SignalPlus Macro Analysis Special Edition: Asymmetric

After three consecutive inflation data points exceeded expectations, the CPI data released on Wednesday was roughly in line with expectations, a result sufficient to stimulate another round of large-scale rebounds in risk markets. Here’s a look at market performance:

• SPX index hits a new high

• The U.S. 1-year forward rate saw its largest single-day drop since early January

• The pricing of the 2025 federal funds futures fell by 25 basis points from the April peak (equivalent to a rate cut)

• The dollar index DXY recorded its largest single-day drop of the year so far

• Cross-asset volatility (foreign exchange, stocks, interest rates) has retreated to mid-term and/or historical lows

Will the Federal Reserve cut rates soon? The June federal funds futures show only a 5% chance of a rate cut, and only 30% for July. Even for September, the probability of a rate cut is only about 64%. So what is everyone excited about?

As we mentioned earlier, the Federal Reserve has shifted to a completely unbalanced stance. As long as inflation does not accelerate again, even if inflationary pressures persist, they can be tolerated, and any signs of weakness in the labor market will be seen as a driver for policy easing. Therefore, although overall inflation and core inflation are still above the Federal Reserve's targets of 3.6% and 3.4%, respectively, the market is concerned about prices accelerating again, which did not occur last month. This aligns with the Federal Reserve's theme of returning to "observing easing opportunities," as both "labor market slowdown" and "high but tolerable inflation" are being confirmed one by one.

Returning to the CPI data itself, the core CPI in April rose by 0.29% month-on-month. After exceeding expectations for three consecutive months, this data result was only slightly below market expectations, with the weakness mainly coming from a decline in commodity prices and controlled growth in housing prices and owners' equivalent rent. Core services inflation, excluding housing, rose by 0.42% month-on-month, roughly in line with expectations.

After the CPI/PPI release, Wall Street expects the core PCE for April to increase by about 0.24% month-on-month, moving towards a 2% annualized level and the Federal Reserve's comfort zone. Traders remain confident that inflation will continue to decline in the second half of the year.

On the other hand, April retail sales data was significantly weak, with various spending categories generally softening. Retail sales were flat month-on-month, below the widely expected increase of 0.4% - 0.5%, and control group spending fell by 0.3%, with the previous value also revised down. General merchandise and even non-store sales saw their largest declines since the first quarter of 2023.

The retail sales data falling short of expectations continues a recent trend of weak consumer data, including rising credit card and auto loan delinquency rates, depletion of accumulated excess savings, and deterioration in the labor market. While it is still too early to assert a significant economic slowdown, we seem to be approaching a turning point in economic growth. Are high interest rates finally starting to erode the U.S. economy?

As always, the market is keen to ignore any risks of economic slowdown, temporarily focusing only on the Federal Reserve's easing policies. Just a reminder, while the market is very forward-looking and adept at incorporating all available information into pricing, it is also not that forward-looking. Enjoy the current party while it lasts!

In the cryptocurrency space, BTC prices continue to be influenced by overall stock sentiment, breaking through this month's highs and recovering to around $67,000, the peak in April. ETF inflows have also been very good, with an additional $300 million flowing in after the CPI release yesterday, and even GBTC saw net inflows. However, the performance of various tokens still varies greatly, with ETH and some of the top 20 tokens still struggling to recover their losses, while market gains are increasingly concentrated in a small number of tokens (BTC, SOL, TON, DOGE), rather than a broad market rally.

This situation is expected to continue, with the focus remaining on BTC, the main beneficiary of TradFi inflows (13F filings show that some large hedge funds are increasing their BTC ETF exposures), and the FOMO phenomenon for native or degen tokens is likely to be relatively low in this cycle. Good luck to everyone!