Macroeconomic Weekly Report: When Will the Market Turnaround Come? Interpretation of Credit Market Signals

1. Macroeconomic Review of the Week

1. Market Overview

The market remains in a phase of multiple expectations this week. The performance of U.S. stocks, cryptocurrencies, and commodity markets mainly revolves around adjustments to the Federal Reserve's interest rate cut expectations and the slowdown of the U.S. economy, leading investors to enter a phase of adjustment in the pricing of risk assets.

The three major U.S. stock indices generally pulled back, with the Dow Jones Industrial Average falling by 3.1%, the Nasdaq Index down by 2.6%, and the Russell 2000 Index decreasing by 1.8%. The utilities sector rose 1.4% against the trend, becoming the only industry to gain, reflecting a shift of funds towards defensive assets. The VIX index remained above 20, indicating that market sentiment is in a cautious adjustment phase.

In the commodities market, gold has broken through $3,000 per ounce, reaching a historic high, reflecting an increase in safe-haven demand. Copper prices rose by 3.9%, indicating that manufacturing demand remains supported. The energy market shows a mixed performance, with crude oil prices stabilizing around $67, but net futures positions decreasing by more than 9.6%, suggesting a weak expectation for global demand growth. Natural gas prices continue to decline, primarily affected by oversupply and weak industrial demand.

The overall cryptocurrency market is adjusting in sync with the U.S. stock market. Although Bitcoin shows a downward trend on the weekly chart, the volatility has narrowed, indicating a easing of short-term selling pressure. Altcoins such as ETH and SOL are performing weakly, reflecting a decrease in market risk appetite. The market capitalization of stablecoins continues to grow, but net inflows are slowing down, suggesting that market liquidity is becoming more cautious.

The impact of tariffs is gradually becoming apparent, and the global supply chain is accelerating its adjustment. The Baltic Dry Index ( BDI ) continues to soar, indicating strong shipping demand in the Asia-Europe region, and manufacturing capacity may accelerate its shift overseas. The U.S. transportation index has declined by 6.5%, suggesting weak domestic demand. The rise in copper prices and the stability of oil prices further indicate a divergence in market pricing regarding the economic recession.

2. Economic Data Analysis

The NFIB Small Business Confidence Index fell for three consecutive months in February, indicating that small and medium-sized enterprises continue to be concerned about the uncertainty of trade policies.

CPI data is better than market expectations, with the seasonally adjusted overall CPI and core CPI both at 0.2%, lower than the expected 0.3%. The overall CPI annual rate has decreased to 2.8%. Commodity inflation has rebounded, but service inflation continues to decline.

PPI data continues to show a downward trend, with the core PPI's month-on-month decline being the largest since April 2022, decreasing by 0.1%, while an increase of 0.3% was expected. Transportation services are the main contributing factor to the decline in PPI.

The University of Michigan Consumer Sentiment Index and one-year inflation expectations diverge from actual data. The initial values for one-year and five-to-ten-year inflation expectations rose to 3.9%, higher than the expected 3.4%. However, the data continues the previous trend of partisan divergence, with significant differences in expectations by party affiliation.

3. Changes in Liquidity and Interest Rate Markets

In terms of broad liquidity, the Federal Reserve's balance sheet has shown a clear upward trend in the past two weeks, maintaining above 6 trillion this week, mainly influenced by outflows from the U.S. Treasury TGA account. The usage of the Federal Reserve's discount window continues to decline, indicating that overall macro liquidity is tending to stabilize.

In terms of the interest rate market, the federal funds futures market has a very low expectation for a rate cut in March. The 6-month term rates and the yield curve for government bonds suggest that there may still be around 2-3 rate cuts this year. The short-term yields have declined significantly, while the long-term yields remain relatively stable, indicating that the market is gradually pricing in future rate cuts by the Federal Reserve.

In the credit market, corporate credit spreads are widening. North American investment-grade credit default swaps (CDX IG) have risen by more than 7%. Both US sovereign CDS and high-yield bond credit default swaps have shown varying degrees of increase, reflecting growing market concerns about the sustainability of the US debt fiscal deficit and corporate credit risk.

2. Macro Outlook for Next Week

1. Global Stock Market Strategy

• Focus on defense, pay attention to mistaken kill opportunities
• Reduce high beta asset allocation and increase defensive sectors (utilities, healthcare, consumer staples)
• Avoid over-betting on high growth and high volatility sectors.
• Focus on blue-chip stocks with high dividends and stable cash flow
• Appropriately increase allocation in the Asia-Europe market, especially in China, India, Southeast Asia, and the European market.

2. Cryptocurrency Market Strategy

• Bitcoin still has allocation value in the long term, and can be held or accumulated on dips.
• Reduce the allocation of altcoins and maintain a wait-and-see attitude.
• Pay attention to the flow of funds in stablecoins and observe the liquidity conditions in the market.

3. Credit Market Strategy

• Beware of the widening credit spread, as debt risks may intensify.
• Avoid high-leverage corporate bonds and increase allocation to high-rated bonds.
• Pay attention to the potential impact of the US debt deficit on the market

4. Key Events Next Week

Focus on the FOMC meeting, the main point of contention in the market is:

• The number of rate cut expectations given by the dot plot (2/3 times)
• Powell's speech tendency
• Did the Federal Reserve announce a pause in QT?

Overall, the market is still seeking a new balance point, and investors need to remain cautious to seize potential opportunities from mispriced quality assets.