GLMS SEC has released a research report stating that the probability of the Federal Reserve continuing to cut interest rates this year remains significant. Considering the renewed weakening impact of current tariffs on inflation, the risk of economic "stagnation" may be greater in the short term. The unexpected drop in the US Q4 annualized quarter-on-quarter GDP growth rate to 1.4% has already revealed certain underlying concerns. Furthermore, previous reports from GLMS have indicated that the K-shaped economic divergence in the US is becoming increasingly severe. Middle and low-income groups, affected by persistently high inflation and stagnant wages, continue to experience constrained consumption capacity. Against this backdrop, despite significant internal disagreements within the Fed, the probability of further rate cuts this year remains substantial, given the structural pressures on the economy and employment. However, market focus will gradually shift from expectations for rate cuts this year to expectations for rate hikes next year. There exists a certain "trade-off" between the two, creating a delicate balance where a more dovish outlook for this year is somewhat offset by a potentially more hawkish outlook for the next.
During the recent Spring Festival holiday, overseas markets were full of major developments. In the first half, the situation in Iran drove oil prices to lead significantly among major asset classes, while precious metals and the US dollar also strengthened. Overseas software stocks, however, came under relative pressure due to growing concerns about AI. As the holiday period drew to a close, a US court ruling deeming tariffs illegal and new developments regarding a potential visit by former President Trump to China added further significant shocks to the market. The potential risk of massive tariff refunds sparked concerns about US fiscal pressure, leading to simultaneous weakness in the US dollar and US Treasury bonds. US stocks, meanwhile, received a noticeable boost, supported by profit expectations and a recovery in risk appetite.
Reviewing the first week of the holiday, market activity revolved around three main themes: AI, geopolitics, and tariffs. Concerns about AI continued to intensify, putting relative pressure on technology stocks. On one hand, markets worried about AI disrupting software business models, leading to sustained weakness in the software sector. On the other hand, giants like Microsoft and Meta faced scrutiny over excessively high capital expenditures. The resilience within the tech sector currently shows a clear hierarchy: the scarcest hardware (e.g., memory) > pure-play AI large model companies (e.g.,港股MinMax) > core hardware supply chain (e.g., NVIDIA, TSMC) > high-capital-expenditure internet giants. This differentiation is fundamentally driven by the logic of profit chain and cash flow transmission, where the actual purchasing power on the demand side is the core determinant of fundamentals. While there are widespread concerns about over-investment in AI, GLMS believes that sustained capital expenditure by major players is not the risk itself (rather, it underpins strong upstream fundamentals); the true potential risk lies in a future substantive contraction of this spending. Given the ongoing momentum in AI technology adoption, the current adjustment in the AI sector is judged to be primarily healthy. The sector still holds structural opportunities, with a focus on the timing for investing in scarce hardware and high-quality large model companies.
On the geopolitical front, US-Iran negotiations experienced twists and turns, while Sino-US relations saw new developments. Since the outbreak of the Russia-Ukraine conflict, markets have generally treated geopolitical events as a core barometer for global risk appetite, with their impact on commodity prices being particularly pronounced and volatile. During the holiday, US-Iran negotiations swung dramatically from reaching a preliminary agreement to a rapid return to confrontation and preparedness, directly causing "rollercoaster" movements in commodity prices (gold, crude oil, etc.). However, the impact of such geopolitical events is often difficult to gauge and short-lived, contributing more to short-term volatility. The medium to long-term logic behind commodity assets deserves greater attention. Specifically, gold acts as a hedge against uncertainty and remains within a favorable long-term window. Its implied volatility is gradually normalizing, and as volatility stabilizes, its value as a portfolio allocation will become more apparent; it retains significant long-term upside potential. For crude oil, supply and demand dynamics are expected to improve steadily after Q1, potentially allowing oil prices to gradually emerge from a bear market, with notable upside potential this year. Beyond the Iran issue, progress in Sino-US relations undoubtedly captured significant attention. White House officials indicated that former President Trump might visit China in late March, which would be his first visit in eight years. Reflecting on his first visit in 2017, which coincided with the 45th anniversary of normalized relations and resulted in $253.5 billion in trade deals characterized by prioritizing economic engagement and expanding cooperation, the current external environment has fundamentally changed. With global geopolitical fragmentation and intensified tech and trade frictions, GLMS believes this potential visit may not be merely about signing new trade agreements. Instead, it could represent a critical effort by the world's two largest economies towards risk management and rule-setting at a pivotal juncture, with the core significance likely being to stabilize expectations, manage differences, and uphold baseline stability, providing a scarce anchor of certainty for global markets.
Regarding tariffs, the most significant market-moving event was the Supreme Court ruling that tariffs imposed by the former administration under IEEPA authority were illegal. This implies that previously levied reciprocal tariffs and fentanyl-related tariffs are simultaneously invalidated. However, a rapid response was implemented, imposing a 10% global provisional tariff under Section 122 of the Trade Act of 1974 for a 150-day transition period. It is anticipated that a gradual shift towards frameworks like Section 301 and 232 will occur, though the overall impact is expected to be less severe than the previous broad reciprocal tariffs. Key issues to monitor going forward include, firstly, the process for refunding illegally collected tariffs. While theoretically required, the Supreme Court did not specify a refund procedure, and a blanket refund appears challenging. A case-by-case approach is likely, where companies seek partial refunds through litigation or applications, but this process could be protracted and disorderly. From a fiscal perspective, full tariff refunds (approximately $175 billion) would exacerbate US fiscal pressure, potentially leading to higher long-term interest rates and a weaker US dollar. Secondly, the impact on monetary policy and liquidity warrants attention. The dominant market narrative early this year was closely tied to liquidity, driven by TGA account drawdowns and technical balance sheet expansion by the Fed, leading to unexpectedly loose conditions. However, with recent adjustments in previously strong assets like precious metals and tech stocks, and the nomination of a new Fed Vice Chair for Supervision, the near-term liquidity outlook has become more uncertain. The Fed's January meeting minutes revealed significant internal divergence on future policy, with some officials even discussing the possibility of rate hikes, casting further uncertainty over the liquidity outlook. Despite this, GLMS maintains that the probability of further rate cuts this year remains significant. Considering the renewed weakening impact of tariffs on inflation and the potentially greater near-term risk of economic stagnation, as hinted by the Q4 GDP slowdown, and the increasingly severe K-shaped economic divergence constraining consumer spending power, the structural pressures on the economy and employment suggest continued rate cuts in 2024 are still likely.
Risk warnings include significant shifts in US trade and economic policy; tariffs spreading beyond expectations, leading to a sharper-than-expected global economic slowdown and increased market adjustments; and frequent geopolitical events causing heightened volatility in global assets.