The macro logic of the June market

In the past two weeks, the reaction of stocks and bonds to real estate policies has gradually returned to consistency from differentiation. Government bond futures rebounded continuously after a brief initial pullback, indicating that the bond market is more concerned about the substantial impact of real estate policies; real estate stocks also gradually retreated to the levels before the policy was introduced in the later period, reflecting the stock market's wait-and-see attitude towards the policy's effects.

The main issues in the current real estate sector are high inventory and overvaluation, and the relaxation policies on the demand side, whether it is purchase restrictions, loan restrictions, down payment ratios, or adjustments to mortgage rates, mainly aim to allow those who have genuine housing needs to purchase homes while also reducing the rental demand of this group, essentially adjusting the structure within genuine housing needs. However, the impact on the total volume of genuine housing needs may be relatively limited.

The core goal of the current property acquisition policy is not to reduce inventory, but to promote the construction of affordable housing, which requires less funding. However, acquiring without storing may not have a significant impact on rents and housing prices. In February last year, the central bank launched a 100 billion yuan rental housing loan support plan, with a utilization progress of 2% as of March this year, indicating a significantly slow progress.

Currently, the rental yield in the top 100 cities is only 2.2%, lower than the financing cost of around 3% for urban investment, considering operational, management, maintenance, and vacancy costs. Therefore, the enthusiasm of local governments for property acquisition mainly lies in helping urban investment, by prioritizing the acquisition of projects and land developed by urban investment, they can obtain an additional low-interest loan, easing the liquidity pressure on urban investment.

If the effectiveness of real estate policies remains limited, the economic fundamentals may continue the trend of structural transformation and weak recovery. The GDP growth rate in the first quarter exceeded the annual target, but the central government's leverage expansion is constrained by exchange rate restrictions. Therefore, the current policy focus is more on implementing existing policies.

With little change in fundamentals and policies, there may be limited incremental capital inflows before the Third Plenum, and A-shares may still be dominated by sector rotation. As of May 31st, the trading congestion of various styles has exceeded 50%, with an average of 75%, indicating a relatively high level, with no significant trading value ratio, so there may still be some short-term adjustment pressure.

Reform is the focus of the next stage of policies and is also an important factor determining market style, mainly reflected through risk preferences. We believe that the reform measures of the Third Plenum may focus on five aspects: technological innovation, factor allocation, income distribution, economic system, and education system. These reform measures are divided into supply-side (technological innovation, factor allocation, economic system, education system) and demand-side (income distribution).

Highly anticipated reform measures include factor marketization reform—such as "land follows people," matching the increase and decrease of urban construction land with population mobility to promote the free flow and equal exchange of factors such as labor, land, and capital; as well as fiscal and tax system reform—such as the three-tier and two-tier value-added tax, expanding consumption tax, optimizing tax types, tax rates, and fiscal fund allocation structure to enhance fiscal sustainability and improve the efficiency of fiscal fund utilization

Overseas, despite the slight decline in US inflation and employment data in April, the manufacturing and services seasonally adjusted PMI in May recorded 51.3% and 54.8% respectively, up by 1.3 and 3.5 percentage points from April, especially the resilience of the service industry, the US economy still shows resilience. Starting from June, the base effect of US inflation data will see a significant decline, weakening the suppressive effect of the base on inflation data, leading to the pressure of secondary inflation.

Currently, neither the US inflation level nor the employment data support the Fed's rate cut before the election. If a cut is necessary within the year, the probability is higher in December than in September. Market expectations for the timing of the Fed's rate cut have been brought forward, believing that the Fed will start cutting rates earlier, but the pace of rate cuts may be slow. The latest Fed Watch shows that the market expects the Fed to cut rates for the first time in September.

The ECB cut interest rates for the first time in five years, as the economic cycles in Europe and the US have been diverging for a year, with greater growth pressure than inflation pressure in the current European economy: Since the second quarter of 2023, economic growth in Europe and the US has started to diverge, with the US economy's growth rate continuously rising, while the Eurozone GDP growth rate once fell to -0.2% (2023Q3), slightly rebounded in 2024Q1 but only to 0.4%. However, inflation pressure in the Eurozone has been continuously declining from high levels. As of May 2024, Eurozone HCPI and core CPI were 2.6% and 2.9% year-on-year respectively, although still below the 2% inflation target, they are close to the upper limit of the normal fluctuation range, with inflation pressure relatively smaller than growth pressure.

Author: Song Xuetao (Practitioner Number: S1110517090003), Source: Xuetao Macro Notes, Original Title: "The Macro Logic of June Market"