Minsheng Macro Lin Yan: Is "strong data" an illusion? The logic of the US economy's false prosperity is exposed, and Powell's interest rate cut timetable hides secrets!

On July 31, Lin Yan, Chief Macro Analyst at Minsheng Securities, guest-starred in the "Celebrity Lounge" of Wall Street Insights live broadcast. At the first moment after the July FOMC meeting concluded, he helped you understand what the Federal Reserve's "wait-and-see" means. For the live replay, please click → Will the July Federal Reserve interest rate meeting become a turning point for the market?

1. The U.S. second-quarter GDP growth rate announced last night far exceeded expectations, but the market reaction was quite mixed. How should we understand the "discrepancy" between economic data and the market?

How to interpret the U.S. second-quarter GDP data: This data is indeed slightly higher than the consensus expectation, but the extent is actually not large. The market originally expected around 2.6%, while the actual figure came out to be around 3%, which indeed exceeded some expectations.

The reason for the mixed market reaction is that there are actually "mixed blessings" behind it. If you take a closer look at the data, you will find that a large part of this growth comes from changes in imports.

Why did GDP jump from -0.5% in the first quarter to 3% in the second quarter? One of the core reasons is the reversal of imports. Everyone remembers that in April, Trump announced a new tariff policy, and before the tariffs officially took effect, companies engaged in "panic importing," leading to a surge in imports in the first quarter. Since imports are a deduction item in the GDP expenditure method, the more imports there are, the lower the GDP, which significantly lowered the GDP in the first quarter.

By the second quarter, the tariffs were officially implemented, and companies no longer concentrated on panic importing, leading to a significant decrease in imports. This increase and decrease alone caused about a 10 percentage point difference in the quarter-on-quarter annualized rate of GDP due to imports. From this perspective, the second-quarter GDP appears to have "jumped," but it is actually a technical correction.

After excluding the disturbance factor of imports, the other components are actually not very optimistic. Consumption basically met expectations, contributing about 1 percentage point to GDP; however, investment was the biggest drag, around -3 percentage points.

In particular, corporate investment showed a significant slowdown, which is related to the debt refinancing pressure mentioned in previous reports. For example, many companies issued a large amount of low-interest debt in Q1 2020, and now these debts are gradually maturing (2025-2027). Due to still high interest rates, companies either choose not to borrow anymore (balance sheet reduction) or are forced to refinance at higher interest rates, which has a significant suppressive effect on investment confidence.

Therefore, if you only look at the numbers, you might feel that the U.S. economy is "heating up again"; but if you strip away the import fluctuations caused by tariffs, you will find that actual economic growth is still moderate, or even slightly slowing.

2. After Powell's speech, U.S. stocks experienced a roller coaster of "initial decline followed by rise." What does this reflect about the market's internal struggles?

This is a very good question. We also stayed up late last night to follow this FOMC meeting closely At first, the market did not have high expectations for the July interest rate meeting. This is because it was generally believed that there would be no interest rate cut this time, and there wasn't much to look forward to, with the real key being the meeting in September.

However, despite this, the market has already priced in expectations for a rate cut in September quite fully. According to tools like FedWatch, the market expects a 25 basis point rate cut in September with a probability of about 60%-70%. In other words, investors already have a strong bet on a rate cut.

But at the beginning of the press conference, Powell did not clearly signal anything regarding a rate cut in September, and his attitude was quite ambiguous for a time. The market began to doubt whether the Federal Reserve was planning to cut rates again, leading to a brief decline in the stock market.

However, in subsequent remarks, Powell's description of the economy and employment clearly began to lean towards a more dovish stance. He did not completely rule out the possibility of a rate cut but continued to emphasize monitoring data and relying on data. He also pointed out that there are signs of a slowdown in the U.S. economy.

Additionally, market sentiment was influenced by a key background: the Federal Reserve has taken no action in the past five interest rate meetings, mainly because Trump proposed a new round of tariff policies during this period.

The process from the announcement to the implementation of these tariff policies was very uncertain—the tax rates, exemptions, and negotiation details changed frequently, and even the final tax rate was unclear to the market. Therefore, for the past few months, the Federal Reserve has been in a "wait-and-see" mode, unable to see the situation clearly.

