What is the probability of a global synchronized recovery?

Report Summary

Since the "reciprocal tariffs (April 2)," most major global equity markets have performed outstandingly, and even the prices of globally priced commodities like copper have gradually strengthened. In the historical upward trend of the S&P 500, there have been several typical cases where the adjustment magnitude exceeded 15%. This time, the "filling speed" is the fastest, with a decline taking 34 trading days and filling taking 55 trading days.

From the perspective of global asset price performance, it seems that tariffs, inflation, and short-term economic uncertainties are not so significant in the pricing factors.

So, what exactly is the current market trading? In the second half of the year, will the global fundamentals land smoothly, and is there a possibility of renewed recovery under monetary and fiscal easing stimulus?

From the perspective of U.S. monetary policy: The Federal Reserve's interest rate cut is just a matter of time. On June 24-25, Powell attended the semi-annual monetary policy hearing, maintaining an overall cautious stance; however, he did not rule out the possibility of an early rate cut, believing that the data in June and July is very important. The popular candidates for the next Federal Reserve chair are currently consistent in their stance on rate cuts.

From the perspective of U.S. fiscal policy: The Trump 2.0 government has gone through several months of reform attempts, ultimately returning to the old path of fiscal expansion, lowering interest rates, and diluting debt. The Senate version of the tax cut bill is more aggressive: raising the debt ceiling by $5 trillion (vs. the House version of $4 trillion), with an increase in the deficit of $3.5-4.2 trillion over the next 10 years (vs. the House version of $3 trillion).

From the perspective of U.S. investment: Behind equipment investment is a new round of technological innovation cycle. The capital expenditure of the U.S. technology sector accounts for 10.3% of revenue, the highest level since 1990; the proportion of capital expenditure to net profit has reached 48.8%.

From the perspective of U.S. inventory: Looking at the segmented industry, the inventory growth rate of most industries in the U.S. is below the historical 50th percentile.

European Monetary Perspective: Based on the implied European Central Bank (ECB) interest rate cut outlook calculated from overnight index swaps, the ECB's rate cut cycle is nearing its end, with one more cut expected in the second half of the year.

European Fiscal Perspective: Although government spending in France is rising and fiscal revenue growth is below expectations, there is limited fiscal maneuvering space; however, Germany's fiscal policy is shifting after more than a decade of the "debt brake" system, with a trillion-euro fiscal stimulus plan introduced over ten years.

European Inventory Perspective: The inventory cycles in both China and the U.S. are at historical lows; while the European inventory cycle is at a historical median level, actual inventories are not high, with low inventories in most countries except Germany. The high inventory in Germany is mainly due to structural automotive inventories.

Chinese Fiscal Perspective: After the Two Sessions, the broad fiscal policy for 2025 shows a significant change compared to the past three years, with the proportion of GDP increasing by about 1.5 percentage points compared to last year.

Report Body

I. Is the Current Trading Stagflation, Recession, or Recovery?

(1) "Reciprocal Tariffs" and Strong Asset Prices

In the past upward trend of the S&P 500, several typical adjustments exceeding 15% occurred, with the current "fill the gap speed" being the fastest, taking 34 trading days to decline and 55 trading days to recover.

Since the "reciprocal tariffs (April 2)," most major global equity markets have performed outstandingly, and even the prices of globally priced commodities like copper have gradually strengthened.

From the perspective of global asset price performance, it seems that tariffs, inflation, and short-term economic uncertainties are not as significant in the pricing factors. So, what exactly is the market trading now?

(2) Is the US stock market trading on a "perfect path"?

This year, the performance of the US stock market can be divided into four stages: (1) From January to mid-February, trading on fundamental resilience, the stock market showed strong fluctuations, and interest rate cut expectations remained low; (2) From mid-February to early April, trading on recession and tariff shocks, the US stock market continued to decline, and interest rate cut expectations rose; (3) From the equal tariff day to mid-June, trading on stabilizing fundamentals, the US stock market fluctuated and repaired, and interest rate cut expectations decreased; (4) Since mid-June, economic data has shown marginal weakness, interest rate cut expectations have been significantly revised upward, and the US stock market and interest rate cut expectations have risen together, with the market beginning to trade on recovery expectations.

