Reviewing the performance of the commodity market after the Spring Festival: from February to March, during the traditional peak season, the main futures went to the warehouse quickly, and the fundamentals drove the major commodity futures to soar; from April to mid-May, under the target requirements of "carbon peak" and "carbon neutralization", production reduction led to a larger gap between supply and demand, and the futures market and even stock market related concepts were hyped. To the highest point after the Spring Festival, the main contracts of rebar, thermal coal and coking coal rose by 35.0%, 30.9% and 52.9%, respectively.

Since late April, the exchange gradually raised the margin ratio and handling fees, and the National Development and Reform Commission began to interview relevant enterprises. The National standing Committee has repeatedly raised concerns about the impact of upstream price increases. Under a series of policies, most commodity futures prices peaked on May 12. The main contracts for iron ore, rebar, thermal coal and coking coal fell 21.3%, 21.2%, 14.7% and 20.9% respectively from their highs.

The collapse in commodity markets over the past two weeks and the simultaneous peak of inflation expectations have catalysed the bull market for both stocks and bonds. Whether the follow-up stock and debt bulls can continue depends on the trend of commodities. A basic judgment is that as long as commodities do not repeat the across-the-board boom from late April to early May, the underlying logic of both stocks and debt will not be weakened.

The first issue that needs to be clarified is that inflation expectations are more important than inflation itself, similar to risk-free interest rate expectations and risk-free interest rate expectations, which can drive the stock market higher. From a quantitative point of view, PPI in may, announced next month, is expected to hit 8 per cent year-on-year, then fall back a few months before hitting the second-highest level of the year at the beginning of the fourth quarter (expected to be around 7 per cent). We do not deny that the inflation data are likely to rise further, but based on the recent sharp fall in commodities, inflation expectations have clearly begun to fall.

How to confirm that inflation expectations have peaked? First of all, the recent situation in the stock and bond market is already strong evidence. In addition, the forecast of inflation is mainly based on the tail-warping factor and the new price increase factor. The contribution of the tail warping factor can be calculated at the end of the previous year. The n-month CPI tail-warping factor of the current year = the CPI month-on-month ratio of the first month of last year * the CPI month-on-month ratio of the second month of the previous year. * CPI in December last year. Data show that the tail warping rate of PPI in May 2021 was 2.83%, and has continued to weaken since then.

Since the tail-warping factor is a known variable, inflation expectations can only be affected by new price increases, which are mainly speculated by the extent of commodity price increases. For example, the rise in US inflation expectations in late January was catalyzed by the sharp rise in crude oil and copper prices; the sharp rise in iron ore, thread and coal prices in April also led the market to shift from worrying about domestic imported inflationary pressures to more worried about the transmission pressure of rising domestic pricing commodities to core CPI.

Looking back at our initial suggestion that market inflation expectations would be revised downwards, we were not sure how long the actual data would peak ahead of time. But coincidentally, the appearance of the commodity "three crows" last week indicates that the commodity market has peaked in stages and that the new price increase in inflation has been suppressed, corresponding to a slowdown in the upward slope in part of the month-on-month period. Therefore, there is a better basis for reversing the market expectation to reach its peak. Combined with the quantitative judgment, it is concluded that inflation expectations peaked one month ahead of the actual inflation data.

The next question is to explore whether commodities will repeat the accelerated rise from late April to early May. We initially suggested that there was adjustment pressure on commodities, and the core was that the policy crackdown would be effective. Referring to 2016-2017, which is also a supply-driven large-scale commodity bull market, after the intensive introduction of policies in April 2016, commodities entered the adjustment, and it was not until October of that year that they broke through the previous high and emerged from the second main wave.

In our communication with investors, we found that the market has the following differences on "historical anchoring": first, whether the policy crackdown effect can be sustained, after all, there is also a perception that "policy top (bottom) is not equal to market top (bottom)"; second, even if commodities do not rise, but if high shocks are maintained, whether there is still pressure on inflation and inflation expectations.

As for the first disagreement, our view is that policy suppresses better in a commodity rally led by supply rather than demand. Relatively speaking, in this round of commodity boom, the demand side is more flexible, while in the previous demand-led market, the demand side is more rigid. Demand is insensitive to policy crackdowns unless credit and financing contract sharply, hitting physical demand. In the supply-driven market, the middle and lower reaches of the industrial chain passively carry costs and shrink profits are not sustainable, will actively adjust demand, under the catalysis of policy crackdown, this adjustment is more powerful and more sustainable.

In addition, short-term commodities have exceeded fundamentals and there is a large speculative bubble. The previous report combed that this round of commodity futures prices soared, but the spot price adjustment was limited, resulting in a sharp rise in futures, accounting for a large proportion of speculative demand driven by hot money at the futures end. On the spot side, the gap between supply and demand is undeniable, but the NDRC interviewed enterprises also proposed to crack down on "crackdown on hoarding", indicating that there is also a certain speculative demand on the spot side. The policy crackdown will lead to the withdrawal of speculative hot money, as evidenced by the "free fall" of commodities after their recent peak.

As for the second disagreement, our view is that speculative commodity skyrocketing, the high probability will not maintain high volatility, but characterized by wide shocks, it is difficult to drive one-way price expectations. Similarly, taking the 2016 Q2~Q3 adjustment as an example, the maximum adjustment has retreated by nearly 70 per cent from its peak. And the concussion time is longer, forming a window that lasts as long as half a year. Corresponding to this year's market, with the momentum of economic recovery declining, commodity prices can not find a catalyst to soar again in the short term.

To sum up, we believe that after the collapse in commodity prices, there is a high probability that inflation expectations will remain weak and volatile, inflation expectations have already peaked ahead of the inflation data, and will continue to fall in the next few months. the next stage of the stock and bond market will usher in a relatively favorable trading window.