Zheshang Securities has released a research report suggesting that an early rate hike by the Federal Reserve could help curb inflation transmission from energy to downstream sectors, potentially leading the market to revise down its future inflation expectations. As a result, long-term interest rate expectations may progressively stabilize. The firm believes that the threshold for further rate increases will rise significantly, and market expectations for rate hikes beyond September could be gradually revised downward. This would correspond to a notable improvement in long-term liquidity expectations, which could directly support gold prices. If the Fed implements a rate hike in September, it might conversely drive a marginal improvement in long-term liquidity expectations, potentially shifting equity style preferences back toward growth stocks, while also presenting a favorable outlook for gold allocation opportunities.
How should we interpret the impact of September rate hike expectations on the market outlook?
A September rate hike could signal that inflation expectations have peaked. In August, the U.S. core CPI rose 0.3% month-over-month, surpassing market expectations. Following the data release, market pricing for a September Fed rate hike climbed to around 90%, nearly fully pricing in the move. However, if the September hike ultimately materializes, it could paradoxically boost market sentiment. Although the CPI figure slightly exceeded expectations, the composition shows that the increase was primarily driven by the energy component—gasoline price gains contributed over one-third of the CPI rise—while inflation diffusion effects remain limited. From perspectives such as trimmed mean and median measures, inflation stickiness is actually declining. Consequently, an early rate hike could block the transmission of inflation from energy to downstream sectors, aiding the market in lowering its future inflation expectations and helping long-term rate expectations gradually stabilize.
Why might a strong rally in gold be on the horizon?
The firm projects that after a front-loaded September hike, market inflation expectations will likely stabilize, and the core focus of monetary policy may shift from inflation to economic growth. At present, while the overall U.S. economy remains resilient, there is a pronounced K-shaped divergence internally. Manufacturing activity remains relatively strong, supported by AI investment, but traditional sectors such as real estate and consumption are notably weak—existing home sales and personal consumption expenditures stand at the 5% and 30% percentiles since 2000, respectively. Under the persistent pressure of high interest rates, the traditional economy is approaching recessionary conditions. Additionally, rising rates have reflexive effects; the 10-year Treasury yield exerts a lagged impact on economic activity of roughly three months. Since rates have been climbing since March, the firm has indeed observed U.S. economic data beginning to weaken since June. Based on these indicator trends, U.S. economic data may continue to decline through year-end.
Therefore, the firm argues that the bar for further rate increases will become significantly higher, and expectations for rate hikes after September may be progressively revised downward. This would correspond to a substantial improvement in long-term liquidity expectations, which could directly underpin gold prices.
Why might market momentum shift back to growth stocks in the coming period?
Since mid-August, market hotspots have rotated quickly, but from a style perspective, a common underlying factor is the strength of low-valuation stocks. Between August 18 and September 11, the Shenwan high P/E and low P/E indices recorded changes of -9.96% and +2.69%, respectively, reflecting the market's continuous search for undervalued sectors amid weak risk appetite. However, the strength of the low-valuation style may be approaching a cyclical extreme. Looking at the rolling 20-day excess return of the Shenwan low-valuation index relative to the high-valuation index, as of September 11, this metric has reached the 88.4th percentile since 2020, suggesting that the likelihood of a reversal has notably increased—meaning higher-valuation growth styles could outperform again. This aligns with the firm's macroeconomic assessment: after the market absorbs the negative impact of a September rate hike, it may begin pricing in controlled inflation, coinciding with a rebound in risk appetite and a resurgence of growth style strength.
Risk warnings
1. The conclusions of this report are derived from quantitative models, which are based on statistical summaries of historical data; these conclusions carry a risk of failure in the future. 2. Measurement deviation risk—changes in market conditions may cause estimated data to diverge from actual figures. 3. Significant volatility risk in gold remains, and investors should exercise prudent decision-making.