Before mid-June, the performance of the US stock market was inversely related to interest rate cut expectations. When the economy was strong, recession expectations/interest rate cut expectations cooled, and the stock market rose; when the economy weakened, recession expectations/interest rate cut expectations warmed, and the stock market fell.

This also indicates that, compared to "inflation," the US stock market is actually more concerned about "stagnation." The weight of fundamental pricing in the US stock market is significantly greater than the weight of interest rate cut impacts or event shocks. Each phase of significant upward movement in interest rate cut expectations has been accompanied by shocks from weakening fundamental data, during which the stock market may perform weakly.

However, since mid-June, the US stock market and interest rate cut expectations have risen together, and the market seems to have opened a new trading logic: low inflation fluctuating + marginal economic slowdown but not recession + accelerated interest rate cuts stimulating economic restart.

2. What is the probability of a global synchronized recovery (globally, in the US)?

(1) Monetary: Global easing is underway

As of now, in this round of interest rate cut cycle, the European Central Bank has cut rates 8 times in a row, with the policy rate falling from 4.5% to 2.15%; the Federal Reserve has cut rates 3 times, with the policy rate falling from 5.5% to 4.5%; the Bank of England has cut rates 4 times, with the policy rate falling from 5.25% to 4.25%; the Bank of Canada has cut rates 7 times, with the policy rate falling from 5.0% to 2.75%.

Currently, inflation levels have also fallen back to around 2%.

However, tariff frictions have also raised concerns about rising inflation, especially from July to September.

The Federal Reserve's interest rate cut is just a matter of time. On June 24-25, Powell attended the semi-annual monetary policy hearing, maintaining a cautious stance overall; however, he did not rule out the possibility of an early rate cut, believing that the data from June to July is very important. Several key statements: if the price transmission from tariffs is limited, or if the labor market significantly deteriorates, then a rate cut will become an option; if inflation is milder than expected, a rate cut will come sooner; if the data supports it, the Federal Reserve does not rule out the possibility of a one-time rate cut of 50 basis points.

The popular candidates for the next chair of the Federal Reserve currently have a consistent attitude towards rate cuts.

(2) Fiscal: Expansion is an option and a result

The Trump 2.0 administration has gone through several months of reform attempts, ultimately returning to the old path of fiscal expansion, lowering interest rates, and diluting debt.

The United States frequently faces the issue of the debt ceiling. Adjustments to the debt ceiling are routine for the U.S. government; since the debt ceiling was first set in 1939 (at $45 billion), Congress has raised or suspended the debt ceiling over 100 times. However, to date, the debt ceiling has always been raised or suspended after being reached, without causing substantial default disasters. Since the first suspension of the debt ceiling in 2013, Congress has suspended it eight times, with the most recent being the "Fiscal Responsibility Act" signed by President Biden in June 2023, which suspended the debt ceiling until January 1, 2025. The U.S. debt ceiling was restored to $36.1 trillion earlier this year, and since then, it has been maintained through the Treasury's "extraordinary measures."

A key issue in Trump's tax reform plan is addressing the debt ceiling. The Trump tax reform plan, known as "The One Big Beautiful Bill" (OBBB), mainly includes: tax reduction policies (extending the 2017 tax cuts, making the 37% top personal income tax rate permanent, and introducing new tax incentives), cutting welfare spending (Medicaid reform, adjustments to renewable energy subsidies), energy policies (restoring incentives for traditional energy projects), and adjustments to the debt ceiling.

On May 12, the House Ways and Means Committee released the tax reform bill; on May 22, the House voted to pass the tax reduction bill; on June 16, the Senate version of the tax reduction bill was released, raising the debt ceiling by $5 trillion, while the House version raised it by $4 trillion; On June 29, the U.S. Senate voted to pass the "motion to continue" for the tax reduction bill.

