Macro Weekly Report: When Will the Market Turning Point Arrive? How to Interpret Signals from the Credit Market?

1. Macroeconomic Review of This Week

1. Market Overview

The market is still in a phase of multiple expectation games this week. The performance of the US stock market, cryptocurrency, and commodity markets mainly revolves around adjustments to the Federal Reserve's interest rate cut expectations and the slowdown of the US economic growth, leading investors to enter a phase of adjustment in pricing risk assets.

The three major U.S. stock indices have shown a clear correction, 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%, indicating a decline in overall market risk appetite. The utilities sector rose by 1.4% against the trend, reflecting a shift of funds towards defensive assets. The VIX index remains above 20, suggesting that market sentiment is in a cautious correction phase.

In the commodity market, gold has surpassed 3000 USD/ounce, reaching a historic high, reflecting increased demand for safe-haven assets. Copper prices rose by 3.9%, indicating that manufacturing demand remains supported. Crude oil prices have stabilized around 67 USD, but net futures positions have decreased by more than 9.6%, suggesting a weak market expectation for global demand growth. Natural gas prices continue to decline, primarily impacted by oversupply and weak industrial demand.

The cryptocurrency market as a whole is adjusting in sync with the US stock market. Although Bitcoin shows a downward trend, its volatility has narrowed, indicating that short-term selling pressure has eased. Altcoins 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.

2. Economic Data Analysis

The NFIB Small Business Optimism Index for February has declined for three consecutive months, reflecting the ongoing concerns of small and medium-sized enterprises 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 dropped to 2.8%. Commodity inflation has rebounded somewhat, but service inflation continues to decline.

The PPI data continues its downward trend, with the core PPI experiencing the largest month-on-month decline since April 2021, decreasing by 0.1% against an expected increase of 0.3%. Transportation services are the main contributing factor to the decline in PPI.

The University of Michigan Consumer Sentiment Index and one-year inflation expectations present opposing directions to the actual data. The initial one-year and five-to-ten-year inflation expectations rose to 3.9%, higher than the expected 3.4%. However, there is a clear partisan divide in the data, primarily driven by an increase in expectations among Democrats.

3. Changes in Liquidity and Interest Rate Markets

In terms of broad liquidity, the Federal Reserve's balance sheet size remains above $6 trillion, mainly influenced by outflows from the U.S. Treasury's TGA account. The usage of the Fed's discount window continues to decline, indicating that the overall macro liquidity is currently stabilizing.

In terms of the interest rate market, the federal funds futures market no longer anticipates a rate cut in March. The 6-month interest rates and the yield curve of government bonds suggest 2-3 rate cuts this year. Short-term yields have dropped significantly, while long-term yields remain relatively stable, reflecting the market's gradual pricing of future rate cuts.

The credit market is worth paying attention to, as the corporate credit spread is widening. The North American investment-grade credit default swaps (CDX IG) rose by more than 7% this week. The U.S. sovereign CDS and high-yield bond credit default swaps have also increased, reflecting growing concerns in the market regarding the sustainability of U.S. debt and corporate credit risk.

II. Macroeconomic Outlook for Next Week

The market is currently in a period of multiple contradictions including inflation, credit risk, and liquidity. Investors should pay special attention to changes in the credit market, which often serve as an important leading indicator for risk assets.

1. Global Stock Market Strategy

• In terms of the US stock market, it is recommended to reduce the allocation of high β assets and increase defensive sectors.
• Focus on opportunities for mispriced assets, especially blue-chip stocks with high dividends and stable cash flow.
• Appropriately increase allocation to the Asia-Europe markets to hedge against uncertainty in the US market.

2. Cryptocurrency Market Strategy

• Bitcoin still has investment value in the long term, and short-term selling pressure is easing.
• Reduce altcoin allocation 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 spreads and the decline in market risk appetite.
• Avoid high-leverage corporate bonds and increase allocation to high-rated bonds.
• Pay attention to the impact of the U.S. debt deficit issue on market sentiment.

The FOMC meeting next week will be the focus of the market, with particular attention on the interest rate cut expectations indicated by the dot plot and whether a pause in QT will be announced. In addition, retail sales data and the dynamics of various central banks are also worth monitoring.