However, recently, this uncertainty has been decreasing. The U.S. has successively reached tariff agreements with major manufacturing countries such as the European Union, Japan, and Southeast Asia, with tax rates stabilizing roughly in the 10%-20% range. This means that after the policy is implemented, the Federal Reserve can more clearly assess its actual impact on the economy, allowing for policy adjustments.

Moving forward, the market will pay more attention to employment data, especially the non-farm payroll reports for August and September. Because the September interest rate meeting is relatively late, the non-farm data will be released in advance, and if the data is weak, the Federal Reserve is more likely to cut rates.

Overall, the current market expectation for a rate cut in September is a "50:50 baseline assumption." If future data strengthens the expectation for a rate cut, the market will rise and recover; conversely, if the data does not support a rate cut, expectations may decline.

Additionally, regarding the interpretation of employment data, I would like to particularly remind you: many investors only look at non-farm job additions and the unemployment rate, but these indicators have limitations—they do not consider changes in the labor force participation rate. If the participation rate declines, even if employment numbers rise, the unemployment rate may remain unchanged or show misleading changes.

I suggest paying attention to some more detailed indicators, such as:

New job additions ÷ job openings, this type of ratio can more accurately reflect the actual tightness of the job market.

3. Current CME implied probabilities show that expectations for no rate cut in September are rising. Do you think this pricing is reasonable? Will the Federal Reserve continue to "wait for data"?

I believe the pricing of "50-50" is reasonable.

For those of us engaged in macro analysis, the first half of this year has actually been a very "frustrating" phase—whether looking overseas or domestically, the overall situation is in a very chaotic state.

Why do I say this? Because this round of policy expectations revolves too much around the uncertainty of tariff policies. Sometimes tariffs are suddenly increased, sometimes there are temporary exemptions or delays, and the policy changes are frequent with inconsistent implementation times.

More critically, this uncertainty affects not ordinary consumers, but enterprises engaged in international trade. For example, when the U.S. imposes a 100% tariff on China at a certain stage, while Southeast Asia is exempted with only about 10%, this can create a huge arbitrage opportunity—enterprises will engage in re-export trade to capture this profit.

Such operations will lead to a series of chain reactions, such as:

• Dramatic fluctuations in shipping prices
• Warehouse costs soaring and plummeting
• Port throughput fluctuating wildly

For instance, during the most chaotic period of tariff expectations in April and May this year, some ports on the U.S. West Coast (such as the Port of Seattle and the Port of Los Angeles) had throughput that was only 3.6% of normal levels at one point, but recently it has returned to near full capacity.

These significant fluctuations are also reflected in trade data and GDP data. Just like the example I mentioned earlier regarding the second quarter GDP, both the import and export data and GDP data of China and the U.S. are much stronger than expected, and behind these figures actually contains a lot of elements of "rushing imports and exports" and "rushing re-exports."

In addition, there is also a time lag in data recording. For example:

• The goods we export to Southeast Asia have already been counted in China's GDP or customs statistics;
• However, these goods have not yet cleared customs in the U.S., and may still be in transit, leading to a "gap" in U.S. imports, causing data anomalies.

This lag effect not only affects GDP but also impacts employment data. Positions such as dockworkers and truck drivers—during the pandemic, we also saw that the abnormal fluctuations in non-farm data were often caused by actual issues such as labor shortages, high labor intensity, and slow recovery from illness.

So overall, the current economic state remains quite chaotic.

However, by the end of July, the tariff rates of major economies have basically been clarified, and the uncertainty of this phase has begun to dissipate, entering the "observation of actual effects" phase.

I believe the September meeting will be a crucial observation window. At that time, we can look at:

Will inflation show signs of rebound or decline?

Is the job market still stable?

Are high prices suppressing consumer demand?

These are all prerequisite assumptions that determine the path of monetary policy, and the Federal Reserve indeed needs to wait for more data to verify.

4. Will "tariff disturbances" still become a mainline risk in the future? How significant is their impact on inflation and policy paths?

I think that looking at it now, the impact of tariffs on the risk appetite of the capital market has clearly weakened. You will find that in the past few months, regardless of how hawkish or dovish Trump has been, the US stock market continues to rebound, and the market has developed a sense of "detachment." Moreover, the major negotiations have basically been signed, and recently there has only been a "threat" to impose a 25% tariff on India, but after negotiating with India, there are not many major countries left that can have a substantial impact. Therefore, the uncertainty phase regarding tariffs has come to an end.