Due to the annual fiscal deficit of approximately $2 trillion in the United States, raising the debt ceiling by $4 trillion/$5 trillion means that the U.S. is unlikely to face constraints from the debt ceiling before the midterm elections in November 2026.

In terms of timing, tax cuts are prioritized, while spending cuts are postponed. The spending and tax reduction scale of the tax reduction bill is concentrated in the first few years of the next 10 years, while spending cuts are concentrated in the years following Trump's departure from office, which will lead to a rapid increase in the U.S. fiscal deficit during Trump's term. The CBO estimates that about 55% ($2.8 trillion) of the total deficit increase will occur in the first half of the budget window, but only 40% of the spending cuts ($970 billion) will accumulate during this period.

(3) Investment: Strong Equipment Investment

On the investment side, U.S. private investment is performing strongly, mainly supported by equipment investment.

Additionally, residential investment is currently weak, primarily suppressed by the high interest rate environment; construction investment experienced a wave of investment boom in 2022-2023, mainly supported by Biden's three major bills.

Behind equipment investment is a new round of technological innovation cycle. The capital expenditure of the U.S. technology sector as a percentage of revenue has reached 10.3%, the highest level since 1990; the ratio of capital expenditure to net profit has even reached 48.8%.

(4) Inventory: Positive Support

The inventory cycles in both China and the U.S. are at historical lows; the European inventory cycle is at a historical median level, with low inventory levels in countries other than Germany.

Although the inventory cycle is a lagging indicator in the economic cycle, it plays a key role in whether the economy can recover smoothly and the strength of the recovery. If inventory levels are high, companies face pressure to reduce inventory; even if demand warms up, their willingness to invest in expansion may be weak. Conversely, if inventory levels are low, even marginal improvements in demand may lead to a new round of investment expansion cycles for companies

From the perspective of segmented industries, the inventory growth rate in most industries in the United States is below the historical 50th percentile.

(5) Prosperity: Possible Recovery Trend in Manufacturing

In the past two months, the spread between the ISM and S&P manufacturing PMI data in the United States has widened. The ISM focuses on multinational corporations, while the S&P emphasizes small and medium-sized enterprises in the U.S., indicating that the domestic fundamental situation in the U.S. is better.

From a global perspective, there may be a certain recovery trend in manufacturing. The manufacturing PMIs in the Eurozone, China, Japan, and the UK have begun to show signs of rising from low levels.

Summary:

Since the "Reciprocal Tariffs (April 2nd)," most major global equity markets have performed outstandingly, and even the prices of globally priced commodities like copper have gradually strengthened. From the performance of global asset prices, it seems that tariffs, inflation, and short-term economic uncertainties are not as significant in the pricing factors.

So, what exactly is the current market trading? In the second half of the year, will the global fundamentals stabilize, and is there a possibility of renewed recovery under monetary and fiscal stimulus?

In comparison, the current cyclical structure is somewhat similar to the second half of 2019:

Monetary Cycle: Global monetary easing is ongoing, with the interest rate cut cycle lasting over a year; it is only a matter of time before the Federal Reserve accelerates rate cuts.

Fiscal Cycle: Expansion in Europe and China; U.S. tax cuts are about to take effect, and the debt ceiling will also be lifted.

Investment Cycle: Strong investment in U.S. technology and equipment; residential investment is at a low level, sensitive to interest rates.

Inventory Cycle: There is positive support. The inventory cycle in China and the U.S. is at historical lows, while the inventory cycle in Europe is at the historical median.

Prosperity Indicators: The current services PMI is relatively robust, and there is a marginal possibility of recovery in the manufacturing PMI.

Currently, the third quarter is a verification and turning point. The extent of the trade war's drag, whether inflation concerns can be disproven, and the short-term impact of U.S. Treasury bonds in the third quarter are all uncertain factors. However, under the dual easing of fiscal and monetary policies in major global countries and the support of the inventory cycle, the trend of fundamentals may be somewhat optimistic.

