ZhiKe | Is the Fed Standing Idly By as Tariffs Bite?
Author | Huang Yida
Editor | Zheng Huaizhou
This week (April 7th - 11th), the A - share market declined significantly. Especially after the Black Monday, the Shanghai Composite Index dropped by 3.34% during the week, closing at 3,238 points on April 11th; the Wind All - A Index fell by 4.31% this week.
In terms of sectors, among the 31 first - level industries of Shenwan, only four industries, namely agriculture, forestry, animal husbandry and fishery, commerce and trade retail, military industry, and food and beverage, rose this week, while the remaining 27 declined. Among them, sectors such as power equipment, communication, machinery and equipment, and media declined this week.
In terms of style, constrained by the sharp market fluctuations, among the 39 broad - based and style indices of Wind, only the Beijing Stock Exchange 50 Index rose slightly, while the rest declined. Even so, there are still obvious structural differentiations. Large - and medium - cap value stocks represented by the SSE 50 and SSE 180 are relatively resistant to decline, and so are dividend stocks. In contrast, technology stocks have declined significantly, and the indices related to the STAR Market/GEM led the decline.
The trend of the Hong Kong stock market is similar to that of the A - share market, with a larger decline. The Hang Seng Index dropped by 8.47% during the week; the Hang Seng Tech Index fell by 7.77% this week. In terms of sectors, all 12 Hang Seng industry indices declined this week. Sectors such as essential consumption, telecommunications, and public utilities are relatively resistant to decline, while sectors such as non - essential consumption, energy, and healthcare declined significantly.
In terms of overseas major assets, the three major U.S. stock indices all rose this week. In Europe, most of the major stock indices in Western Europe, except for Spain, closed down, while most of the major stock indices in Eastern Europe closed up. In the Asia - Pacific region, most of the major stock indices, except for those in South Korea and Vietnam, closed down. The U.S. dollar index declined significantly this week.
Chart: Weekly gains and losses of major global assets; Source: Wind, 36Kr
01 How does the Fed's interest rate cut affect the process of the tariff war?
Both the A - share and Hong Kong stock markets experienced a Black Monday this week. The main reason is Trump 2.0. Although the market performance seems to imitate that in 2018, the current situation is quite different from that year. In our Zhike article "What is lost will always come back" on April 7th, the basic judgment on the impact of current tariffs on the A - share market is as follows:
Compared with 2018, China's dependence on direct exports to the United States has decreased significantly, and the level of industrial autonomy has also increased significantly. At the same time, it is currently on the eve of a new industrial revolution wave such as AI and robotics. Therefore, the support of the fundamentals for valuation is stronger than in 2018.
It can be seen that after a long - term trend of anti - globalization, the impact of the tariff war on the A - share market has actually weakened marginally, and the market has overestimated the impact of tariffs in the short term. However, the tariff issue can still affect investors' short - term risk appetite from the emotional aspect. So the short - term impact of tariffs on the A - share market depends on the intensity and timing of the implementation of specific tariffs under the game between the two countries. Therefore, judging the room for the U.S. to play its cards is an important window for pre - judging the short - term impact of tariffs.
Speaking of the U.S.'s room for action, the interest rate level and the decision on interest rate cuts will have a huge impact on the future direction of the tariff war. The core logic of how interest rates affect tariff policies is: with the implementation and deepening of tariff policies, imported inflation usually occurs. Once the re - inflation expectation in the United States heats up, it will directly affect the Fed's interest rate decision. Once the interest rate cut slows down or even turns into an interest rate hike, with the high interest rate, the social financing cost will increase, which will negatively affect the economic operation, and the recession expectation will in turn affect asset prices.
