CICC: Has global liquidity reached a turning point?

CICC published a research report stating that if the July CPI forecast is realized, U.S. inflation will significantly decline year-over-year for the second consecutive month. Coupled with a cooling job market, the Federal Reserve's tightening narrative may further reverse, and equities, bonds, and gold are expected to continue benefiting from the return of easing trades. The gold bull market has not ended; the window for reallocation after prior adjustments has opened, and it is recommended to continue overweighting gold. The recent rise in traditional sectors may not be sustainable, as evidence for style rotation is still insufficient. The bullish outlook on AI and technology growth remains steadfast. Driven by the technology sector, both U.S. and Chinese stock markets may perform well in the second half of the year, and it is advisable to overweight A-shares and Hong Kong stocks while maintaining a standard allocation to U.S. stocks. Global liquidity has receded from its peak, but overall, it remains in a loose range. In the first half of 2026, global assets faced two liquidity tightening shocksfirst with the nomination of Waller as Federal Reserve Chairman in January, and then with the outbreak of the U.S.-Iran conflict in late Februaryresulting in a comprehensive reversal of global central bank rate cut expectations to rate hike expectations, a temporary strengthening of the U.S. dollar, and pressure on major assets such as stocks, bonds, and gold. The market fears that liquidity may be approaching a tightening turning point. AI-related assets are currently in a state of high expectations, high valuations, and high crowding, making them particularly sensitive to changes in liquidity. To comprehensively track the operation of global liquidity, CICC compiled balance sheets, M1 and M2 total scales of central banks from major economies such as China, the U.S., the Eurozone, Japan, the U.K., and Canada, calculating their year-on-year growth rates. The findings show that these three liquidity indicators have consistent trends. Although liquidity indicators have declined since February 2026, a tightening turning point has yet to be confirmed. M1 and M2 remain in an expansion range, while the growth rate of central bank balance sheets has slightly turned negative. Chart 1: The year-on-year trends of M1, M2, and central bank balance sheets for major economies are consistent, and they remain in an expansion range. Note: Data is as of June 2026, including data from China, the U.S., the Eurozone, Japan, the U.K., and Canada, converted to dollars at the end-of-period exchange rate. Source: FRED, ECB, BoJ, PBoC, BoE, BoC, CICC Research Department M2 is a broad measure of liquidity, covering a wider scope and having a stronger guiding effect on overall liquidity than central bank balance sheets. The balance sheet reduction of some central banks or credit contractions in certain countries cannot be simply equated with a global "lack of liquidity." By country, China currently shows the most significant positive contribution to the growth of M1, M2, and total central bank assets among major economies, while the U.S. also shows a strong contribution to M1 growth. In contrast, Japan is the only economy contributing negatively to M1 and M2 growth, and its total central bank assets continue to contract. Chart 2: China and the U.S. are the main contributors to M1 growth among major economies; the Eurozone, the U.K., and Canada provide positive contributions, while Japan is contracting. Note: The U.S. M1 has been adjusted in its statistical caliber since May 2020. To avoid the impact of the caliber discontinuity, this chart does not include the U.S. M1 year-on-year growth rate from May 2020 to April 2021. Source: FRED, ECB, BoJ, PBoC, BoE, BoC, CICC Research Department Chart 3: China is the main contributor to M2 growth among major economies, while the Eurozone, the U.K., and Canada provide positive contributions, and Japan is contracting. Source: FRED, ECB, BoJ, PBoC, BoE, BoC, CICC Research Department Chart 4: China is the main positive contributor to the expansion of central bank balance sheets, while Japan is the main negative contributor; the overall year-on-year change is negative, but the decline is slowing. Source: FRED, ECB, BoJ, PBoC, BoE, BoC, CICC Research Department CICC found that the year-on-year changes in M2 for major economies lead the performance of U.S. and Chinese stocks by about three months and commodity performance by about six months. Excluding Chinas M2 data, the growth rate of M2 in overseas countries still provides a