III. Europe: Fiscal Expansion + Monetary Easing, Actual Inventory Levels Are Not High

(1) Monetary Cycle: After 8 rate cuts, inflation stabilizes near the target in Europe, signaling the end of the European rate cut cycle, with one more cut expected in the second half of the year.

By mid-2024, inflation in the Eurozone and major countries is expected to fall to around 2%. The European Central Bank (ECB) will initiate a new round of rate cuts. After 8 rate cuts, the three main interest rates in the Eurozone—main refinancing rate, overnight deposit rate, and overnight loan rate—have fallen to 2.15%, 2.00%, and 2.40%, respectively, at historical lows. Mid-term inflation stabilizes near the target, with the harmonized CPI for the Eurozone, Germany, and France in May at 1.9%, 2.1%, and 0.6%, respectively, around the inflation target of 2%. According to the overnight index swap implied ECB rate cut outlook, the ECB's rate cut cycle is nearing its end, with one more cut expected in the second half of the year.

(2) Fiscal Cycle: Germany's fiscal policy shifts significantly, introducing a trillion-euro plan over ten years.

Although government spending in France is rising and fiscal revenue growth is below expectations, leaving little room for fiscal maneuver; Germany's fiscal policy is shifting after more than a decade of the "debt brake" system, with a trillion-euro fiscal stimulus plan introduced over ten years.

(1) After the 2008 subprime mortgage crisis, Germany enshrined the "debt brake" system in its constitution, the Basic Law, in 2009, stipulating that unless facing special circumstances, the federal government cannot incur debt for state governments, and the federal government's new financial deficit cannot exceed 0.35% of GDP, among other provisions.

(2) The "debt brake" system, lasting over a decade, allowed Germany to adhere to fiscal discipline, performing relatively well during the European debt crisis and having significant leverage space during the pandemic. However, during economic downturns, especially amid the current energy crisis, global supply chain tensions, and high automotive inventory, it severely restricted Germany's counter-cyclical fiscal adjustment space.

(3) On March 22, 2025, German Federal President Steinmeier officially signed the amendment to the Basic Law, and the next day the bill was published in the Federal Law Gazette. Germany officially passed a trillion-euro fiscal expansion plan over ten years, breaking the Basic Law's restrictions on fiscal deficits and entering a more relaxed era of debt finance.

On June 24, 2025, the German government cabinet approved the draft budget for 2025 and the fiscal budget framework for 2026 (including a medium-term fiscal plan extending to 2029). (1) Investment amounts will significantly increase in the coming years. In 2024, Germany's investment amount is only EUR 74.5 billion, while the newly approved investment amount for Germany in 2025 will increase to EUR 115.7 billion, and the investment amount in 2026 is expected to be around EUR 123.6 billion. By 2029, Germany will maintain an annual investment of about EUR 120 billion.

(2) The draft budget for 2025 has been approved, which means that Germany's finances are expected to gain momentum in the second half of the year: Due to the collapse of the previous German government led by Scholz in November last year, the 2025 budget was not approved, and Germany has been operating under a temporary budget since 2025. The newly approved draft budget for 2025 significantly increases the investment amount to EUR 115.7 billion, indicating that finances will gain momentum in the second half of the year.

(3) Military spending will increase significantly: By 2029, Germany's defense spending will account for 3.5% of Gross Domestic Product (GDP). Among them, Germany's defense spending in 2025 is expected to be around EUR 95 billion, and by 2029, defense spending will reach EUR 162 billion.

(4) According to the plan, the budget framework for 2026 will be discussed in the Bundestag in September and will be approved in the Bundestag in November, followed by approval in the Bundesrat in December.

(3) Inventory Cycle: Actual inventory in Europe is not high, with high levels mainly in Germany's automotive inventory.

(1) In May 2025, the EU finished goods inventory was at the 58.8th percentile since 2000, indicating that European inventory is around the historical median, higher than the inventory levels in China and the U.S.

