Zhongjin: The US dollar index may return to the weak fluctuation range, and the market is expected to open "lagging curve" trading.

CICC released a research report stating that the Federal Reserve is "hawkish in name but dovish in reality" this year. It is more likely that the actions taken by Powell will focus on deregulating the banking industry to sustain the investment cycle and buy time for the implementation of AI to improve economic efficiency. The market is expected to enter a period of "lagging curve" trading after the peak of interest rate expectations is reached but the Federal Reserve does not actually raise interest rates, trading on the enhancement of the Fed's inflation tolerance and the economic recovery in an environment of actual loose monetary policy. At that time, the US dollar may return to the weak volatility range of the past year, and market styles are also expected to return. It is recommended to continue to favor tangible assets, upstream sectors, and technology in major asset classes, emphasizing the themes of "national security," "resource self-sufficiency," and "increased productivity," and recommending countries, asset categories, and industry sectors that are upstream in the commodity and AI industry chains. Since June, the market has entered into a continuous adjustment phase: on one hand, the US dollar index has broken through the upper limit of the volatile range of the past year; on the other hand, indices in global capital markets that are significantly impacted by AI prosperity and US dollar liquidity are generally experiencing a correction, with defensive sectors in the US stock market taking the lead. The main drive behind this series of adjustments is the fermentation of interest rate expectations and the marginal tightening of US dollar liquidity. Powell is likely to show a hawkish stance at the beginning of his term, but overall, it is unlikely that there will be a fundamental basis and financing environment for interest rate hikes throughout the year, making the monetary policy "hawkish in name but dovish in reality." The market may enter a phase of "lagging curve" trading after this round of adjustments, with the US dollar index possibly returning to a weak volatility range, tangible assets, industrial sectors, and technology still holding expansion potential, and attention should be paid to the role of financial deregulation on traditional cyclical sectors. Liquidity: from marginal improvement to marginal tightening From December last year to May this year, due to the Federal Reserve's implementation of the Reverse Repo Program (RMP), narrow liquidity reserves (reserve funds) have slowly increased from the bottom of around $2.9 trillion, marginally easing the liquidity tension caused since July last year by the issuance of government debt. Short-term market financing pressure improved, with the SOFR rate sliding relative to policy rates such as IORB and ON RRP. However, as financing pressures improved, starting in late April, the Federal Reserve's pace of expanding the balance sheet decreased from $40 billion per month to the current $10 billion per month. The marginal tightening effect of fiscal financing is strengthening. The outstanding amount of US debt broke $39 trillion in May this year, and the market expects that the US debt ceiling of around $41 trillion will be reached as soon as next summer. In the game of raising the US debt ceiling next year, the Trump administration may bear the risk of defaulting on US debt due to the delay in passing the bill to raise the ceiling. An effective hedging strategy is to accumulate funds early to buy time for the negotiations. In fact, over the past few quarters, the US Treasury has continuously increased its projected size of the General Account (TGA), absorbing liquidity and tightening reserve funds. Under the dual impact of slowing expansion speed and tightening fiscal financing, the downward trend in the SOFR rate gap ended in June and financing pressures resurfaced. This is an important background for the current strong US dollar and market adjustments. Interest Rate Expectations: from high to low The fermentation of interest rate expectations has intensified the tightening of liquidity conditions, leading to a rapid rise in the US dollar index in late June, breaking through resistance levels. Looking ahead, CICC reiterates that the fundamentals of the US do not support actual interest rate hikes this year. CICC predicts that the high expectations for interest rate hikes and the US dollar index will likely be lowered in the coming months. Firstly, the fundamental resilience is not solid; the lower half of the K-shaped economy (consumption, real estate, and small businesses) remains weak and cannot withstand interest rate hikes. Small businesses in the US have been slow to recover during this easing cycle, with weak hiring demand and a labor market in a frozen state, with hiring and turnover levels even lower than pre-pandemic levels. In May, the wage growth rate at the Atlanta Fed fell to 3.5%, and real wages even saw a decline. Secondly, the current economic operation is extremely dependent on loose financing conditions. In the lower half of the K-shaped economy, consumer loans, car loans, and small business financing rates are all linked to policy rates. In the upper half of the K-shaped economy, the upward trend in the investment cycle is highly dependent on loose bank credit, and historically, once the Federal Reserve starts raising interest rates, the bank credit cycle tends to shift from loose to tight. From the current perspective, as the US and Iran negotiations progress and oil prices decline, inflation expectations have begun to fall. Powell acknowledged this fact in his speech on July 1st. The substantial decline in the WEI index since June shows that with the decrease in urgent demand caused by the US-Iran conflict, the actual growth rate of the US economy may not be as strong as expected by the market. The Atlanta Fed has lowered its expected annualized GDP growth rate for the second quarter to 1.2%. Market: from adjustment to "lagging curve" trading CICC reiterates that the Federal Reserve is "hawkish in name but dovish in reality" this year. Powell's actions this year are more likely to focus on deregulating the banking industry to sustain the investment cycle and buy time for the implementation of AI to improve economic efficiency. Before substantial inflation data declines, interest rate hike expectations may still ferment. Remarks from Powell, Brainard, and others about reshaping the Fed's independence in a "show of strength" manner may become key points to stimulate the market and maintain strong US dollar and market adjustments in the short term. However, CICC also points out that the market is likely to enter into a phase of "lagging curve" trading after interest rate expectations peak but the Federal Reserve does not actually raise interest rates, trading on the enhancement of the Fed's inflation tolerance and the economic recovery in an environment of actual loose monetary policy. At that time, the US dollar may possibly return to the weak volatility range of the past year, and market styles are also expected to return. It is recommended to continue to favor tangible assets, upstream sectors, and technology in major asset classes, emphasizing the themes of "national security," "resource self-sufficiency," and "increased productivity," and recommending countries, asset categories, and industry sectors that are upstream in the commodity and AI industry chains.