Easing of China-US relations drives a rise in financial markets, Fed may restart interest rate cut cycle

Recently, the first contact between the United States and China in Switzerland has achieved significant results, marking a new phase in the tariff dispute between the two sides. This progress exceeded market expectations, and the US stock market and the crypto market quickly absorbed the previous negative impact.

Traders are starting to focus on new concerns: whether the U.S. economy will fall into recession and when the Fed will restart the rate cut cycle. This week's inflation and employment data show that inflation continues to decline, employment remains temporarily stable, and the impact of tariff shocks is lower than expected. These better-than-expected data have significantly pushed up U.S. stock indexes this week, while gold prices have seen a sharp decline.

The Fed chairman mentioned in an important speech this week the possibility of re-evaluating the "monetary policy framework", which may indicate that the interest rate cut cycle could be restarted soon. However, the rating agency downgraded the rating of U.S. Treasury bonds, highlighting the long-term debt crisis that the United States faces.

Policy, Macroeconomic Finance, and Economic Data

On May 12, after meeting in Switzerland, the US and China announced a temporary tariff reduction agreement lasting 90 days. The US will lower tariffs on Chinese goods from a maximum of 145% to 30%, while China will also reduce tariffs on US goods from a maximum of 125% to 10%, and suspend or cancel some non-tariff countermeasures. This development indicates that the impact of the tariff dispute may be gradually weakening, and the short-term effects on the global economy may not exceed expectations.

Driven by this news, the US stock market saw a significant pump this week. The Nasdaq, S&P 500, and Dow Jones indices rose by 7.15%, 5.27%, and 3.41% respectively, marking four consecutive weeks of rise. If the expectations for interest rate cuts increase further, the stock market is expected to break historical highs in the short term.

The US April CPI data shows that the seasonally adjusted month-on-month rate is 2.3%, lower than expected and has declined for three consecutive months. In terms of employment data, the number of initial jobless claims is 229,000, in line with expectations. The PPI is 2.4%, slightly below expectations. These data indicate that the tariff dispute has not yet caused substantial damage to consumption, while inflation continues to decline, creating favorable conditions for restarting interest rate cuts.

The Fed chairman stated in a speech that the monetary policy framework introduced in 2020 may need adjustments in the current economic environment. He mentioned that frequent supply shocks make it difficult for the average inflation targeting regime to cope, necessitating policy adjustments to better balance inflation and employment goals. This statement may imply that the Fed will formulate policies based on shorter-term CPI data, increasing its flexibility to respond to policy fluctuations.

At the same time, the U.S. debt issue remains a significant challenge. This year, the U.S. has added $1.9 trillion in debt, with the amount of debt maturing that may need to be refinanced potentially reaching $9.2 trillion. If interest rate cuts are not initiated soon, the U.S. government will not only continue to bear high interest costs but may also face difficulties in auctions in the primary market.

The rating agency downgraded the long-term issuer and senior unsecured debt rating of the U.S. government from Aaa to Aa1, marking the first downgrade since 1917. This move signifies that the U.S. has lost its top credit rating from the three major rating agencies, highlighting the long-term debt challenges faced by the U.S.

Crypto Market

Bitcoin maintained a high level of consolidation for most of the week, suddenly rising to $106,692.97 on Sunday, with a weekly pump of 2.24%. From a technical indicator perspective, Bitcoin operated above the "first upward trend line" throughout the week, close to the upper edge of the "Trump bottom". The overbought indicator has seen some correction, and the trading volume is similar to last week.

Capital Flow

This week, the cryptocurrency market maintained a strong influx of funds, with a total of $2.527 billion flowing into the two main channels, including $1.88 billion in stablecoins and a total of $647 million in Bitcoin ETFs and Ethereum ETFs. It is worth noting that the fund inflow in the ETF channel has shown a downward trend over the past four weeks.

The on-site lending funds are in an expansion phase, and the contract market is experiencing a second expansion in this round of market conditions.

Selling Pressure and Sell-off

After Bitcoin returned to $100,000, some bottom-fishing funds took profits. With the restoration of liquidity, some long-term holders also made a small amount of sales. Overall, the phase of "long holders reducing their positions while short holders increasing theirs" has not yet fully unfolded, and experienced long-term investors are still waiting for higher prices.

This week, the inflow of Bitcoin into exchanges was 127,226 coins, marking a continuous decline for four weeks. The outflow from exchanges reached 27,965 coins, the highest level this year. With a decrease in selling pressure and an increase in buying activity, this typically indicates that future prices may rise rapidly under favorable external conditions.

Cycle Indicator

According to eMerge Engine data, the EMC BTC Cycle Metrics is 0.875, in a rise period.