Monetary policy "moderately loose," how will the stock, bond, and foreign exchange markets unfold?

The December Politburo meeting established a monetary policy orientation of "moderate easing" and removed the requirement for "stability." Reviewing historical periods of policy operations during shifts in monetary policy orientation in monetary policy reports and Politburo meetings, after the reaffirmation of the current round of loose monetary tone, the probability of a rapid exit from loose monetary tools in the future is relatively low, while a bond bull market may continue in stages, and a dual bull market in stocks and bonds can be expected.

The December Politburo meeting established a monetary policy orientation of "moderate easing" and removed the requirement for "stability."

On December 9, the Central Committee of the Communist Party of China held a meeting mentioning "implementing a more proactive fiscal policy and a moderately loose monetary policy," removing the expression "stability," and defining "moderate easing"; the meeting required "strengthening extraordinary counter-cyclical adjustments," with a positive expression regarding the intensity of macro policies for next year. Historically, when the tone of monetary policy shifts during the Central Politburo meetings and monetary policy reports, subsequent policy operations and market trends in stocks, bonds, and foreign exchange exhibit certain characteristics.

What are the similarities and differences in policy orientation between the Politburo meeting and monetary policy reports?

The shift in monetary policy tone during the Politburo meeting typically occurs in the middle of a monetary cycle. Since 2011, the Politburo meetings have rarely directly mentioned "tightening" or "easing," while the December meetings in the past two years have consistently defined the monetary policy tone for most of the following year. Changes in the tone of monetary policy reports often occur in the early stages of a monetary cycle and reflect marginal orientation changes, with direct mentions of easing being relatively rare.

What kind of market trends correspond to changes in the tone of monetary policy for stocks, bonds, and foreign exchange?

From historical experience, for the bond market, mentioning "moderate easing" does not equate to the approach of a bull market's end; the duration of a bond bull market primarily depends on the sustainability of subsequent loose monetary operations. For the stock market, compared to expectations of subsequent loose monetary policy, the stock market trades on the impact of loose monetary policy on the real economy, although this characteristic has somewhat reversed in recent years. For exchange rates, the establishment of a loose monetary orientation may coincide with or lead exchange rate weakening by 1 to 4 months; for commodities, changes in monetary orientation have a weaker correlation, generally slightly leading major market turning points.

With the reaffirmation of the loose monetary tone, a bond bull market may continue in stages, and a dual bull market in stocks and bonds can be expected.

The mention of "moderate easing" in November 2008 was primarily due to the rapid concentration and exit of subsequent loose monetary tools, nearing the end of the bond bull market. Looking ahead, the meeting mentioned "strengthening extraordinary counter-cyclical adjustments," with a relatively positive expression regarding incremental policy space, while the effectiveness of previous policy tools has not yet been fully reflected in data, and the probability of a rapid exit from loose monetary policy remains low. Both stock and bond markets may have a foundation for strengthening, while exchange rate pressures may continue in stages; in the commodity market, financial attributes of certain varieties, as well as industrial products related to real estate, may also see potential price increases.

Author of this article: Mingming Team of CITIC Securities (S1010517100001), Source: CITIC Securities Research, Original Title: "Bond Market Enlightenment | Monetary Policy 'Moderate Easing,' How Will Stock, Bond, and Foreign Exchange Markets Evolve?"Risk Warning and Disclaimer

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