But the question is: what is its "impact path"? When will it start to manifest? How significant is the impact? That is the key.

At the beginning of the year, everyone was calculating the impact of tariffs—such as how much the tax rate would increase and what the impact on the US-China economy would be—but I want to say that such calculations usually have a very large margin of error. It’s fine to make interval predictions, but making precise predictions is almost impossible, with very low confidence. Why? Because even just a change in expectations or a shift in short-term policy direction is enough to cause businesses to shuffle goods back and forth across the sea, transporting them 20,000 nautical miles and rebranding them; this kind of "transshipment trade" brings too many variables.

Moreover, even after the tariff policy is implemented, the path through which it transmits to inflation is also very complex and multi-layered. For example:

Which products will start to be discontinued because "they are really not profitable anymore";

Which products have relatively rigid prices that will transmit downstream;

During the transmission process, tariffs cannot simply be added to prices unchanged; they must be shared by different links in the industrial chain;

Who is stronger? Who has more inventory? Who has tighter short orders? Who has more pricing power? All these factors will affect the pace and magnitude of the transmission.

So to summarize:

In the short term, the "emotional impact" of tariffs on the market has already diminished marginally; even if Trump posts something on Real Social, it will not change the market direction;

But in the medium term, what really needs attention is the change in fundamentals—for example, rapid consumption of corporate inventory and rising inflation, which are the "substantial impacts" that the market must take seriously;

At that time, corporate profits will be substantially squeezed, which will trigger a repricing of profit expectations and monetary policy by the market.

Currently, it is still more about the game of expectations, or the adjustment of valuations. Once it enters the "actual impact" phase, the market reaction will be more intense.

5. The US stock market continues to hit new highs, and the Asian and European markets are also strengthening. What do you think of this "global synchronized optimism"? Is it the starting point of a real bull market, or just a peak of sentiment?

This question is actually something you should ask semiconductor analysts or AI analysts, because this round of global synchronized optimism essentially starts from the improvement of sentiment in the US stock market, driving an increase in global risk appetite.

On one hand, the US dollar index has fallen from 110, which means that funds are starting to flow out of the US—this is the core driving force. You see the dollar weakening, and funds are flowing from the US to other non-US markets; in non-US markets like Hong Kong, the Hong Kong dollar exchange rate is under pressure, local liquidity is flooding, borrowing costs are very low, and naturally, risk assets rise On the other hand, even though the US dollar is flowing out, US stocks are still reaching new highs. The reason behind this is that there is still a large amount of "excess liquidity" in the US, and this liquidity is combined with strong micro themes—such as the AI industry chain and expectations of capital expenditure expansion, with leading stocks like Nvidia continuously having their expectations raised.

Another point that is easily overlooked is that the US economy actually has a "K-shaped distribution", meaning not everyone is feeling the improvement. You see US stocks hitting new highs, but in reality, many people do not have assets, and some may have just "entered the market" during the significant drop in US stocks in April. They belong to the group that is in the bottom 50% or 70%—they did not hold stocks before and are now using stock assets to achieve wealth appreciation. Therefore, this round of market activity also has the power of the "wealth compensation effect", supporting the spread of sentiment.

In summary, this is a round driven by:

• Local excess liquidity in the US,
• Weakening dollar leading to capital outflow,
• AI and other themes driving continuous upward revisions of micro expectations,
• And the "profit effect" brought about by the rebound in asset prices—collectively driving the global risk appetite recovery.

As for whether this is the starting point of a bull market or the peak of sentiment? I think the answer should be viewed in two parts:

First, there is currently no evidence to the contrary, so "maintaining optimism" is reasonable. Especially since the earnings of several representative AI companies just announced this week are also quite good, the theme is still being reinforced.

Second, we must be aware that the "financial cost pressure" is gradually approaching—for example, if you borrowed money at low interest rates before, now the debt needs to be extended, and interest rates are rising, future capital expenditures will become increasingly expensive. If the profitability on the AI application side does not keep up, the pressure throughout the entire chain will quickly transmit.

In simple terms:

• If the "speed of AI profitability" can keep up with the "speed of rising financing costs," this round of market activity can continue;
• If it cannot keep up, then risk appetite may experience a reversal.

So now is neither the peak of sentiment nor the confirmation point of the bull market's starting point; it is more like a "high-level oscillation phase" supported by multiple forces, and the direction will depend on the subsequent earnings realization and the results of the race against funding costs.

