United Securities: The probability of the Federal Reserve continuing to cut interest rates this year remains relatively high

CITIC Securities APP learned that Guolian Minsheng Securities issued a research report stating that the probability of the Federal Reserve continuing to cut interest rates this year remains relatively high. Considering that the current impact of tariffs on inflation has weakened again, the risk of the economy “stagnating” in the short term may be greater. The unexpected decline in U.S. GDP annualized quarter-over-quarter growth to 1.4% in Q4 already hints at certain hidden risks. Moreover, Guolian Minsheng’s previous report pointed out that the current U.S. K-shaped economic divergence is becoming increasingly severe, with middle- and low-income groups affected by high inflation and stagnant wages, leading to continued limitations on consumption capacity.

Against this backdrop, although there are significant disagreements within the Federal Reserve, considering the structural pressures on the economy and employment, the probability of further rate cuts this year remains relatively high. However, market focus will gradually shift from this year’s rate cuts to expectations of rate hikes next year. There is a certain “break-even” between the two, making it difficult for this year’s dovish expectations to face the hawkish outlook next year, creating a subtle balance.

Guolian Minsheng Securities’s main views are as follows:

During this year’s Spring Festival holiday, overseas markets were in full swing. In the first half, the Iran situation drove oil prices to lead the major asset classes significantly, with precious metals and the dollar also strengthening in tandem, while overseas software stocks faced pressure amid concerns over AI. As the holiday countdown began, the market was further impacted by the ruling that U.S. tariffs were illegal and new developments in Trump’s China visit, adding heavy “bombs” to the market. The potential risk of tariff refunds triggered concerns about U.S. fiscal pressure, leading to a weakening of the dollar and U.S. Treasuries; U.S. stocks received a clear boost supported by earnings expectations and risk appetite recovery.

Reviewing the first week of the holiday, the market focused on three main themes: AI, geopolitics, and tariffs.

AI concerns continued to ferment, putting technology stocks under pressure. On one hand, there are worries that AI will reshape software business models, leading to continued weakness in the software sector; on the other hand, giants like Microsoft and Meta face questions about excessive capital expenditure. Currently, the resilience of the tech sector shows a clear hierarchy: most scarce hardware (such as storage) > pure AI large models (e.g., Hong Kong-listed MinMax) > core hardware supply chains (Nvidia, TSMC) > high-capital internet giants. Behind this differentiation, the core is the profit chain and cash flow transmission logic: actual payment ability from demand is the fundamental driver.

Although there is widespread concern about overinvestment in AI, we believe that the ongoing capital expenditure by giants is not a risk in itself (and even forms the foundation of strong upstream fundamentals). The real potential risk lies in a substantial contraction of capital expenditure in the future. From current industry trends, the pace of AI technology implementation remains steady, so we judge that the current adjustment in the AI sector is mainly benign. The sector still offers structural opportunities, with a focus on the deployment window for scarce hardware and high-quality large model targets.

Geopolitics: U.S.-Iran negotiations face twists and turns, and U.S.-China relations see new developments. Since the Russia-Ukraine conflict erupted, the market has generally regarded geopolitical events as the core indicator affecting global risk appetite, with pulse-like shocks to commodity prices being particularly prominent. During the Spring Festival holiday, U.S.-Iran negotiations showed sharp fluctuations, quickly shifting from reaching a principle consensus to confrontation preparations, directly causing “roller coaster” movements in commodities such as gold and crude oil. However, the impact of such geopolitical events is often unpredictable and short-lived, mainly causing short-term volatility, while the medium- and long-term logic behind commodity assets deserves more attention.

Specifically, gold is a price for chaos and remains in an era of dividend windows. Currently, implied volatility in gold is gradually recovering. As volatility stabilizes, the value of gold allocation will become evident with time, and it still has upside potential in the long term. Regarding crude oil, supply and demand are expected to continue improving after Q1, and oil prices are likely to gradually emerge from the bear market, with significant potential upside this year.

Apart from Iran issues, progress in U.S.-China relations is undoubtedly more captivating. White House officials announced that Trump will visit China at the end of March, marking his first visit to China in eight years. Reflecting on Trump’s first visit to China in 2017, which coincided with the 45th anniversary of normalized U.S.-China relations, the two sides ultimately reached a $253.5 billion trade and economic cooperation agreement, characterized by trade priority and expanded cooperation.

Compared to that time, the external environment has fundamentally changed: global geopolitical fragmentation and intensified technology and trade competition. We believe this visit may no longer be a simple trade agreement signing but rather a risk management and rule-setting effort between the world’s two largest economies at a critical juncture. Its core significance may lie in stabilizing expectations, managing divergences, and safeguarding bottom lines, providing a scarce certainty anchor for global markets.

Tariffs: The Supreme Court ruled tariffs illegal, and Trump faced a major failure during his term. The most significant “bomb” during the holiday was the Supreme Court ruling that Trump’s tariffs imposed under the IEEPA were unlawful, meaning his previously levied reciprocal tariffs and fentanyl tariffs are invalid. However, Trump quickly responded with measures to mitigate this, imposing a 10% global temporary tariff under Section 122 of the Trade Act of 1974 for a transition period of 150 days. It is expected that the final framework will gradually shift to the 301 and 232 provisions, though the impact of broad reciprocal tariffs will diminish compared to previous measures.

Key issues to watch moving forward include: one, the refund of tariffs deemed unlawful. In theory, unlawful tariffs should be refunded, but the Supreme Court did not specify the refund process, and a blanket refund is difficult. We believe a case-by-case approach may be adopted, with companies seeking refunds through litigation or voluntary applications, but the process could be lengthy and chaotic. From a fiscal perspective, if tariffs totaling about $175 billion are fully refunded, it would further increase U.S. fiscal pressure, leading to higher long-term interest rates and a weaker dollar.

The second concern is the impact on monetary policy and liquidity. Since the beginning of the year, the long-lasting market narrative has been closely tied to liquidity. The early-year TGA account injections and the Fed’s technical balance sheet expansion have indeed driven liquidity to exceed expectations. However, as gold, tech stocks, and other assets that performed strongly earlier have adjusted, and with Waller’s nomination, the outlook for liquidity has become more uncertain. The January FOMC minutes also reveal significant internal disagreements among officials regarding future policy, with some even discussing the possibility of rate hikes, adding a “cloud” to liquidity prospects.

Nevertheless, we believe the probability of further rate cuts this year remains relatively high. Considering that the impact of tariffs on inflation has weakened again, the risk of economic “stagnation” in the short term may be greater. The unexpected decline in Q4 U.S. GDP growth to 1.4% annualized already hints at hidden risks. Additionally, our previous report pointed out that the U.S. economy’s K-shaped divergence is worsening, with middle- and low-income groups constrained by high inflation and stagnant wages, limiting consumption capacity. In this context, despite significant disagreements within the Fed, the structural pressures on the economy and employment suggest that further rate cuts this year are still likely. However, market focus will gradually shift from this year’s rate cuts to next year’s rate hike expectations. There is a certain “break-even” between the two, making it difficult for this year’s dovish outlook to fully face next year’s hawkish expectations, creating a delicate balance.

Risk warnings: Major changes in U.S. trade policies; tariffs spreading beyond expectations, leading to a sharper slowdown in the global economy and larger market adjustments; frequent geopolitical events causing increased volatility in global assets.