SignalPlus Macroeconomic Analysis (20240417): Strong U.S. Economic Data and Inflation Set to Continue Rebounding

Despite the volatile price movements during the day and thin order liquidity making profit and loss situations quite tense, the market was able to catch a breather yesterday. The Chinese economic data released yesterday provided a relatively positive start, with the second quarter GDP growing by 5.3% year-on-year, far exceeding the market's general expectation of 4.8%. However, the optimistic sentiment quickly faded as investors remained skeptical about the strength of the fundamentals, especially considering the much weaker industrial production and retail sales data. Industrial production in March grew only by 4.5%, significantly below the expected 6.0% and last year's 7% growth rate, while the manufacturing capacity utilization rate plummeted to 73.8%, the lowest level outside of the pandemic since 2015. Even in nationally supported sectors such as automobiles, chips, solar panels, and other electrical equipment, the decline in utilization was evident, exacerbating investors' concerns about an impending oversupply issue.

On the U.S. side, recent strong data has led the Atlanta Fed's GDPNow model to raise its GDP forecast to 2.9%, still well above Wall Street's predictions. As inflation concerns intensified, the 10-year real yield (adjusted for inflation) rebounded to 2.2%, and the 2/10 real yield curve steepened to its steepest level since October 2022. Does anyone remember when certain macro observers "guaranteed" a recession due to the inverted yield curve in 2022 to 2023?

Given the undeniable reality of stubborn inflation and a strong economy, the entire Federal Reserve, including the chairperson, has been forced to retract their dovish rhetoric. Regarding the future policy trajectory, the Fed finds itself in an isolated position:

• Fed Chair Powell: "Recent data has clearly not given us greater confidence, but rather suggests that reaching such a level of confidence may take longer than expected."

• Fed Vice Chair Jefferson: If "inflation proves to be more persistent than I currently expect," U.S. interest rates may need to remain elevated for a longer period.

• Boston Fed Collins: "It may take longer than previously thought," and "the CPI data for the first quarter was higher than I would have liked."

• Richmond Fed Barkin: Hoping to see more "broad-based signs of inflation slowing, not just commodity inflation."

• New York Fed Williams: "Rate cuts do not seem imminent," suggesting "in some cases we certainly need higher rates, but that is not what I consider the baseline scenario."

Compared to the rhetoric of other developed market central banks:

• ECB Lagarde: Unless there are significant surprises, the ECB will soon begin to cut rates; "We are monitoring the progress of inflation slowing, which is in line with our expectations."

• BOE Lombardelli: Rate cuts "are the direction forward."

• BoC Macklem: "We do not have to follow the Fed's actions; we will take the actions that Canada needs."

Against the backdrop of the Fed's dramatic shift in attitude, the interest rate market has ruled out most rate cut expectations for 2024, with the dovish sentiment from the first quarter completely evaporating, even surpassing the hawkish peak from last October. Additionally, the divergence in policy between the Fed and other central banks has brought strong buying pressure to the dollar, with USD/JPY trading above 155 and USD/CNY maintaining above 7.10, while the overall DXY index has returned to its strongest level since 2022.

Furthermore, the spillover effects from the rise in real yields have been more severe, with the stock market finally yielding to the "higher rates lasting longer" outlook, although this is more due to overbought positions rather than changes in fundamentals. The negative correlation between the U.S. stock market and yields has increased, leading the SPX index to decline by 1% for the first time since last October. Additionally, the stock VIX closed above 19 for the first time since Halloween, and implied correlation has surged to 23, compared to just 12 at the end of March. Ongoing tensions in the Middle East may keep implied volatility elevated in the short term.

In the cryptocurrency space, BTC prices have not further broken down, hovering around $64,000 as of the time of writing. However, the performance of other tokens has lagged far behind BTC, as the likelihood of the SEC approving ETH ETFs in this round continues to diminish, causing the ETH/BTC ratio to drop to a nearly four-year low. Meanwhile, altcoins have lost 30% to 40% of their value over the past month, far exceeding BTC's -5%. The market has experienced significant losses over the past 1.5 weeks, and it will take a considerable amount of time to recover.

Retail investors' interest in "buying the dip" is low, and ETF inflows continue to slow, with Blackrock's IBIT being the only ETF showing net inflows since last Friday. As the current FOMO narrative has largely ended, ETF inflows are expected to be less significant in the short term. Meanwhile, we anticipate that BTC price movements will once again resemble the more volatile Nasdaq index, reverting to the behavioral patterns of the past four years.

In other words, Bitcoin is no longer seen as digital gold, but more like a leveraged beta tool. We hope that in the upcoming earnings season, tech stocks in the same category can hold their ground with strong profit results. Good luck to everyone!