Minsheng Macro Lin Yan: The market underestimates the impact of tariff inflation, and a "soft landing" is almost impossible; Hong Kong stocks have a higher winning rate in gold

On September 18, Lin Yan, the chief macro analyst at Minsheng Securities, guest-starred in the Wall Street Journal live broadcast "Big Shot's Lounge," discussing the implications of interest rate cuts, economic risks, and the ranking of major asset classes for Q4. For the live replay, please click → Has the interest rate cut really arrived, and how should we view the market outlook?

Q1: The Federal Reserve's interest rate cut of 25 basis points this time, is it a positive for ordinary investors and the market, or is there a greater concern?

Lin Yan: This interest rate cut is neither a positive nor a concern. The decision of 25 basis points was fully digested by the market two to three weeks ago. Initially, there was a divergence in the market regarding whether it would be 25 or 50 basis points, but since the downward revision of non-farm payroll data two months ago, the probability of a 25 basis point cut exceeded 80%, and the divergence disappeared.

Therefore, this interest rate cut does not bring any particular positive or negative impact, and the market reaction is neutral. The dot plot and SEP report after the meeting leave some suspense for the next two meetings, but overall, it continues the easing logic.

A 25 basis point cut is a reasonable response to the decline in employment and does not have a political color. Overall, it was a relatively neutral meeting.

Q2: This interest rate cut feels a bit "passive." Is it because of the weakening economy and employment that the Federal Reserve was forced to lower rates?

Lin Yan: Powell was actually more hawkish earlier. He cut rates by 50 basis points as soon as he took office last September, exceeding market expectations. Then he cut rates by 25 basis points twice, and paused from last December to this September.

The key reason is Trump's tariffs. Tariffs would push up prices, and the Federal Reserve chose to wait and see if inflation would rise. However, inflation has remained stagnant, hovering in the 2.4-3% range, proving that Powell's wait may have been a mistake.

At the same time, Trump continuously pressured for rate cuts, making Powell passive between independence and political pressure. The market is concerned not only about the data but also about whether the Federal Reserve will lose its independence as a result. This is the main reason why Powell appears a bit "awkward."

Q3: Your team's report mentions, "The interest rate cut is not the end of the problem, but the beginning." The job market is indeed slowing down; can this interest rate cut effectively prevent the U.S. economy from stalling, or is it already somewhat lagging?

Lin Yan: Employment is indeed weakening, but the problem is not entirely due to high interest rates; it is structural. There is a significant reduction in entry-level positions, while the impact on higher-level positions is minimal. More layoffs are coming from companies replacing labor costs with AI rather than high interest rates.

Interest rate-sensitive industries (construction, automotive, real estate brokerage) may see demand released due to the interest rate cut, which could improve employment somewhat. However, the trend of AI replacement will still bring long-term pressure.

The unemployment rate has not risen significantly because the labor supply is also decreasing (due to reduced immigration and demographic changes), and the smaller denominator masks some of the issues.

Overall, the interest rate cut helps short-term employment, but structural weaknesses remain. In the future, it will depend on whether AI further replaces labor and whether demand in interest rate-sensitive industries can be released.

Q4: Regarding inflation, pressures from tariffs, supply chains, and labor costs are still present. Will there be stagflation in the future? In which areas will inflationary pressures mainly rebound?

Lin Yan: My judgment on inflation risk is more resolute than the market. Most analysts believe the impact of tariffs is limited, but I think it has only been delayed, not disappeared.

U.S. import companies have mitigated the impact through stockpiling and bonded zone operations. However, since August, tariff revenues have clearly increased, and September data is likely to be even higher. After inventory clearance, goods subject to tariffs will truly enter the market. It is expected that inflation will rise month-on-month from September to December, possibly exceeding 3.5%.

Although tariffs are referred to as a one-time shock, once prices rise, they remain at a higher level, and the actual burden on consumers is real. In the next two months, the market is pre-trading a "soft landing" and continued easing, but there are risks of fluctuations and corrections.

Q5: Based on these inflation risks, do you still have doubts about the probability of a "soft landing" for the Federal Reserve? Is there still significant risk for the U.S. economy in the fourth quarter?

Lin Yan: The so-called "soft landing" is, in fact, a beautiful wish that any economy desires, but it is difficult to achieve. Because once you use policy to "ensure a soft landing," it changes market expectations, which in turn alters leverage, operations, and credit behavior, ultimately increasing the difficulty. Economist Goodhart has a famous law: when an indicator becomes a policy target for the government, it loses its original economic meaning. This is because, to achieve the target, the government will artificially tilt the results, which often do not align with the endogenous logic of the market.

So how to define "soft landing" is itself a question. In the downward phase of the debt cycle, encountering tariffs, I believe the risks are unavoidable.

Q6: After interest rate cuts are implemented, will the market's main line change?

