++4 Alpha Core Insights:++

I. Macro Review of the Week

1. Market Corrects Expectations, Defensive Sentiment Dominates

• U.S. stocks generally retreated, while the utilities sector rose against the trend, with funds flowing into defensive assets.

• VIX remains above 20, indicating that market sentiment is still in a cautious adjustment phase.

2. Commodity Market Divergence, Risk Aversion Intensifies

• Gold broke through $3000 per ounce to reach a new high, and copper prices rose by 3.9%, indicating continued demand support in manufacturing.

• Oil prices stabilized, but net futures positions decreased, reflecting concerns about global demand growth.

3. Cryptocurrency Market Adjusts in Sync, BTC Still Holds Long-term Allocation Value

• Short-term selling pressure on BTC has eased, supported by the long-term liquidity environment.

• Altcoins performed weakly, with declining market risk appetite and slowing inflows into stablecoins.

4. Tariff Impact Emerges, Global Supply Chains Accelerate Adjustment

• The BDI index rose, indicating increased manufacturing activity in Asia and Europe, while the U.S. transportation index declined, showing weak domestic demand.

• The trend of supply chain restructuring is evident, putting pressure on the U.S. domestic economy.

5. Inflation Data Cools, but Inflation Expectations Diverge

• CPI and PPI were below expectations, reinforcing market expectations for rate cuts, but consumer inflation expectations rose, highlighting significant partisan divides.

• The divergence between actual data and expectations increases market uncertainty.

6. Marginal Liquidity Eases, but Credit Market Risks Intensify

• TGA account outflows and decreased use of the Fed's discount window indicate temporary stability in liquidity.

• Credit spreads widened, and CDS rose, reflecting growing market concerns about corporate and government debt, potentially suppressing the performance of risk assets.

II. Macro Outlook for Next Week

1. Key Market Variables Next Week: FOMC Meeting, Retail Data, Global Central Bank Dynamics

• Focus on the Fed's dot plot for guidance on rate cuts (expectations for 2-3 cuts).

• Whether QT will pause will become a market focus, potentially affecting market risk appetite.

2. Strategy Recommendations

ü U.S. Stocks: Reduce high-beta assets, increase holdings in defensive sectors, and look for mispriced opportunities.

ü Cryptocurrency Market: Hold BTC long-term, reduce altcoin allocations, and monitor stablecoin liquidity.

ü Credit Market: Reduce exposure to high-leverage corporate bonds, increase holdings in high-rated bonds, and be wary of U.S. debt deficit risks.

ü Core Turning Point Signals: Recovery in the credit market or clearer easing signals from the FOMC.

【Macro Weekly Report┃4 Alpha】When Will the Turning Point Arrive? How to Interpret Signals from the Credit Market?

I. Macro Review of the Week

1. Market Overview

As pointed out in last week's market report, the current market is still in a phase of multiple expectation games. This week, based on the specific performance of U.S. stocks, cryptocurrencies, and the commodity market, the core trading logic of the market continues to revolve around adjustments to Fed rate cut expectations and slowing U.S. economic growth, leading to a phase adjustment in the pricing of risk assets.

U.S. Stocks: Defensive Assets Favored, Market Corrects Previous Optimism. This week, the three major U.S. stock indices saw significant declines, including:

• Dow Jones Industrial Average (-3.1%),

• Nasdaq Index (-2.6%),

• Russell 2000 Index (-1.8%)

showing a general downturn, indicating a retreat in overall market risk appetite. Notably, the utilities sector (+1.4%) was the only industry to rise, reflecting a shift of funds towards defensive assets. Additionally, the VIX volatility index remains above 20 but has not entered extreme panic territory, indicating that market sentiment is more about correcting previous excessive optimism rather than an accelerated release of pessimism.

Commodity Market: Gold Hits Historical High, Copper Prices Rise, Energy Market Divergence.

This week, gold broke through $3000 per ounce, reaching a new historical high, reflecting a sustained demand for safe-haven assets. Meanwhile, copper prices rose by 3.9%, indicating that there is still some manufacturing demand support. However, the energy market showed divergence:

• Oil prices stabilized around $67, but CFTC net futures positions decreased by over 9.6%, suggesting that market expectations for global demand growth remain weak.

• Natural gas prices continued to decline, primarily affected by oversupply and weak industrial demand.