significant leading guide for global assets. Based on the analysis above, although liquidity expectations have noticeably tightened in the first half of the year, global liquidity has, in fact, continued its loose trend. Chart 5: The year-on-year growth rate of M2 for major economies leads the S&P 500 index by about three months. Source: FRED, BIS, ECB, Wind, Haver, CICC Research Department Chart 6: The year-on-year growth rate of M2 for major economies leads the CSI 300 index by about three months. Source: FRED, BIS, ECB, Wind, Haver, CICC Research Department Chart 7: The year-on-year growth rate of M2 for major economies leads the South China Commodity Index by about six months. Source: FRED, BIS, ECB, Wind, Haver, CICC Research Department Chart 8: Excluding China, the year-on-year growth rate of M2 in the remaining major economies also leads the S&P 500 index by about three months. Source: FRED, BIS, ECB, Wind, Haver, CICC Research Department In the second half of 2026, global liquidity is expected to further loosen. Looking ahead, will global liquidity trend towards easing or tightening? In the major asset outlook report for the second half of 2026 released in early June, CICC suggested that the market's concerns over geopolitical escalation, inflation resilience, and Federal Reserve tightening could be "false risks." A more likely scenario for the second half is the de-escalation of geopolitical conflicts, a downward trend in inflation, and a dovish shift in Federal Reserve policy, leading to further loosening of global liquidity. Over the past two months, CICC's "anti-consensus" forecast has already begun to materialize: concerning inflation, U.S. inflation has not demonstrated resilience. The June CPI inflation fell significantly below expectations, with nominal CPI declining 0.4% month-on-month and core CPI seeing nearly zero growth. Regarding policy, the July FOMC meeting did not implement "preemptive rate hikes," instead releasing clear dovish signals. CICC believes that "preemptive rate hikes" lack fundamental support. Maintaining the policy interest rate in July was an appropriate decision, with the following logic: 1) Prior to the June meeting, U.S. inflation was as high as 4.2%, with strong job data; even under such pressure, the Federal Reserve chose not to raise rates. In contrast, prior to the July meeting, U.S. inflation had significantly fallen below expectations, and job data showed a clear slowdown, offering the Fed even less reason to raise rates. 2) Although oil prices rebounded in July, the likelihood of the U.S.-Iran situation easing is high before the midterm elections. If the Federal Reserve were to raise rates out of concern for oil prices, a sudden drop in oil prices due to an unexpected shift by Trump would leave Fed policy in a very passive position. 3) In CICCs July asset allocation monthly report titled "Has the K-Shaped Divergence Begun to Converge?", it was stated that improvements in U.S. credit and PMI do not indicate a full economic recovery. The rebound in employment data from April to June largely reflects data quality issues and one-time shocks from the World Cup. If the Federal Reserve raises rates, it could lead to economic downside risks. The July U.S. non-farm payrolls decreased by 23,000, with previous values significantly downwardly revised, greatly below expectations, confirming previous forecasts. Chart 9: July U.S. non-farm payrolls turned negative, with previous values adjusted downward. Source: Haver, CICC Research Department 4) The Federal Reserve has tolerated inflation above its target for five years. Since it demonstrated patience in maintaining interest rates at the June FOMC meeting, there is no need to suddenly lose patience just one month later, necessitating a rate hike to control inflation in July. Given that the view has begun to be initially validated, CICC has greater confidence in its prediction of liquidity trending towards easing in the second half of the year: On the geopolitical front, the U.S.-Iran situation is not an "asymmetric" game; as the U.S. midterm elections approach, Trump's likelihood of sudden shifts may significantly increase, making it more inevitable for U.S.