(2) However, in reality, the high inventory in the EU is mainly in Germany. In May 2025, the inventory levels in Germany, France, Italy, and Spain were at the 80.9%, 37.5%, 24.0%, and 21.0th percentiles since 2000, respectively. The inventory levels in France, Italy, and the UK have already decreased to levels near those in China and the U.S.

(3) The high inventory in Germany is also structural, mainly due to the cancellation of subsidies for new energy vehicles, high costs, and the impact of Chinese new energy vehicles, leading to high automotive inventory in Germany.

(4) Economic Indicators: PMI Repair Trend is Obvious, Service Industry Recovers Better than Manufacturing.

(1) Eurozone Service PMI Reaches the Boom-Bust Line, Manufacturing PMI Stabilizes: In June 2025, the Eurozone service PMI is 50.0%, relatively stable, while the manufacturing PMI marginally stabilizes at 49.4%;

(2) Germany's Service PMI Recovers Faster than Manufacturing: In June 2025, Germany's service PMI is 49.4%, a significant rebound from 48.5% last month; the manufacturing PMI is 49.0%, up from 48.3% last month.

(3) France's Manufacturing and Service PMIs Both Decline: In June 2025, France's service PMI is 48.7%, down from 48.9% last month; the manufacturing PMI is 47.8%, down from 49.8% last month.

(4) UK's Service PMI Recovers Faster than Manufacturing: In June 2025, the UK's service PMI is 47.7%, up from 46.4% last month; the manufacturing PMI is 51.3%, up from 50.9% last month.

4. China: A New Round of Fiscal Expansion Cycle

1. China Welcomes a New Round of Fiscal Expansion Cycle: Over the past 20 years, China's PPI has experienced 4 upward cycles driven by 4 rounds of fiscal expansion, and the ratio of broad fiscal spending to nominal GDP needs to exceed 5 percentage points, corresponding to the years 2007, 2009, 2015-2016, and 2020.

In 2006-2007, global economic recovery and the inventory replenishment resonance between China and the U.S. led to a broad deficit rate increase of nearly 6 percentage points;

In 2008-2009, the four trillion yuan plan resulted in a broad deficit rate increase of nearly 5 percentage points.

In 2015-2016, the monetization of shantytown renovations and supply-side reforms led to a broad deficit rate increase of nearly 10 percentage points.

In 2020, special government bonds stimulated post-epidemic recovery, resulting in a broad deficit rate increase of 5 percentage points.

After the Two Sessions, the broad fiscal situation in 2025 shows significant changes compared to the past 3 years, with the proportion of GDP increasing by about 1.5 percentage points compared to last year (considering capital expenditures in AI, the total amount may be even higher).

2. Monetary Cycle: The transition from loose monetary policy to loose credit is still not smooth, and there is still room for interest rate cuts in the future.

(1) Although there have been signs of a bottoming out and recovery in social financing since the beginning of this year, from a detailed perspective, the recovery in social financing is mainly driven by a significant increase in local government bonds and national bonds, which grew by 115.2% in the first half of 2025 compared to the same period in 2021-2024.

(2) Although credit also showed signs of bottoming out and recovering at the beginning of this year, it was mainly due to the surge in bills, while medium- and long-term loans, which represent real financing demand, remain relatively weak, declining for 24 consecutive months.

3. Inventory Cycle: Currently, China's inventory cycle is at a historical low. From a detailed perspective, relatively high inventories are mainly concentrated in the infrastructure chain (railway ships, non-ferrous metals, liquor, etc.) and the export chain (textiles and clothing, rubber, etc.), and inventories may provide positive support for the subsequent global fiscal stimulus cycle.

Note: This article has been abridged.

Authors of this article: Liu Chenming, Li Rujuan, Yu Kecheng, Chen Zhenwei, Source: Chenming's Strategic Deep Thinking, Original Title: "【GF Strategy Hong Kong Stocks & Overseas】What is the Probability of Global Resonance Recovery?"

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