6. Gold suddenly "plunged" last night; is its safe-haven attribute weakening? Is gold still worth long-term allocation in the current macro environment?

The core reason for gold's sharp decline is not a weakening of its safe-haven attribute, but rather the significant rise of the US dollar. Currently, the strong performance of US GDP data is pushing the dollar close to the 100 mark, and gold, as a dollar-denominated asset, is naturally under downward pressure.

However, this does not mean that gold lacks allocation value. You must understand that if it truly had no value, it would not be priced at $3,300, and it might not even reach $2,300 or $1,700—its mining cost itself is the bottom line of value.

The current macro background is characterized by rising US Treasury yields and global capital flowing back to the US from emerging markets, which exerts pressure on gold, an asset with "strong financial attributes." However, in the medium to long term, the US debt cycle has entered a phase of "exchanging expensive debt for cheap debt," and the problem can ultimately only be solved by lowering interest rates Once we enter a rate-cutting cycle, the opportunity for gold will re-emerge.

In addition, many central banks have increased their gold holdings in recent years, essentially to counter the risks of U.S. dollar hegemony and financial sanctions. As long as Trump still has a chance to return to power, this allocation logic will not weaken.

I have always believed that gold is neither a financial asset nor a traditional commodity. Financial assets must yield interest, and commodities must have a supply-demand feedback mechanism (if prices rise too high, no one buys; if they fall too much, no one sells). But gold is the opposite; the more it rises, the more people buy. It is more like a "currency" that serves as a store of value.

If measured by purchasing power parity, the price of gold at $900 in 1980 might be equivalent to $10,000 to $20,000 today, so its current price is actually not high.

Finally, you will find that even though risk appetite has significantly increased in recent times, gold has not really fallen, which actually indicates that its safe-haven and anti-inflation properties remain very strong.

7. What market opportunities and risks should we pay attention to in the second half of the year?

The structural opportunity I am most focused on in the second half of the year is actually the revaluation of Hong Kong stocks. Since 2021, Hong Kong stocks have experienced a long bear market, but some core assets, such as Tencent, Alibaba, and Baidu, have still shown strong profitability during this downturn. Their business fundamentals are not inferior to the seven giants in the U.S. stock market; they have just been long suppressed in valuation. I believe these companies deserve a higher valuation premium.

Currently, the fundamentals of our economy are in a "bottoming phase," and policies are also gaining momentum. At the same time, the "14th Five-Year Plan" is about to enter its concluding phase, and the "15th Five-Year Plan" will place greater emphasis on the development direction of new momentum. These companies often stand at the forefront of new momentum, possessing dual opportunities of policy support and valuation recovery.

Moreover, this year, many high-quality companies from the A-share market have listed in Hong Kong, such as CATL raising a large amount of financing in Hong Kong, but this has not caused a significant impact on Hong Kong stocks, indicating that the liquidity of Hong Kong stocks is steadily increasing. Against the backdrop of a weakening dollar, Hong Kong stock assets are more attractive to foreign capital— they are pegged to the dollar, have strong liquidity, and allow for flexible capital inflows and outflows, which are advantages compared to A-shares.

From a broader cyclical perspective, the U.S. economy has passed its peak and is entering a downward cycle. The dollar will also enter a trend of weakness, possibly maintaining a decline for 1-2 years, which is favorable for liquidity allocation in non-U.S. economies, with Hong Kong stocks likely being the primary beneficiaries.

As for risks, I am mainly concerned about whether the U.S. will experience a "rapid economic decline." On one hand, the fiscal pressure in the U.S. has not eased; on the other hand, if inflation further declines, leading to sustained rate cuts, it may indicate structural problems in the economy.

Additionally, from a valuation perspective, U.S. stocks are currently not cheap, and one could even say they are extremely low in cost-effectiveness. A former colleague of mine once used the "ERP (Equity Risk Premium)" model for calculations, and the results showed that the current ERP for U.S. stocks is negative, meaning: taking on the risk of stocks is not as cost-effective as buying bonds — this is a serious deviation from common sense. Historically, similar situations have only been seen in 1998-99 Therefore, once the risk appetite reverses and the market begins to price in bad news, U.S. stocks may face nonlinear adjustment pressure, which is something I particularly want to remind investors to pay attention to.

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