CICC: The Narrative of U.S. Recession and Global Asset Revaluation

The Narrative of U.S. Recession Resurfaces, Supporting Global Asset Revaluation

In the major asset outlook we published last November ("The Response to Time Changes") and this year's major asset February report ("A New Phase of the Trump Trade"), we suggested that the market had previously been overly optimistic about Trump's policy expectations, recommending a defensive shift in overseas asset allocation after Trump's inauguration, reducing exposure to U.S. stocks and other overseas risk assets. Since late February, the U.S. stock market has declined for three consecutive weeks, with the S&P 500 and Nasdaq indices adjusting nearly 9% and 13%, respectively, marking the largest drop since August 2024, reflecting deepening market concerns about Trump's policies and the U.S. economic outlook, bringing the narrative of U.S. recession back into focus.

Chart 1: U.S. Economic Policy Uncertainty Index at its Highest Since the Pandemic

Source: Wind, CICC Research Department

Chart 2: Citigroup Economic Surprise Index Falls to Its Lowest Since August 2024

Source: Wind, CICC Research Department

During the Spring Festival, DeepSeek was released, driving up Chinese assets; the incoming German Chancellor proposed a fiscal expansion plan [1], improving the European fiscal outlook. The Hang Seng Index in China and the DAX Index in Germany rose by 25% and 9%, respectively, during the same period. The macroeconomic situation is shifting, and with the relative valuation advantage of Chinese and European stocks, if a portion of global assets reallocates from the U.S. to markets like China and Europe, the global asset revaluation may just be beginning.

The U.S. Economy and Recession May Still Be Distant

Will the U.S. really face a recession soon? We believe there is still insufficient evidence at present. Although the recession narrative is supported by data, the recent concerns in the market regarding manufacturing PMI, consumer expectations, and GDP forecasts may have exaggerated the downward pressure on the economy. Manufacturing PMI and the University of Michigan consumer expectations are survey-based "soft data," reflecting the subjective feelings of economic participants, unlike consumption, investment, and GDP, which are "hard data" of economic activity and are more objective. Over the past two years, manufacturing PMI has consistently remained below the threshold, and consumer expectations are at cyclical lows, yet U.S. GDP has maintained rapid growth, and consumption has remained relatively resilient.

Chart 3: U.S. Manufacturing Has Long Been Below the Threshold Over the Past Two Years

Source: Wind, CICC Research Department

Chart 4: U.S. Consumption Remains Strongly Resilient

Source: Wind, CICC Research Department

The long-term divergence between "hard data" and "soft data" indicates that "soft data" has been severely distorted in recent years, and the current economic situation in the United States may not be as bad as "soft data" suggests. Furthermore, although the manufacturing PMI is relatively weak, the services PMI remains high, even exceeding expectations in February, indicating that some sectors of the economy may still have momentum. Looking at short-term GDP growth, although the Atlanta Fed's GDPNow model has adjusted the U.S. first-quarter GDP growth to -2.4%, this is mainly influenced by the "import rush" due to tariffs, and other economic sectors outside of net exports have not shown significant contraction. Therefore, current economic data is still insufficient to prove that the U.S. economy is about to fall into recession.

Chart 5: The decline in net exports is the main reason for the GDPNow forecast downgrade

Source: Wind, CICC Research Department

The U.S. economy is also unlikely to enter an upward cycle, downplaying the "soft data" noise

In the past one or two quarters, the market has at times expected the U.S. economy to gradually enter an upward cycle, but we have always held a skeptical view. The judgment of an upward cycle in the U.S. economy is largely based on "soft data" such as credit surveys and business surveys. As discussed earlier, there has been a significant divergence between "soft data" and "hard data" in recent years. Since the deterioration of "soft data" cannot predict an economic recession, an improvement in "soft data" does not necessarily indicate that the economy is about to enter an upward cycle.

Since the U.S. election, some "soft data" has clearly risen, likely driven more by sentiment than by actual economic recovery. For example, according to the NFIB report, the small business optimism index surged in November 2024, mainly reflecting business expectations regarding tax cuts and deregulation under the Trump administration. If we only observe "hard data" such as hiring, profits, and capital expenditure plans, the actual recovery of businesses is limited. At this point, we recommend downplaying the "soft data" noise and extracting the true signals of the U.S. economy from core economic indicators "hard data."

