Guotai Junan Securities: Expectations for Fed rate cuts fluctuate under "Trump-Powell" game.

Investment Points Last week, most global asset classes saw an increase; US industrial production fell compared to the previous month, industrial capacity utilization slightly decreased; privately owned housing starts increased compared to the same period last year; retail sales growth rebounded; the market expects the Federal Reserve to cut interest rates four times in 2025; the Federal Reserve stated that there is currently no conflict between US inflation and interest rate cuts, but there is no immediate need for interest rate cuts. Global asset class performance. Last week (April 11, 2025-April 18, 2025), in terms of global asset prices, stock markets in major economies rose. The Nikkei 225 rose by 3.4%, the Hang Seng Index rose by 2.3%, the Shanghai Composite Index rose by 1.2%, and the S&P 500 fell by 1.5%; IPE crude oil futures rose by 5.0%, COMEX copper rose by 3.3%, and London gold rose by 2.7%; the yield on 10-year US Treasury bonds fell by 14 basis points to 4.34% compared to the previous week, while the price of domestic 10-year government bonds futures rose by 0.1%; the US dollar index fell by 0.5% compared to the previous week, closing at 99.23, the yen strengthened, with the dollar/yen exchange rate at 142.2, and the renminbi appreciated, with the dollar/yuan exchange rate at 7.3. Economy: In the US: In March, US industrial production fell compared to the previous month, and industrial capacity utilization rate slightly decreased; last week, crude steel production increased compared to the previous month; in March, privately owned housing starts increased year-on-year; retail sales growth rebounded in March; the number of initial claims for unemployment insurance fell slightly last week; market expectations for inflation were somewhat mixed. As of April 18, the 5-year inflation expectation in the US was 2.26%, down by 7 basis points from the previous week, and the 10-year inflation expectation was 2.23%, up by 3 basis points from the previous week. The market expects four interest rate cuts in 2025. As of April 18, expected total interest rate cuts by the Federal Reserve in 2025 increased from 75 basis points the previous week to 100 basis points, with interest rate cuts expected in June, July, October, and December. In addition, market expectations for interest rate cuts by the Federal Reserve in 2026 decreased from 50 basis points the previous week to 0 basis points, with a 25 basis point cut in June and a 25 basis point hike in December. Europe: The Eurozone's industrial production index increased year-on-year; the ZEW economic sentiment index for the current situation declined; ZEW economic sentiment index also decreased significantly; ZEW inflation index fell slightly. Policy: The Federal Reserve does not see an immediate need for interest rate cuts; the European Central Bank will decide on the pace of interest rate cuts based on data; the Bank of Japan's rate hikes depend on economic outlook; the Bank of Korea maintains its key interest rate unchanged; the Bank of Canada maintains its key interest rate unchanged. Risk warning: Escalation of short-term tariff games between China and the US; the impact of tariffs on domestic economy and US inflation. 1. United States: Repeated expectations of interest rate cuts Last week (April 11, 2025-April 18, 2025), stock markets in major economies saw an increase. The Nikkei 225 rose by 3.4%, the Hang Seng Index rose by 2.3%, the Shanghai Composite Index rose by 1.2%, the S&P 500 fell by 1.5%, developed market stock indices fell by 0.03%, and emerging market stock indices rose by 1.6%. Commodity prices all rose, with IPE crude oil futures rising by 5.0%, COMEX copper rising by 3.3%, and London gold rising by 2.7%. In the bond market, the yield on 10-year US Treasury bonds fell by 14 basis points to 4.34%, while the price of domestic 10-year government bonds futures rose by 0.1%. In the foreign exchange market, the US dollar index fell by 0.5%, closing at 99.23, the yen strengthened, with the dollar/yen exchange rate at 142.2, and the renminbi appreciated, with the dollar/yuan exchange rate at 7.3. Industrial production fell compared to the previous month. In March, US industrial production fell by 0.2 percentage points to 0.4% compared to the previous month, marking the second consecutive month of decline; on a month-on-month basis, it fell by 1.4 percentage points to -0.4%. Industrial capacity utilization rate slightly decreased. In March, the US industrial capacity utilization rate fell by 0.3 percentage points to 77.8%; however, the manufacturing capacity utilization rate slightly increased by 0.2 percentage points to 77.3%. Crude steel production increased compared to the previous month. Last week, US crude steel production was 1.689 million short tons, up by 33,000 short tons compared to the previous period; on a year-on-year basis, it increased by 2.0 percentage points to -0.4%. Privately owned housing starts increased year-on-year. In March, the US saw 1.324 million privately owned housing starts, down by 170,000 units from February and below the market expectation of 1.42 million units; on a year-on-year basis, it increased by 5.3 percentage points to 1.9%, returning to positive territory for the first time since August 2024. Retail sales growth rebounded. In March, retail and food service sales in the US increased by 4.6% year-on-year, up by 1.1 percentage points from February, with retail sales up by 0.9 percentage points on a year-on-year basis to 4.6%. Retail sales also rose by 1.0 percentage points on a month-on-month basis to 1.4%, in line with market expectations. Initial claims for unemployment insurance fell slightly. Last week, the number of initial claims for unemployment insurance in the US was 215,000, down by 9,000 from the previous period, below the market expectation of 225,000; meanwhile, the number of continuing claims for unemployment insurance for the week ending on April 5 increased by 41,000 to 1.885 million, exceeding the market expectation of 1.87 million. Market expectations for inflation were somewhat mixed. As of April 18, the 5-year inflation expectation in the US was 2.26%, down by 7 basis points from the previous week, and the 10-year inflation expectation was 2.23%, up by 3 basis points. The market expects four interest rate cuts in 2025. As of April 18, expected total interest rate cuts by the Federal Reserve in 2025 increased from 75 basis points the previous week to 100 basis points, with interest rate cuts expected in June, July, October, and December. In addition, market expectations for interest rate cuts by the Federal Reserve in 2026 decreased from 50 basis points the previous week to 0 basis points, with a 25 basis point cut in June and a 25 basis point hike in December. 