Breakthrough developments in US-China relations boost market recovery, Fed policy framework may face significant adjustments

The first meeting between the United States and China held in Switzerland has achieved significant results, marking a new stage in the trade relationship between the two sides. This progress exceeded market expectations, and the US stock market and cryptocurrency market quickly absorbed the previous negative pricing.

Traders are beginning to adopt a new trading paradigm, primarily focusing on the game between a potential recession in the U.S. economy and the Fed's restart of interest rate cuts. This week's inflation and employment data show that inflation continues to decline, employment remains temporarily stable, and the impact of trade frictions seems to be lower than expected.

These better-than-expected data have driven the US stock indices to rise significantly this week under the new trading framework, while gold prices have seen a notable decline.

It is worth noting that the Fed chairman mentioned in an important speech this week that they would re-examine the "monetary policy framework," which could accelerate the restart of the interest rate cut cycle. However, Moody's downgraded the U.S. government bond rating from Aaa to Aa1, highlighting the severity of the long-term debt issues in the United States.

Policy, Macroeconomic Finance and Economic Data

On May 12, a significant turning point in U.S.-China relations occurred. Both sides announced a temporary 90-day tariff reduction agreement. The U.S. will reduce the highest tariff on Chinese goods from 145% to 30%, while China will lower the highest tariff on U.S. goods from 125% to 10%, and suspend or cancel a series of non-tariff countermeasures that were recently implemented.

This preliminary agreement indicates that bilateral relations are gradually improving, and its impact may not cause an unexpected shock to the global economy in the short term. This is also the main reason for the strong rise of US stocks throughout the week. The Nasdaq, S&P 500, and Dow Jones Industrial Average increased by 7.15%, 5.27%, and 3.41%, respectively, achieving four consecutive weeks of gains.

The CPI data for April in the United States shows that the seasonally adjusted CPI month-on-month rate is 2.3%, which is lower than expected and has declined for three consecutive months. In terms of employment data, the number of initial jobless claims is 229,000, which meets expectations. The PPI is at 2.4%, slightly lower than expected. These data indicate that trade frictions have not yet had a significant impact on consumption, while inflation continues to decline, creating conditions for a resumption of interest rate cuts.

The Fed chairman stated in a speech that the monetary policy framework introduced in 2020 may no longer be fully applicable in the current economic environment. He mentioned that frequent supply shocks make it difficult for the average inflation targeting regime to respond, necessitating adjustments to policies to better balance inflation and employment goals. This statement may imply that the Fed will formulate policies based on shorter-term CPI data, enhancing its flexibility in responding to economic fluctuations.

At the same time, the U.S. debt issue remains severe. According to analysis, the U.S. has added $1.9 trillion in debt this year, with the amount due for refinancing potentially reaching $9.2 trillion. If interest rates are not lowered 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.

On May 16, Moody's downgraded the long-term issuer and senior unsecured debt rating of the U.S. government from Aaa to Aa1. This is the first downgrade of U.S. Treasury ratings by Moody's since 1917, and it marks the loss of the highest credit rating from the three major rating agencies for the United States.

Crypto Market

Bitcoin maintained a high-level consolidation for most of the week, suddenly surging to $106,692.97 on Sunday, ultimately rising 2.24% for the week. From a technical indicator perspective, Bitcoin traded above the "first upward trend line" for the entire week, close to its historical high. The overbought indicators have seen some correction, and trading volume was comparable to last week.

Capital Flow

This week, the cryptocurrency market maintained a strong inflow of funds, with a total of $2.527 billion flowing in through two main channels, including $1.88 billion in stablecoins and a combined $647 million in Bitcoin ETFs and Ethereum ETFs. It is worth noting that the inflow of funds through the ETF channel has shown a declining trend over the past four weeks. On-chain lending funds are in an expansion phase, and the contract market has entered the second expansion phase of this round of market trends.

Market Sentiment

After Bitcoin returned to $100,000, some early investors took profits. With liquidity restored, some long-term holders also made small sell-offs. Overall, the trend of "long-term holders reducing their positions and short-term speculators increasing theirs" has not yet fully formed, and experienced long-term investors seem to be waiting for higher prices.

Data shows that this week, 127,226 bitcoins flowed into exchanges, marking a decline for four consecutive weeks. The outflow of bitcoins from exchanges reached 27,965, the highest since the beginning of the year. A decrease in selling pressure coupled with an increase in buying pressure, under favorable external conditions, typically signals that prices may rise rapidly in the future.

According to eMerge Engine data, the EMC BTC Cycle Metrics indicator is at 0.875, in an upward phase.