Lin Yan: If inflation really rises as expected in the fourth quarter, the market trading logic will definitely adjust.

First, overvalued varieties are likely to be corrected: for example, interest rate futures, small-cap stocks (Russell 2000), and commodities with strong financial attributes like copper. These may face volatility when data reverses.

Relatively speaking, assets with clear industrial cycles are more worthy of attention: such as the U.S. dollar, gold, and AI. The logic for gold is the simplest; as long as the U.S. economy is not too good, a "landing" is fine, but not landing is not acceptable. Coupled with the narrowing gap between China and the U.S. and central bank reserve demand, it remains an important allocation tool.

The U.S. dollar will depend on data and political factors: for example, Trump's expectation of a 150 basis point rate cut, which may pressure the Federal Reserve and even lead to personnel adjustments, could cause the market to reprice the Fed's independence. Additionally, considering the pressure of U.S. Treasury issuance—now that rates are above 4%, which is clearly higher than the cost of existing debt—whether the government can smoothly issue bonds also constrains the dollar's movement.

As for AI, the logic still falls within the realm of industrial research; macroeconomics can only look at its profit realization, which exceeds the advantages of macroeconomic analysis.

Q7: The dot plot shows significant divergence; what does this mean?

Lin Yan: Although there is significant divergence in the dot plot, this time the FOMC has surprisingly shown unity. In the September decision, there was only one dissenting vote, from the person advocating for a 150 basis point rate cut. Apart from him, everyone else maintained basic consensus This indicates that although the dot plot is dispersed, when it comes to actual decision-making, the committee members are still data-driven, not politically motivated. Powell's statement was also very direct: "Whatever data you give me, that's what I'll arrange for." This is a preventive rate cut, respecting the weakening employment data. Whether further cuts will occur depends on how the data evolves.

Q8: Will U.S. stocks continue to rise in the fourth quarter or face adjustment risks?

Lin Yan: U.S. stocks need to be viewed separately. The Dow Jones is generally average, but the Mega Seven is performing outstandingly, boosting global risk appetite, and the AI narrative is also strengthening.

Whether the short-term AI rally can continue depends on whether profits can be realized. However, from the perspective of free cash flow, I am relatively cautious. For example, Meta, Google, and Microsoft have capital expenditures reaching $400 billion, plus $200 billion in annual buybacks and dividends, totaling over $500 billion in expenses, while operating cash flow is just over $300 billion, resulting in a gap of around $200 billion. How will the market price such a gap? This is a big issue.

Therefore, if inflation rises in the fourth quarter and rate cuts stagnate, the probability of a U.S. stock adjustment is greater than continued upward movement. Of course, if new technologies catalyze and EPS is revised upward, the space will reopen. But from a common-sense perspective, I am cautious about continued significant upward movement.

Q9: Does gold still have the opportunity to hit new highs?

Lin Yan: I have always been a firm bull on gold. Gold should not have a "fixed point," and if priced in currency, its historical high should actually be adjusted according to the M2 and income levels of that year. For example, in 1980, $900 per ounce, the economic scale at that time was only 1/20 of what it is now, so the reasonable price of gold could be around $18,000 when adjusted.

Therefore, in the long term, gold is still far from its true historical high.

I expect $2,500 in 2023, revised to $2,800 in 2024, and I firmly believe it can reach $3,500 or even higher in 2025. The weak dollar, global debt pressure, and geopolitical factors all support this logic in the short term.

In trading, gold pricing is relatively restrained, unlike copper, which has an amplified slope, so the trend is more stable. Looking at a two-year dimension, I dare say it will definitely break through $4,000.

Q10: Has your price anchor for gold been further raised from $3,500?

Lin Yan: I am not setting an anchor point, but rather hoping everyone has an expectation in mind. The fate of analysts is that target prices must be adjusted with market conditions; it is impossible to be optimistic yet give a low target. So my $3,500 is actually a psychological anchor for everyone, helping to understand the long-term trend, rather than an accurate prediction.

Q11: If you were to rank global asset classes for the fourth quarter—stocks, bonds, commodities, gold, foreign exchange—how would you rank them? Which assets are more likely to outperform, and which have greater risks?

Lin Yan: It is difficult to compare assets under the same logic, but if we only look at the weak dollar + convoluted rate cuts as the main theme, my ranking is: First tier: Hong Kong stocks and gold. High win rate, and the odds are not bad. A-shares follow closely behind.

Second tier: In foreign exchange, the euro is more elastic than the renminbi, and more than the yen. Among commodities, oil and copper are relatively neutral with some fluctuations.

Third tier: U.S. stocks appear slightly expensive, with risks outweighing opportunities.

Fourth tier: Bonds. The long end of U.S. Treasuries is showing signs of profit-taking, and may decline in the next two months. Domestic bonds have also entered the year-end "settlement" phase, with some funds flowing into equity assets, resulting in relatively weak bond performance.

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