CICC: What does the current rise in US dollar and US bond interest rates reflect?

1. What does the current rise in US dollar and US bond interest rates reflect?

Recently, U.S. bond interest rates have risen rapidly, and the U.S. dollar has reached a new high. The simultaneous strengthening of the two is more worthy of attention, and the reflected macro and liquidity environment is the main constraint or even challenge for various assets at present . The historically simultaneous phases have several commonalities: 1) the rate hike cycle; 2) the tightening of domestic financial conditions; and 3) the tightening of overseas dollar liquidity.

But the converse is not true. First, the Fed raises interest rates. If emerging growth is strong, the dollar can still weaken (2017); second, the US tightening growth weakens, and interest rates cannot continue to strengthen; or there is a liquidity crisis, the Fed can turn to easing (2020). Because of this, it is rare for the two to strengthen simultaneously since the 1970s . But neither of these two situations are currently available. One is for the US dollar, and other non-US growth problems are more in the short term; the other is for interest rates, and inflation constraints limit the Fed’s policy space.

2. Historical experience: bulk commodities are weak, especially gold, and developed countries are usually better than emerging ones; focus on liquidity shocks in extreme situations

If the US dollar and US bond interest rates continue or enter a more extreme situation, liquidity shocks need to be observed. Observing several experiences since the 1970s: 1) Crude oil, industrial metals, agricultural products and other commodities performed poorly, especially gold. The logic behind this is that demand is sluggish and financial conditions are tightened; 2) The stock market performed in general and fell a lot Rising less, emerging lagging behind, which is also due to the strengthening of the US dollar.

3. The potential impact of rising US dollar and US bond interest rates?

1) U.S. financial conditions tightened, dampening demand. 2) Inhibit exports. 3) suppress the performance of commodities. 4) Affect multinational corporations with higher exposure to overseas income. 5) Markets with a high proportion of foreign debt in the US dollar are under pressure. 6) Increase the cost of obtaining US dollar financing, forming a double squeeze on emerging markets in the context of high commodity prices.

4. Possible follow-up policy options and evolution: Inflation turning point eases interest rate pressure; China’s steady growth eases dollar pressure

For now, the focus is on whether the “impossible triangle” of tightening, inflation and growth can turn around, and the corresponding observation is whether the US bond interest rate and the US dollar can slow down or even fall. A rapid fall in inflation or a re-improvement of non-US growth can partially alleviate or even resolve this current contradiction. Otherwise, the market will remain under pressure, leaving people with “nowhere to hide”.

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