How much longer do we have to wait for policy changes to come?

It's a familiar taste again. In the past two years, as the fourth quarter approaches, both China and the United States have staged policy shifts in the market. So, who will have a bigger "surprise" this time? In 2022, China is seeing a weakening impact of public health events and financial support for real estate, while the U.S. is anticipating the "brutal" end of rate hikes. Looking ahead to 2023, China is no longer mentioning "housing is for living, not for speculation," shifting towards supporting real estate and the capital market, while the U.S. is starting to imagine the Fed beginning rate cuts. Currently, it seems like history is repeating itself: in China, there is a growing call for adjustments in existing home loan rates and other real estate policies, while in the U.S., a rate cut in September seems almost certain. The key point this year lies in the speed and intensity of policies.

We believe that as a key policy affecting short-term demand, adjustments to existing home loans, land purchases, and other real estate tools are essential, and based on last year's experience and the current domestic and international environment, the pace of rate cuts for existing home loans may be faster and the magnitude may be greater. However, based on our assessment of next week's U.S. non-farm data, a 25bp rate cut remains our base case scenario, with a high threshold for a surprise 50bp rate cut.

Q: How long do we have to wait for incremental real estate policies?

A: A new round of intensive policy period may be on the horizon, especially in the real estate sector:

First, the effectiveness of early-year real estate policy impulses is waning, making it urgent to introduce incremental policies. The July Politburo meeting proposed to "reserve and timely introduce a batch of incremental policy measures," and "stabilizing the real estate market" has always been the primary consideration for stabilizing the economy. Second, with the accelerated decline in new mortgage rates, there is a need to lower existing rates. The central bank announced that the average interest rate for new mortgages in the second quarter of this year was 3.45%, which is significantly different from the current 5-year LPR rate and the around 4.0% existing mortgage loan rate, indicating that the relative financing cost of the previous homebuying group is relatively high.

If existing home loan rates are cut, how will it differ from last year? The pace of implementation may be faster and the magnitude may be greater.

Taking a lesson from history, the rate cut for existing home loans in 2023 took more than two months from the central bank's support to final implementation. Factors such as bank interest spreads, policy coordination, and summer holidays may have affected the pace of policy implementation. However, compared to last year, first, we have the experience from last year, and second, with the groundwork laid for manual interest rate adjustments earlier, we have reason to believe that the pace of implementing rate cuts for existing home loans this year may be faster. Looking ahead, if the rate cut for existing mortgages is implemented early, the real estate market and the "Golden September and Silver October" holiday consumption may help amplify the policy effects.

In terms of impact, the central bank previously announced that the scale of the first-week rate cut for existing home loans last year involved 21.7 trillion yuan, with a decrease of 73bp. This year, due to the removal of the national floor for mortgage rates, the level of new mortgage rates in some non-core cities is lower. If we consider lowering existing home loan rates to the level of new mortgages, the rate cut in some cities may be close to 100bp In terms of scale, the balance of individual housing loans at the end of last year was about 382,000 yuan. If most of them can apply for interest rate cuts, it means that there may be more room for interest rate cuts on existing housing loans this year.

To reverse the situation of "strong production, weak consumption," more policy efforts may be needed.

On the one hand, if the interest rate cuts on existing housing loans are implemented, it will help to "boost consumption and stabilize credit." Assuming that existing housing loans are reduced to the average new housing loan interest rate level as of the end of June 2024, involving a scale of 37.8 trillion yuan, the reduction is about 58 basis points. Overall, residents' annual interest expenses can be reduced by about 223.4 billion yuan, equivalent to 0.5% of the total social retail sales in 2023, helping residents unleash consumption momentum.

Furthermore, the difference in financing costs among home buyers will be narrowed, theoretically easing the pressure of early mortgage repayment to a certain extent. However, it is worth noting that the fluctuation of housing prices since the beginning of this year may passively increase residents' leverage ratio, affecting residents' expectations. The stability of credit in the household sector may require more support from loose real estate policies. For banks, interest income is expected to decrease. From the perspective of maintaining bank interest margins and financial stability, there is a demand for further reduction in deposit interest rates within the year.

