Macro Weekly Report: Market Seeks New Balance, Credit Risks Must Be Watched Out For

1. Macroeconomic Review of This Week

1. Market Overview

The market remains in a stage of multiple expectation games this week. The performance of U.S. stocks, cryptocurrencies, and commodity markets is mainly centered around adjustments to the Federal Reserve's interest rate cut expectations and the slowing growth of the U.S. economy, with investors entering a phase of adjustment in the pricing of risk assets.

The three major U.S. stock indices showed a significant pullback, with the Dow Jones Industrial Average down 3.1%, the Nasdaq Index down 2.6%, and the Russell 2000 Index down 1.8%. The utilities sector rose 1.4% against the trend, reflecting a shift of funds towards defensive assets. The VIX volatility index remained above 20, indicating that market sentiment is more a correction of previous excessive optimism.

In the commodity market, gold has broken through $3,000 per ounce, setting a new historical high, reflecting an increase in safe-haven demand. Copper prices rose by 3.9%, indicating that manufacturing demand still has support. The energy market showed divergent performance, with crude oil prices remaining stable around $67, but net futures positions decreased by more than 9.6%, suggesting a weak expectation for global demand growth. Natural gas prices continued to decline, mainly affected by oversupply and weak industrial demand.

The cryptocurrency market is adjusting overall in sync with the US stock market. Bitcoin's weekly trend remains downward, but the amplitude is narrowing, indicating that short-term selling pressure is easing. Altcoins like ETH and SOL are performing weakly, showing a reduced 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

Important data released last week includes CPI, PPI, and inflation expectations. The February NFIB Small Business Optimism Index has declined for three consecutive months, reflecting ongoing concerns among small and medium-sized enterprises about the uncertainty of trade policies.

CPI data is better than market expectations, with seasonally adjusted overall CPI and core CPI both at 0.2%, below the expected 0.3%. The overall CPI annual rate has decreased to 2.8%. Detailed data shows that despite a rebound in goods inflation, service inflation continues to decline.

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

The University of Michigan Consumer Sentiment Index and one-year inflation expectations are contrary 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 notable partisan divide in the data, primarily driven by rising expectations among Democrats.

3. Changes in liquidity and interest rate markets

In terms of broad liquidity, the Federal Reserve's balance sheet has marginally rebounded for two consecutive weeks, remaining above $6 trillion, primarily influenced by outflows from the U.S. Treasury's TGA account. The usage of the Federal Reserve's discount window continues to decline, indicating that the overall macro liquidity is tending to stabilize.

In terms of the interest rate market, the federal funds futures market basically rules out the possibility of a rate cut in March. The 6-month interest rate and the yield curve of government bonds suggest that there may be 2-3 rate cuts this year. Short-term yields have declined significantly, while long-term yields remain relatively stable, indicating that the market is gradually pricing in future rate cuts by the Federal Reserve.

It is worth noting that there have been changes in the U.S. credit market recently. The corporate credit spread has widened, and the North American investment-grade credit default swaps (CDX IG) have risen by more than 7%. The U.S. sovereign CDS and high-yield bond credit default swaps have also shown an upward trend. This reflects an increasing market concern about the sustainability of U.S. Treasuries and corporate credit risk.

II. Macroeconomic Outlook for Next Week

The current market is in a period of multiple contradictions: inflation is cooling but expectations are rising, credit risks are increasing but the economy has not yet entered a recession, and liquidity is marginally easing but policies are constrained. Market sentiment has not yet escaped the panic zone, and the uncertainty of tariff policies is putting pressure on market stability expectations. Investors should pay special attention to changes in the credit market as an important leading indicator for risk assets.

Investment Strategy Recommendations

1. Global Stock Markets:

   • Reduce high beta asset allocation and increase defensive sectors
   • Pay attention to the opportunity of wrongful killing, especially in blue-chip stocks with high dividends and stable cash flow.
   • Appropriately increase allocation to the Asian and European markets to hedge against uncertainties in the U.S. market.

2. Cryptocurrency Market:

   • Bitcoin still has allocation value in the long run.
   • Reduce exposure to the risk of altcoins
   • Pay attention to the fund flow of stablecoins to assess the market liquidity situation.

3. Credit Market:

   • 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 impact of the US debt deficit issue on overall risk assets.

Key Events Next Week

The most important event next week is the FOMC meeting. The market will focus on whether the dot plot indicates expectations for 2-3 rate cuts, as well as the tone of Powell's speech. Another point of interest is whether the Federal Reserve will announce a pause in QT, which could have a significant uplifting effect on the current market.

Overall, the market is still looking for a new equilibrium. Investors need to remain cautious while seizing potential opportunities in undervalued quality assets.