Rare "stock-bond-currency" triple kill in the U.S.: Occurred only 6 times from 1971 to present

Since the United States raised tariffs, the US dollar has not strengthened; instead, there has been a rare occurrence of a simultaneous decline in stocks, bonds, and currency. From April to now, the US dollar index has fallen by 5%, the S&P 500 index has dropped by 6%, and the yield on 10-year US Treasury bonds has risen by 11 basis points (indicating a drop in bond prices). From January 1971 to now, there have only been 6 months where US stocks, bonds, and currency all showed significant declines simultaneously. If there are no significant changes in US stocks, bonds, and the dollar in April, April 2025 will be the 7th month since 1971 where all three have shown significant declines (Chart 1).

Chart 1: Since 1971, there have only been 6 months where US stocks, bonds, and currency all showed significant declines.

Source: Wind, CICC Research Department

Generally speaking, a combination of falling US stocks, rising US bonds, and a rising dollar is a more favorable asset change for investors. If the US faces a growth slowdown, US stocks will decline due to lowered earnings expectations. At the same time, as growth slows, inflation will also decline, leading to a loosening of monetary policy and a decrease in interest rates, which will cause US Treasury bonds to rise. As a significant global demand engine and liquidity provider, if the US economy slows down, the fundamentals of other countries will be worse than those of the US, and their policy space will be relatively smaller, causing the dollar to play the role of a safe-haven asset, thus generally rising.

However, if the US faces the risk of "stagflation," while other economies can support their fundamentals with "non-US" strength, a simultaneous decline in US stocks, bonds, and currency may occur. The simultaneous decline in US stocks, bonds, and currency in December 2022 can help us understand the current situation, as the market was pricing in US stagflation and better-than-expected fundamentals in Europe and Japan. In December 2022, the dot plot from the Federal Reserve's meeting exceeded market expectations; at that time, commodity inflation had receded, but service inflation remained sticky, and the labor market was relatively tight. This was also a significant reason why the Federal Reserve believed that inflation risks had not been alleviated and that high interest rates needed to be maintained, leading to rising Treasury yields. The overly tight monetary policy exacerbated market concerns about recession, resulting in a decline in US stocks. These conditions were directly reflected in the dual decline of stocks and bonds in December 2022 (especially in the latter half of the month).

At that time, while pricing in US "stagflation," the fundamentals of the European and Japanese economies were better than expected, leading to a depreciation of the dollar against the euro and the yen. Before entering the fourth quarter, the exchange rates of the euro and yen against the dollar reached their lowest levels in 20 years. Due to the impact of the Russia-Ukraine conflict, the market was worried about the energy crisis in the eurozone; however, in December, an unusually warm winter in the Northern Hemisphere led to a significant rebound in temperatures, resulting in decreased heating demand and an increase in Europe's natural gas inventory, contrary to previous market concerns about an energy crisis. On December 20, 2022, the Bank of Japan's monetary policy statement "indirectly" abandoned its ultra-loose monetary policy, unexpectedly adjusting the Yield Curve Control YCC) has expanded the target range for the fluctuation of the 10-year Japanese government bond yield from ±0.25% to ±0.5%. We believe this essentially reflects the monetary policy adjustment brought about by the continued rise in inflation in Japan.

Chart 2: "Stagflation" in the U.S. may lead to a "triple kill" in stocks, bonds, and currencies when the U.S. fundamentals are relatively strong.

Source: Wind, CICC Research Department

We believe the mechanism revealed in Chart 2 can still help us understand the recent "triple kill" in U.S. stocks, bonds, and currencies: fundamentally, the market is pricing in "U.S. stagflation" and a "not-so-bad Eurozone."

► The two long-term goals of the U.S. government seem to contradict basic common sense. The U.S. government believes that raising tariffs can ultimately achieve two objectives (the rationale is highly questionable): one is the return of manufacturing, and the other is the reduction of the trade deficit. These two objectives involve "two accounts" that are difficult to clarify. The first is the labor resource account; the U.S. is currently essentially at full employment, with the unemployment rate at a historically low level (Chart 3), and from a macro perspective, there are no surplus labor resources available for manufacturing. The second is the current account; from a total perspective, we believe the U.S. current account is not significantly imbalanced. As shown in Chart 4, if we only look at manufacturing, the U.S. manufacturing trade deficit in 2024 is about $1.59 trillion, accounting for 5.44% of GDP. However, the U.S. has a large trade surplus in agriculture and energy, with a trade surplus of $23 billion in agricultural products in 2024, accounting for 0.08% of GDP, and a trade surplus of $82 billion in energy and mineral products, accounting for 0.28% of GDP. At the same time, the current account includes not only goods trade but also services trade; the U.S. services trade has been in a surplus state for many years, with a services trade surplus of about $295 billion in 2024, accounting for 1% of GDP. Overall, the proportion of the U.S. goods and services trade deficit to GDP in 2024 is 3.14%, indicating that trade is not significantly imbalanced (Chart 4).

Chart 3: The current unemployment rate in the U.S. is at a historically low level.

Source: Haver Analytics, CICC Research Department

Chart 4: The U.S. has surpluses in agricultural products, energy and mineral products, and services trade.

Source: Haver Analytics, CICC Research Department

► How can we achieve the goals of manufacturing repatriation and reducing the current account deficit under conditions of full employment and no significant imbalance in the current account? Macroeconomically, the United States may need a recession to achieve these goals. Only after a reduction in domestic demand can there be surplus labor available for manufacturing employment, and a decrease in domestic demand can lower the demand for overseas products to reduce the trade deficit. Overall, the U.S. government's extreme challenge to the global economic and trade order seems to aim for an inherently unreasonable economic goal through a recession, which is difficult for investors to accept. Furthermore, the recession chosen by the U.S. is one caused by supply shocks (tariffs), and this model has strong structural characteristics affecting prices, making it difficult for investors to determine the future policy path of the Federal Reserve. On one hand, rising tariffs may lead to an increase in the prices of imported goods in the U.S.; on the other hand, on April 3, OPEC+ announced an increase in oil production, and the situation between Russia and Ukraine did not worsen, leading to a significant drop in global oil prices. The market is uncertain about the final inflation trend and whether the Federal Reserve will prioritize inflation or growth, while also worrying about the increase in net supply of U.S. Treasury bonds. Therefore, even after a temporary calm caused by deleveraging from basis trading and interest rate swap arbitrage, U.S. Treasury yields remain high.

► Meanwhile, the fundamentals in Europe show resilience. In March, the German parliament passed a resolution to relax the "debt brake," allowing defense spending to exceed 1% of GDP and broadening the scope of defense spending. In addition to upgrading military equipment, funds are also allowed for civil defense, information security, etc. Furthermore, the German parliament approved a €500 billion infrastructure investment fund, focusing on supporting modern transportation networks, digital infrastructure, renewable energy, and housing construction, which we believe is expected to drive demand for various raw materials and related manufacturing products. Additionally, in April, OPEC+ agreed to increase supply to the market by 411,000 barrels of oil per day starting in May, putting pressure on global oil prices. A stable and sufficient supply of crude oil can reduce energy costs for European manufacturing companies, and combined with the incremental demand brought about by fiscal expansion, it is conducive to companies expanding production capacity and supporting economic growth in Europe.

Note: This article is excerpted from CICC's research report "CICC: From Exchange Rates, Interest Rates to Risk Premiums."

Authors: Zhou Peng, Zhang Wenlang, Source: CICC Insights, Original Title: "CICC: From Exchange Rates, Interest Rates to Risk Premiums"

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