Therefore, to some extent, the interest rate level and the pace of interest rate cuts determine the room for the U.S. to make relevant decisions in tariff policies in the future. The Fed's decision on the benchmark interest rate mainly focuses on two major targets: inflation and employment. From the perspective of the interest rate cycle, after the historical high inflation after the epidemic, although the current inflation level in the United States has approached the 2% policy target, the interest rate level is still relatively high. Considering the current orientation of the U.S. tariff policy, the White House has a clear demand for interest rate cuts to ensure the stable operation of the U.S. domestic economy.
Looking at the trend of inflation in the United States, the inflation data in March showed an unexpected decline. Specifically, the year - on - year CPI in March was 2.4%, and the year - on - year core CPI was 2.8%. The decline was higher than market expectations. In particular, both the year - on - year and month - on - month core CPI, which the Fed attaches great importance to, declined significantly. In terms of rhythm, with the continuous decline of the inflation level, especially the year - on - year CPI in the past year has been below 3%, the base effect in the future will be significantly weakened. Therefore, the decline rate of inflation data after April is likely to slow down.
Chart: Year - on - year U.S. CPI and core CPI; Source: Wind, 36Kr
Moreover, since the tariff policy was not fully effective in March, the inflation data in March did not reflect the impact of tariffs. Therefore, there is a possibility of imported inflation in the future. In terms of rhythm, the impact of the tariff policy that took effect in April may first be reflected in the inflation data in May. Considering the pre - tariff rush of exports from non - U.S. countries and the delayed implementation of the tariff policy, the obvious impact of tariffs on inflation data may appear at a later time.
For the Fed, under the dual - target framework of interest rates for employment and inflation, the current decision - making on interest rates will be more cautious. Considering the impact of tariffs on the U.S. domestic economy, as the recession expectation heats up, it will drive the Fed to continue to cut interest rates. However, as the imported inflation caused by tariffs rises, the Fed's decision on interest rates faces a dilemma. On the other hand, the Fed's interest rate decision is also one of the tools for the game with the White House. That is, the interest rate tool can, to a certain extent, force the White House not to be too radical in tariff policies. In other words, without an interest rate cut in the short term, it will compress the U.S.'s decision - making room in tariff policies.
Therefore, for the U.S. stock market, with the continuation and deepening of the tariff war, and the Fed becoming more cautious in interest rate decision - making, since there is a high probability that there will be no interest rate cut in the short term, the U.S. economy may experience a recession. Considering the high valuation of the U.S. stock market due to the long - term bull market, as the U.S. economy weakens, there is a high risk of a decline in the U.S. stock market.
02 Investment Strategy
Looking back at the A - share market, the actual impact of tariffs has weakened significantly compared with 2018. There may be short - term event shocks related to tariffs in the future, but the long - term expectation is still based on its own situation, depending on the repair situation and rhythm of its own fundamentals.
Currently, the mainstream view in the market is that the domestic economy is still in a weak recovery. Therefore, the A - share market is still in the bottom - building stage in the long term. During this period, the main market themes are defense and technology.
In the market where stock assets are generally weak, the dividend strategy focusing on defense will continue to be the main trading theme. In terms of technology, since it is currently on the eve of a new industrial revolution wave such as AI and robotics, coupled with the profit - making effect, technology - related trading will also be the focus of market attention. In terms of structure, the application and infrastructure ends of AI are favored. The progress of AI large - scale models at the application end is still the core catalyst that the market focuses on.
At the same time, in order to shield the impact of trade tariffs in trading, sectors related to the domestic cycle will be a safe haven for funds. As a pro - cyclical asset, the improvement of the fundamentals of the large - scale consumption sector depends on the overall economic recovery. Therefore, in the medium term, trading will probably focus on relevant stimulus policies represented by "trade - in" programs.
*Disclaimer:
The content of this article only represents the author's views.
The market is risky, and investment should be cautious. In any case, the information in this article or the opinions expressed do not constitute investment advice to anyone. Before making an investment decision, if necessary, investors must consult professionals and make decisions carefully. We have no intention to provide underwriting services or any services that require specific qualifications or licenses for the trading parties.