-Iran tensions to ease; Concerning inflation, component models indicate that core commodities and housing will continue to weaken, and U.S. inflation is expected to improve in the coming months. Moreover, U.S. personal consumption growth is still declining, and the labor market shows signs of cooling, suggesting future growth may slow cyclically. With both inflation and employment weakening, this could open a space for the Federal Reserve to ease. On the policy front, Waller's apparent hawkish statements may mask a genuine intention behind his de-emphasizing of dot plots, proposing new inflation metrics, and incorporating AI into policy reaction functions, which could provide new grounds for earlier rate cuts. As the triple risks of geopolitics, inflation, and policy gradually diminish, global liquidity is expected to become even looser in the second half of the year. Asset Insights: Technology growth remains the main line in the market, with positive views on U.S. and Chinese stock markets; overweight gold and other liquidity-sensitive assets. Global liquidity continues to loosen, benefiting the technology growth sector, gold, and base metals. Currently, the U.S. non-AI sectors have not fully recovered, with employment, consumption, and residential investment all slowing, and there is insufficient evidence for convergence in K-shaped divergence. Chart 10: Leading indicators suggest that U.S. real consumption expenditure growth may continue to decline. Source: Haver, CICC Research Department Chart 11: U.S. residential investment growth is still declining. Source: Haver, CICC Research Department At the same time, the fundamentals for technology growth continue to materialize: in the second quarter, Microsoft's Azure revenue grew by 43% year-over-year, while AWS revenue grew by 37%. Major technology companies are also maintaining or increasing their AI capital expenditures, and the demand for computing power, growth in cloud services, and the commercialization of AI are mutually validating. In terms of funding, the recent adjustments in the global AI sector have digested some of the high crowding and high valuation risks, and the risk-reward ratio for technology growth has improved: the proportion of TMT turnover in A-shares has dropped from a historical high of 52% to 42%, with financing balances decreasing by 387.6 billion yuan from the high point at the end of June. The scale of leveraged ETFs in Korea has also significantly decreased. With fundamentals continuing to materialize and crowding decreasing, the risk-reward ratio for tech growth has improved. Chart 12: A-shares financing balance has significantly decreased from the end of June high. Source: Wind, CICC Research Department The recent rise in traditional sectors may not have sustainability; evidence for style rotation is still insufficient, and CICC maintains a strong bullish view on the main line of AI and technology growth. Driven by the tech rally, U.S. and Chinese stock markets may perform well in the second half of the year, and CICC recommends overweighting A-shares and Hong Kong stocks while maintaining a standard allocation to U.S. stocks. Regarding gold, CICC advised reducing positions early in the year when valuations and crowding were high; in June, when the market was extremely pessimistic about gold, it recommended increasing positions on dips. CICC believes that the two narratives that previously suppressed gold are being debunked: First, global liquidity has not truly entered a tightening cycle. With U.S. inflation falling and growth slowing, the underlying economic fundamentals support a shift towards easier monetary policy. Wallers "hawkish on the surface, dovish at heart" stance may open the way for future rate cuts. Second, "de-dollarization" has not come to an end. Waller's "balance sheet reduction" policy objectively helps restore the credibility of the dollar but is subject to multiple constraints from financial markets and politics, leading to high uncertainty about its future implementation. Meanwhile, high debt, high deficits, and policy uncertainty structurally erode the credibility of the dollar, which may be difficult to reverse. In the second quarter, global central banks net bought 289 tons of gold, a 62% year-over-year increase, marking a historical high for the second quarter, reflecting deep-rooted concerns among central banks about the dollar, and reserve diversification will continue to support gold demand in the medium to long term. As global liquidity becomes looser, the upward pressure on real interest rates and the dollar will lessen, allowing gold to regain support from both liquidity and diversification of the monetary system. CICC believes the gold bull market has not ended; the window for reallocation following previous adjustments has opened, and it is recommended to continue overweighting gold. For U.S. Treasuries, falling inflation, a cooling job market, and a shift in Federal Reserve policy expectations are conducive to declining interest rates, with high coupons providing a safety buffer. If U.S. growth further slows, medium