Guotai Haitong: Expectations of Fed interest rate cuts may further narrow, but US stocks still have room to rise.

Guotai Haitong released a research report stating that the US second-quarter GDP exceeded expectations, with declines in "grabbing imports," resilient consumption, and manufacturing reshoring investments being the main supports. It is expected that the US economy will continue to show resilience in the future, with tariffs gradually being reflected in inflation, and the expectation of a Fed rate cut may narrow further. The Fed's interest rate meeting in July continued to maintain the status quo, but internal divisions have increased. The independence of the Fed is likely to be maintained. The central rate of US Treasury bonds may further increase, and US stocks still have upside potential. Guotai Haitong's main points are: The US second-quarter GDP growth exceeded expectations, mainly supported by declines in "grabbing imports," resilient consumption, and private non-residential investment. The US second-quarter GDP seasonally adjusted annualized rate reached 3.0%, higher than the market's expected 2.6%, and significantly higher than the previous value of -0.5%. The GDP growth in the second quarter was mainly supported by declines in "grabbing imports," resilient consumption, and manufacturing reshoring investments, while private inventory changes, private residential investment, and goods and services exports were major drag factors. Looking ahead, the bank believes that: First, with the significant weakening of "grabbing imports," the support from import decline will weaken; second, the wealth effect in the capital market will continue to support consumption resilience; third, manufacturing reshoring will further strengthen; fourth, the drag from private inventory changes will decrease. Therefore, overall, the economy's resilience can still be maintained, fears of a US economic recession can be refuted, and risks of economic upturn should be watched out for. On July 30, 2025, the Fed released a statement after its interest rate meeting, followed by Powell holding a press conference. From the Fed's statement and Powell's speech, the bank identified three marginal changes: First, the Fed maintained the status quo, but divisions increased. In this rate decision, two Fed governors (Waller and Bowman) opposed keeping rates unchanged and supported a 25 basis point rate cut, showing increased internal divisions within the Fed. Second, the Fed expressed more uncertainty about the economic and inflation outlook. The Fed statement changed from "the uncertainty about the economic outlook has decreased" to "the uncertainty about the economic outlook still exists." Regarding inflation, Powell stated that tariffs are beginning to impact consumer prices, and inflation data is expected to be affected more by tariffs. Third, Powell reiterated the independence of the Fed and gave a vague forward-looking guidance, but expressed a more "hawkish" attitude. Powell reiterated the independence of the Fed, stating that the Fed makes decisions based on data, not politics, giving a vague guidance on the rate cut in September, indicating that decisions will still be data-driven. Overall, Powell's attitude is more "hawkish," and market expectations for rate cuts for the whole year have decreased further. Expected further narrowing of expectations for rate cuts for the whole year, increase in the central rate of US Treasury bonds, and upside potential for US stocks. Short-term US inflation data has not yet fully reflected the impact of tariffs, and the continuation of upward inflation may restrict rate cuts, so caution is needed as expectations for rate cuts may further narrow. Following the Fed's interest rate meeting in July 2025, the US federal funds rate futures market reflects expectations for rate cuts to narrow to only one in October, which is consistent with the bank's previous expectations. The bank warns that expectations for rate cuts may further narrow in the future, and there may even be a risk of not cutting rates for the whole year, causing temporary disturbances to US bonds and stocks. It is expected that Trump's global tariffs will lead to further increases in inflation expectations, combined with subsequent tax cuts, increases in debt ceilings, and more economic policies being implemented to support economic stability, expectations for rate cuts may further narrow, US Treasury bond rates may struggle to go down, and it is expected that the 10-year US Treasury bond rate will fluctuate at a high level in the range of 4.5% to 5.0% in the second half of the year. It is expected that US stocks may experience temporary fluctuations in the second half of the year, but overall the trend is expected to continue to rise, with support for US tech stocks, especially in areas such as AI semiconductors where capital expenditure and performance are supported, and Trump's tax cuts will be more favorable to small and medium-sized enterprises. Risk warning: US tariffs exceed expectations, leading to a significant economic downturn and a substantial increase in inflation; US manufacturing reshoring leads to upward risks for the manufacturing cycle; the independence of the Fed continues to be challenged by Trump.