On the other hand, real estate inventory replenishment is also expected to accelerate, including expanding the scope of purchasing housing sources and increasing financial support for inventory replenishment. However, the policy pace may still be "progressive," and the period around the mid-September economic data release may be a period for observing policy implementation.

Q: What is the "deep meaning" behind the new tool of the central bank?

A: This Friday, the central bank announced the first-ever open market operation of buying and selling government bonds. The new tool has many highlights in terms of structure and method. We believe the following three points are worth noting:

Firstly, buying short and selling long, promoting steepening of the yield curve by adjusting the supply and demand of the bond market. This is similar to the "twist" operation of the Federal Reserve, which has been implemented twice by the Federal Reserve in the 1960s and in 2011-2012. By selling short and buying long, it avoids a substantial expansion of the Federal Reserve's balance sheet while lowering long-term interest rates to stimulate market investment. The central bank's operation this time helps to timely correct and prevent the accumulation of risks in the bond market, maintaining a normal upward-sloping yield curve.

Secondly, there is both buying and selling, in line with the neutral positioning of open market operation tools, rather than "quantitative easing." At the same time, the net purchase of bonds for the whole month is 100 billion yuan, maintaining a net injection in terms of total amount, in line with the central bank's stance of "maintaining reasonably ample liquidity" and "supportive monetary policy."

Finally, the central bank's operation may signal a change in the pattern of monetary expansion in the future. After the central bank purchases bonds in the secondary market, the asset side increases government debt, while the liability side increases government deposits. If the central bank increases the scale of bond purchases in the future, approaching or exceeding the quantity of operations such as OMO and MLF, the pattern of monetary expansion will also shift from the previous focus on commercial bank debt to government debt. The importance of the central government in the process of credit expansion has also increased.

In addition, there are several details worth noting about the central bank's operations. Firstly, unlike the daily announcements of OMO and MLF operations, the new tool is published with monthly data, making the end of the month or the central bank's buying and selling of government bonds the observation point. Secondly, the specific terms, scale, and timing of bond transactions are not disclosed, which may reflect the central bank's consideration to avoid speculation in the bond market and prevent the formation of one-sided expectations.

Q: What is the threshold for a 50bp rate cut in September in the non-farm payroll report?

A: The market still has an obsession with a 50bp rate cut this year. Although the probability of a 25bp rate cut in September this week has remained around 70%, the market is still fixated on a 100bp rate cut for the year. This means that with only 3 more interest rate meetings left, one of them would need to have a 50bp rate cut. Will it be in September?

Our inclination is "not likely". It is expected that there will be an increase in non-farm payrolls in August compared to July, and the unemployment rate may slightly decrease. The unemployment rate in July rose from 4.05% to 4.25%. However, of this 0.2% increase, temporary unemployment contributed about 60%. It is expected that the upward trend in the unemployment rate will pause in August. Due to the impact of Hurricane "Beryl", non-farm payrolls plummeted by 114,000 in July, and it is expected that there will be a significant rebound in non-farm payrolls in August. Firstly, weekly initial jobless claims are trending downwards in August, secondly, intentions for layoffs by companies remain low. For example, expectations of future layoffs in the New York Fed survey and WARN Notice layoffs by the Cleveland Fed both decreased in July.

By industry, the end of the hurricane is beneficial for manufacturing job growth; the peak season for service consumption in August may support leisure and hotel industry employment; the information industry and financial industry, which performed weakly in July, are expected to rebound in terms of new job additions; a sluggish real estate sector may lead to a decline in new jobs in the construction industry.

However, the trend of labor market slowdown remains unchanged. The rise in layoffs usually lags behind the decrease in hiring intentions, and U.S. corporate hiring intentions have cooled significantly since 2023, as the labor market supply-demand gap has also narrowed. A rate cut in September is almost certain.

Therefore, a 25bp rate cut in September is still highly probable at present, but if the increase in non-farm payrolls falls significantly below expectations, below 100,000, the unemployment rate exceeds expectations, or a one-time 50bp rate cut may be on the table.

Risk Warning: Future policies fall short of expectations; domestic economic changes exceed expectations; geopolitical factors exceed expectations