to long-term U.S. Treasuries can also hedge against equity volatility, and it is advisable to standard allocate U.S. Treasuries while increasing positions on dips. Improved liquidity also supports medium-term bonds, but considering the low interest rate environment, the return space is limited, and it is recommended to underweight medium-term bonds. CICC believes that commodity markets may continue to experience differentiation. The demand for copper and aluminum is supported by AI data centers, power grid expansion, and energy transition. Against a backdrop of strong supply constraints, base metals possess two concurrent logic paths from liquidity improvement and physical investment in AI and are recommended for overweighting. Energy commodities like oil still possess hedging value, but future volatility may increase, suggesting a maintenance of positions without chasing highs. Regarding the July U.S. CPI outlook: month-on-month figures remain relatively low, while year-on-year figures continue to decline. On August 12 (Wednesday), the U.S. CPI for July will be released. The CICC major asset team forecasts that nominal U.S. CPI for July may rise to around 0.1% month-on-month (previously -0.42%, consensus expectation 0.1%), while year-on-year it may drop to 3.4%. Core CPI is expected to increase to 0.2% month-on-month (previously -0.02%, consensus expectation 0.2%), while year-on-year it may fall to 2.5%. Chart 13: Breakdown and forecast of contributions to U.S. nominal CPI month-on-month. Source: Haver, CICC Research Department Chart 14: Breakdown and forecast of contributions to U.S. core CPI month-on-month. Source: Haver, CICC Research Department In June, a substantial drop in gasoline prices, abnormally decreased prices in some services, and seasonal adjustment factors collectively suppressed inflation readings, resulting in a month-on-month negative nominal CPI and unusually zero growth in core CPI. In July, as gasoline price declines moderate, the suppressive effect of seasonal adjustment factors wanes, and core service price averages return to normal, the dissipation of these abnormal factors may drive U.S. inflation month-on-month higher than previous values, though it will still remain at a low level. Chart 15: The decline in U.S. gasoline prices narrowed in July. Source: Bloomberg, CICC Research Department Chart 16: Seasonal adjustment factors for May and June were relatively high compared to pre-pandemic levels, lowering inflation readings after adjustment; in July, seasonal adjustment factors return to long-term levels before the pandemic. Source: Wind, CICC Research Department Chart 17: Other core service inflation turned negative month-on-month in June, and may revert to the mean in the future. Source: Haver, CICC Research Department From the component perspective, (1) high-frequency data suggests that the July used car CPI may shift from a previous decline to slight positive growth, potentially boosting core commodity inflation for July; (2) other core service inflation, excluding rent, transportation services, and medical services, may revert to the mean after a month-on-month decrease of 0.17% in June, becoming the main source for the core CPI month-on-month rebound. Chart 18: Wholesale prices lead U.S. used car CPI by about two months. Source: Manheim, Haver, CICC Research Department In the next few months, under the baseline assumptions of no new major supply shocks, inflation for key component items like core commodities and rent may remain low. Even if year-on-year readings may see slight increases post-October due to base effects, the overall trend of U.S. inflation cooling remains a strong likelihood. Chart 19: Component models predict that the peak of U.S. inflation has passed, and will trend downward in the future. Source: Haver, CICC Research Department Some viewpoints express concerns that recent price increases in certain electronics maybe alter the downward trend of inflation. However, CICC calculations reveal that the "computer, peripherals, and smart home assistants" segment only accounts for 0.3% of the U.S. CPI. In extreme hypothetical scenarios, if prices for the entire segment rise by 20%, the maximum pull on CPI would be only approximately 0.06 percentage points, unlikely to change the overall downward trend of inflation. If the July CPI forecast is realized, U.S. inflation will significantly decline year-over-year for the second consecutive month. Coupled with a cooling job market, the Federal Reserves tightening narrative may further reverse, and equities, bonds, and gold are expected to continue benefiting from the return of easing trades.