to grow strongly, with an investment growth rate of 8.7% on a quarterly basis in the first quarter, highlighting the growth in investment in information processing equipment, software, and research and development; on the other hand, the transfer of government consumption from Q4 2025, due to the government shutdown, led to a significant increase in government consumption and investment on a quarterly basis. In the first quarter, U.S. fiscal revenue and expenditure increased by 6.8% and 2.9% respectively, with a fiscal deficit ratio of 5.1%, but due to high interest expenses, government debt continued to grow rapidly, and the ratio of government debt to GDP has reached 119%, approaching the 120% mark. Consumer spending growth has slowed somewhat, reflecting the pressure of high oil prices, especially for middle- and low-income groups: firstly, there was a greater decline in goods consumption, while service consumption demonstrated resilience; secondly, non-durable goods consumption declined more in goods consumption, while durable goods consumption remained stable. In the first quarter, imports grew rapidly due to the impact of high AI investment. The trade deficit in AI-related goods quickly increased to $554 billion, up 19% quarter-on-quarter, causing a certain drag on GDP accounting. Core GDP growth remained stable. Excluding imports and exports, changes in inventories, and government spending, "core GDP" (consumption + fixed asset investment, which better represents potential real demand) rebounded to an annual rate of 2.5% in Q1 (previously 1.8%). The "K-shaped differentiation" convergence process was hindered by the Middle East conflict Firstly, while AI investment grew rapidly, residential investment growth slowed down; secondly, core retail sales growth accelerated, while consumer confidence has not yet stabilized; thirdly, the gap between new employment in interest-sensitive industries (including mining, construction, manufacturing, retail, accommodation, and dining) and total non-farm employment did not show clear convergence. The first quarter data reflects the increase in the sensitivity threshold of the economic recovery to interest rates. Although the convergence process of the "K-shaped differentiation" was hindered, high oil prices did not completely hinder. This was particularly evident in mid-April: while the 10-year U.S. bond yield fell from its high of 4.4% to 4.25%, the 30-year fixed rate of mortgage loans fell from 6.46% to 6.23%, and the spread in loan rates had strong downward momentum under expectations of conflict moderation. This also led to a significant rebound in U.S. real estate purchases and refinancing activities in mid-April. The aforementioned phenomena send out a very important signal The sensitivity threshold of the U.S. economic recovery to interest rates has increased. This means that the bottom of U.S. bond yields has also risen, the U.S. economy is not stagnant inflation but "inflation without stagnation". Therefore, even Miran, a staunch dove council member, mentioned that even before the Iran-related war pushed up global oil prices, the trend of inflation had become "slightly less optimistic," and he lowered his forecast for the number of rate cuts. A vivid description of the overall performance of the U.S. economy in the first quarter is: the opening of the "K" shape has slightly expanded, but the overall "K" shape is moving upward. The key is to maintain a harmonious state between the top and bottom of the "K", if the top moves upward too quickly and the bottom does not keep up, it will lead to high interest rates suppressing traditional economy and employment, and at that time, "stagnation" will become the main contradiction. Risk warning: The geopolitical situation in the Middle East may pose further risks of oil price spikes; the pace of implementation of the shrinking balance sheet advocated by Powell after taking office as Fed Chairman may increase market volatility.