Guojin Securities: If the US economy confirms a "hard landing", the next risk will be "debt default"

According to the Wisdom Financial APP, Guojin Securities released a research report stating that the unexpected monetary actions and minutes of the Federal Reserve both suggest an increasing risk of a "hard landing" in the United States. Once the U.S. economy confirms a "hard landing," it may lead to a risk of U.S. bond default. Maintaining a strategy of "market value defense," the recommendations are: ① maintain a bottom position in banks; ② "attack" with gold + innovative drugs; ③ non-cyclical industries with potential for sustained high dividends.

Key points from Guojin Securities:

Review of previous views: Bottom allocation in the interest rate cut cycle by the Federal Reserve: Selection of innovative drugs and their combinations. The bank still recommends the "right-side trading logic," with the September interest rate cut being an important decision window for offense and defense. If the interest rate cut in September is not realized or is less than 25bp, market volatility may enter an "accelerated upward" channel. Maintain a bottom position in "gold + innovative drugs," banks, high dividend stocks, and other large-cap value defenses. Innovative drugs will significantly benefit from the Federal Reserve's loose monetary policy. For the A-share market, focus on the three factors of "reliance on external demand + non-leaders + high ROE," and for the Hong Kong stock market, focus on the two factors of "reliance on external demand + leaders."

Current market focus: 1. The impact and response to the unfulfilled interest rate cut in September in China; 2. How to interpret the unexpected 50bps interest rate cut by the Federal Reserve and its impact; 3. What is the level of U.S. government debt leverage and interest expense ratio? What potential risks will it bring? 4. How to horizontally compare the background, evolution, and essence logic of the "European debt crisis"? 5. If the confirmation of a "hard landing" in the U.S. economy, will the next risk be a "U.S. debt crisis"?

Domestic and foreign markets may face a new round of upward pressure on "volatility"

The unexpected monetary actions and minutes of the Federal Reserve both suggest an increasing risk of a "hard landing" in the United States. Based on the minutes of the September Federal Reserve meeting, on the one hand, the pressure of the U.S. economic slowdown is increasing, with an upward trend in the unemployment rate and strong momentum; on the other hand, the impact of inflation on monetary policy is showing marginal weakening. Based on the judgment framework of the possibility of a "hard landing" in the U.S. economy, the bank believes that the 4.4% unemployment rate target for 2024Q4 may be seen as an important threshold. Once it is exceeded and continues to rise, it may guide the Federal Reserve to cut rates by another 50bps within the year. The unfulfilled interest rate cut in China in September may lead to a resurgence in market volatility. The bank predicts that the "profit bottom" may be further postponed to at least 2025Q3. Currently, the most direct and effective means to stimulate economic activity and credit recovery is to hedge the downward pressure on the asset side by reducing the cost of the liability side. However, considering that the interest rate cut in September was not realized, the bank tends to judge that a new round of upward pressure on market "volatility" may reappear.

The bank maintains its prediction: If the People's Bank of China cuts interest rates before the U.S. economy experiences a "hard landing," especially by at least 50bps in the 5-year LPR, maintaining the actual return rate of enterprises in a controllable range (-1% to 0%), there is a chance to avoid domestic liquidity risks, control real estate risks, and promote M1 recovery within the year. At that time, the "market bottom" may appear, and the recommendation is still to follow the "right-side trading logic" for interest rate cuts. Before that, maintain a bottom position in "gold + innovative drugs," banks, high dividend stocks, and other large-cap value defenses. In terms of bulk commodities and overseas equity assets, (1) be cautious about bulk commodities other than gold; (2) take profits on high points in U.S. stocks; (3) It is more difficult for Hong Kong stocks to achieve excess returns compared to A-shares.

Once the US economy confirms a "hard landing," it may lead to the risk of US debt default.

Background, evolution, and essence of the European crisis: ① The high debt leverage and excessive fiscal deficits of peripheral countries have laid the potential risks of the crisis; ② The slowdown in economic growth of peripheral countries has led to the deterioration of their national balance sheets due to insolvency; ③ The downgrade of sovereign credit ratings has made it difficult for European countries to maintain their debt maturity, also becoming the trigger for debt defaults; ④ Loss of independence of the domestic currency has passively increased debt pressure, exacerbating the degree of debt defaults; ⑤ The close link between banks and sovereign debt (Doom loop), with the rapid rise in non-performing loan ratios leading to a "chain reaction" of defaults in European peripheral countries. Taking the Greek government as an example, investors, seeing the downgrade in ratings, sold off their sovereign bonds, leading to a cycle of "soaring government bond yields → increased debt burden → fiscal consolidation to meet regulatory standards → further economic decline → eventual government bankruptcy."

How to deduce the debt dilemma or even crisis that the US federal government may face?

(1) In addition to the unexpectedly large 50bps rate cut, attention should also be paid to the marginal expansion of the US fiscal deficit. In the past 12 months, the fiscal deficit as a percentage of GDP has recently risen again, reaching 7.22% in August. At the same time, the US government's debt leverage ratio and interest expenditure ratio have both hit historical highs, comparable to the levels during the "Eurozone crisis." (2) The probability of the US confirming a "hard landing" around November is estimated to be 60%-70%. (3) Once the above two conditions are met, there may be downward pressure on the US sovereign credit rating, leading to the rise of US debt default risks. (4) Once US dollar credit weakens, it will significantly reduce global demand for holding US dollars, further raising the risk of US debt defaults. This means that the US government will face difficulties in normal "debt repayment and interest payment." At that time, the Federal Reserve will have to restart balance sheet expansion to accommodate the refinancing needs of government debt—meaning that US debt will experience a "technical default."

Risk Warning: Domestic export slowdown exceeds expectations; domestic "loose monetary" pace and intensity are lower than expected; US bond yield rebound exceeds expectations; historical experience has limitations