Chart 6: Small business survey soft data shows a greater rebound than hard data

Source: NFIB, CICC Research Department

The true situation of the U.S. economy - declining growth trend + nonlinear risks, the recession narrative may continue to unfold

To confirm the true state of the U.S. economy, it is necessary to distinguish between primary and secondary factors and ignore the noise. Last year, we proposed a comprehensive tracking framework for the U.S. economy ("Trade Recession or Trade Rate Cuts"), categorizing over 70 common U.S. economic data indicators into core indicators, auxiliary indicators, and leading (high-frequency) indicators. This framework tracks and scores six areas: overall economy, consumption, investment, real estate, credit, and employment, providing a comprehensive and prioritized tracking system. Among them, core indicators are the most critical "hard data" metrics for assessing the status of economic sectors, serving as a definitive signal, such as real personal consumption and fixed asset investment. When other indicators diverge from core indicators, the signals from core indicators should generally be used to filter out the noise from secondary economic data. Starting in 2025, the previously resilient "hard data" in consumption and investment began to decline, sending strong signals that the U.S. economy is trending downward:

Chart 7: Compared to Q4 2024, signs of weakening in U.S. consumption and investment began to appear in Q1 2025

Source: Wind, Bloomberg, Haver, CICC Research Department

In January, real personal consumption expenditures fell by 0.4% month-on-month, the lowest level since 2021. The growth rate of personal income, as a leading indicator of consumption expenditure, has also begun to turn downward, indicating that U.S. consumption may weaken in the future.

Chart 8: Significant month-on-month decline in U.S. real personal consumption expenditures in January

Source: Haver, CICC Research Department

Chart 9: Decline in the growth rate of U.S. real personal income, expenditures may retreat

Source: Wind, Bloomberg, CICC Research Department

The growth rate of U.S. private fixed investment maintained a positive growth of 4.5% in Q4 2024, but the growth rate has fallen to the lowest level since the pandemic, with non-residential construction declining the fastest. Under the influence of policies such as Trump tariffs, immigration, and fiscal contraction, we believe the U.S. economy will further cycle downward.

Chart 10: Decline in the growth rate of U.S. fixed asset investment

Source: Wind, Bloomberg, CICC Research Department Although the data has not yet shown an economic recession, economic downturns often exhibit non-linearity, and core economic indicators can deteriorate rapidly within 1-2 months, failing to provide advance warnings. For example, the U.S. GDP could maintain around 4% six months before a recession, and non-farm employment could remain around 100,000 one month prior to a recession. In summary, given that the U.S. economy has confirmed a downward cycle and there are non-linear variables, we believe that even if the economy does not immediately enter a recession, the "recession narrative" will not easily fade.

Chart 11: U.S. GDP growth rate can still maintain around 4% six months before entering a recession

Source: Wind, Bloomberg, CICC Research Department

Chart 12: U.S. non-farm employment can still maintain around 100,000 six months before entering a recession

Source: Wind, Bloomberg, CICC Research Department

How to trade the U.S. recession narrative? Reduce allocation to U.S. stocks and commodities, selectively increase allocation to gold and Chinese stocks, and periodically increase allocation to bonds and high-dividend stocks.

The U.S. recession narrative is an important driver of global asset revaluation, potentially affecting the valuation of global stocks, bonds, commodities, and gold assets. We focus on the implications for U.S. stocks, gold, and Chinese assets. We reviewed instances since the pandemic when the S&P 500 fell more than 5% and found that declines due to uncontrolled inflation and pandemic shocks were more significant, while declines driven by recession fears or emotional fluctuations typically did not exceed 10%.