2. Eurozone: Industrial production index increased year-on-year The industrial production index increased year-on-year. In February, the industrial production index for the Eurozone's 19 countries increased by 1.7 percentage points to 1.2% on a year-on-year basis, exceeding the market expectation of -0.7%, marking the first time it has returned to positive territory since April 2023. ZEW economic sentiment index for the current situation declined. In April, the ZEW economic sentiment index for the Eurozone declined by 5.7 to -50.9. ZEW economic sentiment index fell significantly. ZEW inflation index fell slightly.The index fell sharply. In April, the ZEW Economic Sentiment Index for the Eurozone fell from 58.3 to -18.5, dropping back into negative territory for the first time since September 2023.ZEW inflation index has fallen slightly. The ZEW inflation index for the eurozone in April fell by 9.1 to -3.1. Policy: Inflation and rate cuts are not conflicting, no rate cuts necessary in the short term Inflation and rate cuts are not conflicting, and there is no need for rate cuts in the short term. Federal Reserve Chairman Powell stated that the impact of trade policies may lead the Federal Reserve away from its dual goals of full employment and price stability. However, there is currently no conflict between these two goals, with employment still strong. He also stated that the Federal Reserve will not stop tapering its balance sheet quickly and will continue to consider the 2% inflation target, with monetary policy framework possibly resembling that before 2020. New York Federal Reserve President Williams stated that there is no need to adjust the federal funds rate in the short term, as maintaining anchored inflation expectations is crucial, and tariffs should not lead to sustained high oil prices. He also stated that the nominal neutral interest rate is around 3% or slightly lower, still relatively low. Atlanta Federal Reserve President Bostic stated that the employment and inflation goals are not in conflict at the moment, and there is still a long way to go to achieve the 2% inflation target. Adjusting policies too boldly at the moment would be an imprudent move. Cleveland Federal Reserve President Mester: If there is a conflict between full employment and price stability, the FOMC must ensure stable inflation expectations. She also stated that inflation expectations still seem close to the level we want to see, but repeated tariffs could create inflation pressures. A moderately restrictive monetary policy stance is appropriate, and maintaining interest rates unchanged to balance various risks is likely, as financial conditions have already tightened. ECB rate cuts will depend on data. The ECB's decision to cut rates by 25 basis points in April was in line with expectations. ECB President Lagarde stated that the process of declining inflation is on track, and the ECB is committed to ensuring inflation remains stable at the 2% medium-term target. The ECB must closely monitor the evolving impact of new shocks, and the impact of tariffs on inflation is still unclear. The ECB does not pre-commit to a specific rate path and will follow a data-based, step-by-step decision-making approach. ECB Board member Villeroy also stated that a "flexible pragmatism" applies to the ECB's latest rate decision. He stated that the ECB is in a "very turbulent sea" and is ready to act quickly based on data; current inflation risks are quite weak, with inflation risks from a few weeks ago disappearing. ECB Board member Muller stated that falling energy prices and tariff support warrant rate cuts, and recent growth prospects are more challenging, with current interest rates no longer constraining economic activity. He also stated that key indicators of the European Central Bank are moving in the right direction, and a more diverse world economy will push up prices. BOJ rate hike depends on economic outlook. BOJ Governor Kuroda stated that the Bank will continue to implement monetary policy to achieve its inflation target, and a rate hike will occur if economic outlook is realized. He also stated that food prices are having a greater impact on inflation, and it will take time for rate adjustments to affect prices. Market factors influencing prices change quickly, and the Bank hopes to observe medium- to long-term price trends, with prices gradually rising and potential inflation accelerating towards 2%. BOJ Policy Board member Nakakawa stated that the impact of tariffs on prices is still unclear, making it difficult to measure the likelihood of achieving economic outlook. A loose monetary environment supports the economy, and policies will be decided by examining the prospects. Bank of Korea maintains key rate unchanged. The Bank of Korea maintains the key rate at 2.75%. Bank of Canada maintains key rate unchanged. The Bank of Canada maintains the key rate at 2.75%. Risk warning: Escalation of short-term US-China tariff game; Tariffs have a greater-than-expected impact on the domestic economy and US inflation. This article is translated from the WeChat public account "Liang Zhonghua Macro Research," author: Liang Zhonghua; GMTEight editor: Xu Wenqiang.