The delay in US-China tariffs exceeded expectations, the US dollar saw a big pump, and interest rate cuts may restart soon (05.12~05.18)

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The first contact between the US and China held in Switzerland has led to significant results, marking substantial progress in the third phase of the “reciprocal tariff war.”

The US stock market and the crypto market quickly eliminated the negative pricing of the “reciprocal tariff war,” with a speed and magnitude that exceeded expectations.

Market traders are beginning to trade under a new paradigm - the game of whether the U.S. economy and employment will face a recession and the Federal Reserve’s appropriate timing to restart interest rate cuts.

The inflation and employment data released this week indicate that inflation continues to decline and employment remains temporarily stable - the impact of the equivalent tariffs is lower than expected.

After the input of better-than-expected data into the new trading framework, U.S. stock indices surged significantly over the week, while gold plummeted.

This week, Federal Reserve Chairman Powell mentioned re-evaluating the “monetary policy framework” during an important speech, which may prompt a rapid restart of the interest rate cut cycle. However, Fitch’s downgrade of U.S. Treasury bonds from Aaa to Aa1 further indicates that the long-term crisis of U.S. Treasury bonds is increasingly looming overhead.

Policies, Macroeconomic Finance and Economic Data

In the past few months, the biggest variable in the financial markets, the “reciprocal tariff war,” underwent a significant change on May 12. After discussions between the U.S. and China in Switzerland, a 90-day temporary tariff reduction agreement was announced. The U.S. will reduce tariffs on Chinese goods from a maximum of 145% to 30%, which includes a 20% “fentanyl tariff” and a 10% basic tariff. China will reduce tariffs on U.S. goods from a maximum of 125% to 10%, and suspend or eliminate non-tariff countermeasures that have been in place since April, such as restrictions on rare earth exports.

Previously, we pointed out that the trade war has entered its third phase. The preliminary agreement between the U.S. and China signifies significant progress in the third phase. In addition, Trump’s subsequent announcement about being unable to negotiate with 150 countries individually leads us to lean towards the judgment that the impact of the trade war is gradually subsiding, and the final outcome may not have an unexpectedly significant effect on the global economy in the short term.

This should be the reason why US stock traders have been bullish throughout the week, rapidly pushing the three major stock indices significantly higher. Throughout the week, the Nasdaq, S&P 500, and Dow Jones Industrial Average rose by 7.15%, 5.27%, and 3.41% respectively, achieving four consecutive weeks of gains for all three indices. If interest rate cut expectations increase, it may break historical highs in the short term.

This week, the United States released April CPI data, with a seasonally adjusted CPI of 2.3% m/m, lower than expected, achieving consecutive declines in March. The employment data released on the 15th showed that the number of first-time jobless benefits was 229,000, in line with expectations. The PPI, which showed a corporate trend, came in at 2.4%, slightly lower than expected. A number of data overlays suggest that the tariff war has not yet damaged consumption, and with inflation falling, restarting interest rate cuts is becoming the best option.

In his speech this week, Powell said that the monetary policy framework introduced in 2020 (with an average inflation target of 2% at its core, allowing for a modest overshoot in inflation to support employment) is no longer fully applicable in the current economic environment. He mentioned that frequent supply shocks (e.g., tariff wars, supply chain issues) make it difficult to deal with average inflation targeting, and policy adjustments are needed to better balance inflation and employment targets. In the framework used by the Fed over the past few years, it has tended to pursue when the average CPI has been close to 2% in the past period before taking action. The re-examination of this mention may push it to take action based on shorter or even month-long CPI data. This will undoubtedly increase its flexibility to deal with data fluctuations caused by the frequent policy adjustments of the Trump administration. Under the new framework, the current CPI data is already very close to its rate cut requirements.

The Federal Reserve reiterated that there may be deeper reasons behind the monetary policy framework, which relates to the U.S. debt issue. Accompanied by the rise in U.S. stocks, the yields on 2-year and 10-year U.S. Treasuries rebounded again this week, reaching highs of 4.0140 and 4.4840, respectively.

According to analysis, the United States added $1.9 trillion in debt this year, while the scale of debt maturing for replacement could reach $9.2 trillion this year, with as much as $6.5 trillion due in June alone. If interest rate cuts are not initiated promptly, not only will the U.S. government continue to bear high interest costs, but it may also face challenges in auctions in the primary market. As a “gray rhino,” the massive debt will continue to plague the U.S. government and become the most important variable affecting its political, economic, and financial policies. We judge that the adjustment of the Federal Reserve’s monetary framework and the debt along with the potential crisis it triggers are the fundamental reasons.

On May 16, the rating agency 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 time Moody’s has downgraded the U.S. government bond rating since 1917, marking the loss of the highest credit rating from all three major rating agencies (S&P, Fitch, and Moody’s). Previously, S&P downgraded the U.S. rating to AA+ (equivalent to Aa1) in 2011, and Fitch did so in 2023.

The debt “gray rhino” has become the most important indicator affecting U.S. interest rates and the stability of financial markets in the medium to long term.

Crypto Market

Previously, BTC led the US stock market in pricing the elimination of the “reciprocal tariff war,” approaching the previous high. After a significant rise in the US stock market this week, it maintained a high level for most of the time, and suddenly surged to 106692.97 USD on Sunday, ultimately closing the week up by 2.24%.

On the technical indicators, it operated above the “first ascending trend line” throughout the week, approaching the upper edge of the “Trump bottom.” The overbought indicator has seen some repair. The trading volume is nearly flat compared to last week.

Fund In and Out

This week, the entire market maintained a relatively strong inflow of funds, with two channels bringing in $2.527 billion, including $1.880 billion in stablecoins and a total of $647 million in BTC ETFs and ETH ETFs.

Over the past 4 weeks, the inflow of funds into the ETF channel has been declining, which is worth noting.

The on-exchange lending funds are in an expansion phase. The contract market is in the secondary expansion phase of this round of market trend.

selling pressure and sell-off

After returning to $100,000, some bottom-fishing funds took profit. With the recovery of liquidity, some long-term holders made small sell-offs. Overall, the phase of ‘long-term holders reducing their positions while short-term holders increase theirs’ has not fully opened, as long-term buyers who have experienced more pressure are looking forward to higher prices.

Centralized cryptocurrency exchange BTC inflow and outflow statistics

In terms of the scale of reduction, this week the BTC flowing into exchanges was 127,226 coins, which has decreased for four consecutive weeks. The scale of coins flowing out of exchanges reached 27,965 coins, the highest this year. A decrease in selling scale and an increase in buying scale often indicate a rapid price surge in the future when external conditions are met.

Cycle Indicator

According to eMerge Engine, the EMC BTC Cycle Metrics index is 0.875, indicating an upward phase.

About EMC Labs

EMC Labs (Yong Xian Shi Yan Shi) was founded by cryptocurrency investors and data scientists in April 2023. It focuses on blockchain industry research and investments in the Crypto secondary market, with industry foresight, insights, and data mining as its core competitiveness. It is committed to participating in the booming blockchain industry through research and investment, promoting blockchain and cryptocurrency to bring benefits to humanity.

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