Chart 13: Recent declines in U.S. stocks are mainly influenced by ERP, approaching the emotional shock expected in July-August 2024

Source: Wind, Bloomberg, CICC Research Department

Chart 14: Recent U.S. market decline review

Source: Wind, CICC Research Department

However, based on the previous analysis, Trump's policies have negatively impacted the economy, and the U.S. economy is trending downward, with non-linear downside risks accumulating. The recession narrative may continue to unfold, so this round of stock declines may not necessarily follow historical patterns. Trump recently stated that he is not focused on the stock market and believes the U.S. economy will experience a difficult period of 6-12 months [2]. Therefore, before Trump significantly adjusts economic policies or the Federal Reserve shifts to substantial easing, we recommend overseas allocations focused on risk prevention, maintaining a low allocation to U.S. stocks. **

Trump's policies suppress economic growth and risk appetite, which is also unfavorable for commodity performance. We continue to underweight commodities.

Market risks are increasing, benefiting safe assets such as gold and bonds. However, the pace and extent of the rise in gold and U.S. Treasury bonds over the past few months have been relatively fast, supported by technical factors. With short-term uncertainty rising, we recommend cautious buying on the rise and increasing allocation on dips. From a medium to long-term perspective, Trump's policies have significantly increased the risk of uncontrolled U.S. debt and inflation, and the price of gold may continue to undergo a revaluation process. We predict that in the next decade, the price of gold will rise to USD 3,000-5,000 per ounce (Is Gold Really Expensive?).

On September 24, the shift in macro policy [3] and the release by DeepSeek reversed domestic pessimistic expectations, combined with the narrative of a U.S. recession, which strengthens our confidence in the revaluation of Chinese assets. We maintain our annual outlook published last November, strategically overweighting Chinese stocks in the medium term, especially optimistic about the upward trend of Chinese technology stocks. Meanwhile, the increase in Hong Kong stocks this year has exceeded our previous expectations. Coupled with tariff uncertainties and the spillover risks from fluctuations in overseas markets, we recommend strengthening position management in the short term, phasing in high-dividend and medium-term bonds to diversify portfolio risks.

U.S. February CPI May Marginally Improve, but Absolute Levels Remain High

The U.S. CPI for February will be released on March 12 (Wednesday). CICC's macro asset model predicts a month-on-month increase of 0.30% for the U.S. nominal CPI (consensus expectation 0.3%, previous value 0.47%), and a month-on-month increase of 0.32% for the core CPI (consensus expectation 0.3%, previous value 0.45%), slightly above market consensus expectations.

Chart 15: Breakdown and Forecast of U.S. Nominal CPI Month-on-Month Growth Rate

Source: Haver, CICC Research Department

Chart 16: Breakdown and Forecast of U.S. Core CPI Month-on-Month Growth Rate

Source: Haver, CICC Research Department

The month-on-month decline in nominal CPI is mainly due to the increase in energy prices in February being lower than the same period in previous years. Although the core CPI has declined month-on-month, it remains within a 30bp range, influenced by two factors: high-frequency data shows that the month-on-month increase in wholesale prices of used cars has narrowed; the "transportation insurance" sub-item in transportation services experienced an abnormal month-on-month increase in January, which was a significant force driving up core inflation. Leading indicators suggest that the month-on-month increase in the "auto insurance" sub-item may slow down in February, stabilizing the abnormal fluctuations in core inflation.

Chart 17: February Nationwide Gasoline Price Increase Lower Than Previous Years

Source: Bloomberg, CICC Research Department

Chart 18: Wholesale prices of used cars lead used car inflation

Source: Manheim, BlackBook, CICC Research Department

By deriving year-on-year growth rates from month-on-month forecasts, we predict that the nominal CPI in February will decrease to around 2.9% year-on-year, while the core CPI will remain around 3.2% year-on-year. Looking ahead, due to the high uncertainty in the implementation of Trump's tariff policy, the difficulty of inflation forecasting for 2025 has significantly increased. If tariff immigration policies are implemented quickly in the coming months, making it difficult for inflation to decline further, or even leading to "secondary inflation," it may prevent the Federal Reserve from timely interest rate cuts, putting pressure on global stocks, commodities, and other assets, while supporting the performance of gold and the US dollar. It is recommended to moderately control risk exposure.

Authors of this article: Li Zhao, Qu Botao, Yang Xiaoqing, Source: CICC Insights, Original title: "CICC: Recession Narrative and Global Asset Revaluation"

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk