Guolian Minsheng Securities: The probability of the Federal Reserve continuing to cut interest rates this year is still not low.

Guolian Minsheng Securities released a research report stating that the probability of the Federal Reserve continuing to cut interest rates this year remains not low. Considering the weakening impact of current tariffs on inflation, the short-term risk of economic stagnation may be greater, as the annualized quarter-on-quarter GDP growth rate in the United States in the fourth quarter fell to 1.4%, lower than expected, revealing certain hidden dangers. Additionally, a previous report by Guolian Minsheng Securities indicated that the increasingly severe K-shaped economic differentiation in the United States is affecting the middle and lower income groups, limiting their consumption ability due to high inflation and stagnant wages. In this context, despite significant internal disagreements within the Federal Reserve, the probability of further interest rate cuts remains not low considering the structural pressures on the economy and employment this year. However, the focus of the market will gradually shift from expecting interest rate cuts this year to anticipating interest rate hikes next year. There is a certain "balance of gains and losses", making it difficult to face the shift from dovish expectations this year to hawkish expectations next year, creating a delicate balance. The main points of view of Guolian Minsheng Securities are as follows: During this year's Spring Festival holiday, the overseas markets can be described as being in the spotlight. In the first half, the situation in Iran drove oil prices to lead significantly among major asset classes, precious metals and the dollar also strengthened simultaneously, while overseas software stocks were under pressure due to concerns about AI. As the holiday countdown begins, the recent ruling that the U.S. tariffs are illegal and new developments in the U.S.-China trade negotiations have added significant uncertainty to the market. The potential risk of a significant return of tariffs has raised concerns about U.S. fiscal pressure, leading to a simultaneous weakening of the dollar and U.S. bonds, while U.S. stocks have been boosted by expectations of earnings support and risk appetite recovery. Looking back at the first week of the holiday, the market unfolded around three major themes: AI, geopolitics, and tariffs. Concerns about AI have continued to ferment, leading to pressure on technology stocks. On one hand, the market is concerned about AI restructuring the software business model, leading to the continuous weakness of the software sector. On the other hand, tech giants like Microsoft and Meta are facing questioning about their high levels of capital expenditure. Currently, within the technology sector, there is a clear hierarchical order in terms of resilience: most scarce hardware (such as storage) > pure AI large model targets (Hong Kong stocks MinMax, etc.) > core hardware supply chain (Nvidia, TSMC, etc.) > high capital expenditure internet giants. Behind this differentiation is the transmission logic of the profit chain and cash flow: the ability of the demand side to actually pay is the core trigger of the fundamental. Although the market is generally concerned about overinvestment in the AI sector, we believe that the continuous capital expenditure by tech giants is not a risk point itself (rather, it is the cornerstone of strong fundamentals upstream). The real potential risk lies in the future occurrence of substantial contractions in capital expenditure. From the current industry trend perspective, the pace of AI technology landing has not diminished, so we judge that the current adjustment in the AI sector is mainly benign. The sector still presents structural opportunities, with a focus on positioning windows for scarce hardware and quality large model targets. Geopolitics: U.S.-Iran negotiations have been turbulent, and there have been new developments in U.S.-China relations. Since the outbreak of the Russia-Ukraine conflict, geopolitical events have become a key barometer affecting global risk appetite, with a significant pulse impact on commodity prices. During the Spring Festival holiday, the U.S.-Iran negotiations have shown violent fluctuations, from reaching a rapid agreement to potential confrontation, directly driving major commodity prices (such as gold, oil) to a "roller coaster" market. However, the impact of such geopolitical events is often short-term and difficult to predict, with more short-term volatility, while the longer-term logic behind commodity assets is more worthy of attention. Specifically, gold is priced for chaos and is still in a window of time dividend. Currently, the implied volatility of gold is gradually recovering, and as volatility stabilizes, the value of the gold allocation will become apparent, with long-term upward potential. As for oil, the supply-demand situation is expected to continue improving after the first quarter, and oil prices are likely to gradually emerge from the bear market, with significant potential upside this year. In addition to the Iran issue, developments in U.S.-China relations undoubtedly touch people's hearts. White House officials have stated that President Trump will visit China at the end of March, marking his first visit in 8 years. Looking back at Trump's first visit to China in 2017, it was the 45th anniversary of the normalization of U.S.-China relations, where the two sides ultimately reached a $253.5 billion economic and trade cooperation mega deal, characterized by economic and trade priority and expanding cooperation. However, compared to that time, the external environment has fundamentally changed: global geopolitical fragmentation, intensified technology and trade games. We believe that this visit may no longer be just about simple economic and trade signing but rather about risk control and rule rebuilding between the world's two largest economies at a critical juncture. The core significance lies in stabilizing expectations, managing differences, and safeguarding bottom lines, providing scarce anchor points of certainty for the global market. Tariffs: The Supreme Court ruled that tariffs imposed by Trump were illegal, marking a major failure for him during his term. The most significant "bombshell" during the holiday was undoubtedly the Supreme Court ruling that Trump's tariffs imposed under the IEEPA were illegal, meaning that the equivalent tariffs he levied as well as the fentanyl tariffs are now ineffective. However, Trump quickly took measures to remedy this, imposing a 10% global temporary tariff under Section 122 of the 1974 Trade Act for 150 days as a transitional measure, and is expected to gradually transition to the framework of Sections 301 and 232. However, the impact of this compared to the previous widespread equivalent tariffs will be somewhat reduced. Core issues to be closely monitored in the future: on one hand, the issue of returning the illegally collected tariffs. In theory, illegal tariffs should be refunded, but the Supreme Court did not clearly stipulate the refund process, and the difficulty of implementing a blanket refund is also high. We believe that a "case-by-case" approach may be adopted, with companies seeking partial refunds through litigation or proactive applications, but the entire process may be longer and more chaotic. In terms of fiscal impact, if all tariffs are fully refunded (about $175 billion), it will further exacerbate U.S. fiscal pressure, leading to an increase in long-term interest rates and a devaluation of the dollar. On the other hand, attention needs to be paid to its impact on monetary policy and liquidity. Since the beginning of this year, the longer-lasting market narrative has been closely related to liquidity, with the TGA account injection and technical expansion of the Fed's balance sheet at the start of the year pushing liquidity to be unexpectedly loose. However, with the recent significant adjustments in strong-performing precious metals and tech stocks, as well as the nomination of Powell, the outlook for liquidity has gradually become more uncertain. In combination with the minutes of the Fed's January meeting, internal officials also have significant disagreements on future monetary policy, with some officials even starting to discuss the possibility of rate hikes. This has added a "cloud" to the current outlook for liquidity. However, we believe that the probability of further interest rate cuts this year remains not low. Considering the weakening impact of current tariffs on inflation, the short-term risk of economic stagnation may be greater, as the annualized quarter-on-quarter GDP growth rate in the United States in the fourth quarter fell to 1.4%, lower than expected, revealing certain hidden dangers. Additionally, as indicated in our previous report, the increasingly severe K-shaped economic differentiation in the United States is affecting the middle and lower income groups, limiting their consumption ability due to high inflation and stagnant wages. In this context, despite significant internal disagreements within the Federal Reserve, the probability of further interest rate cuts remains not low considering the structural pressures on the economy and employment this year. However, the focus of the market will gradually shift from expecting interest rate cuts this year to anticipating interest rate hikes next year. There is a certain "balance of gains and losses", making it difficult to face the shift from dovish expectations this year to hawkish expectations next year, creating a delicate balance. Risk Warning: Significant changes in U.S. trade policies; Unexpected spread of tariffs leading to a greater-than-expected global economic slowdown and increased market adjustment; Frequent geopolitical factors leading to increased volatility in global assets.