Cryptocurrency Market: Volatility Converges, Risk Appetite Declines.

The cryptocurrency market remains in a state of synchronized adjustment with U.S. stocks. Although Bitcoin's weekly trend still shows a decline, volatility has narrowed, indicating that short-term selling pressure has eased. However, at the altcoin level, ETH, SOL, and others still show weak performance, reflecting a decrease in market risk appetite. Additionally, the market capitalization of stablecoins continues to grow, but net inflows have slowed, suggesting that market liquidity is becoming cautious, and the pace of new capital entering the market is slowing.

Recent weeks' data indicate that the impact of tariffs is gradually becoming evident, accompanied by adjustments in global supply chains and cooling U.S. demand.

Trump's new round of tariff policies not only impacts the pricing expectations of risk assets but is also starting to have an effect in the real economy. This week's transportation market data further confirms this trend:

• The Baltic Dry Index (BDI) continues to soar, indicating robust shipping demand in Asia and Europe, and manufacturing capacity may be accelerating its shift overseas.

• The U.S. transportation index (-6.5%) has shown a significant decline, suggesting weak domestic demand and a decrease in local logistics demand.

This divergence reflects that, under the influence of tariff policies, global supply chains are undergoing regional restructuring—with U.S. domestic demand slowing while manufacturing and export activities in Asia and Europe may be relatively active. Meanwhile, the rise in copper prices and the stability of oil prices further illustrate that the market's pricing of economic recession remains divided. Although macroeconomic data has not clearly supported a recession judgment, the uncertainty regarding future demand prospects remains high.

2. Economic Data Analysis

Last week's key data included CPI, PPI, and inflation expectation data. Specifically:

The NFIB small business confidence index for February, released on Tuesday, has declined for three consecutive months, indicating that U.S. small and medium enterprises remain increasingly concerned about trade policy uncertainties.

The CPI data released on Wednesday was better than market expectations, with seasonally adjusted overall CPI and core CPI both at 0.2%, below the expected 0.3%; as a result, the overall CPI annual rate fell to 2.8%, providing a brief boost to market risk appetite.

Chart 1: U.S. CPI Annual Rate Change Source: Bloomberg

From the detailed data, although commodity inflation has rebounded, service inflation continues to decline, with service inflation excluding housing dropping to its lowest level since October 2023.

The PPI data released on Thursday continued the downward trend, with the core PPI showing the largest month-on-month decline since April 2021, decreasing by 0.1%, while an increase of 0.3% was expected. Among these, transportation services were the core contributors to the PPI decline.

The University of Michigan consumer confidence index and one-year inflation expectations released on Friday provided a direction opposite to the actual data, with one-year and five-to-ten-year inflation expectations initial values (+3.9%, expected 3.4%) continuing to soar. However, the data continued the previous partisan divergence, with expectations varying significantly by party affiliation, and the surge in inflation expectations mainly coming from Democratic respondents. In fact, this significant partisan data difference has turned this data into market noise.

Chart 2: University of Michigan Inflation Expectations Survey Shows Significant Partisan Differences Source: Bloomberg

The CPI, PPI, and inflation expectation data released this week exhibit a dual signal of "actual inflation cooling" and "divergent inflation expectations," which has a complex impact on market sentiment.

Overall, the decline in actual inflation data has reinforced market expectations for the Fed to cut rates within the year, but the volatility in inflation expectations has increased market uncertainty, exacerbating short-term market adjustment pressures.

3. Changes in Liquidity and Interest Rate Markets

From a broad liquidity perspective (the Fed's balance sheet view), the trend of marginal liquidity recovery has become clear over the past two weeks, maintaining above $6 trillion this week, mainly due to outflows from the U.S. Treasury's TGA account; additionally, the use of the Fed's discount window continued to decline this week, indicating that the overall macro liquidity is stabilizing. Chart 3: Changes in U.S. Treasury General Account Balance Source: Wind

From the interest rate market perspective, the federal funds futures market is almost pricing in a negligible probability of a rate cut in March, essentially indicating that the interest rate market does not believe the Fed will take rate-cutting measures in March.

Chart 4: Federal Funds Rate Futures Source: MacroMicro

However, the six-month term interest rates and the yield curve for government bonds suggest that rate cuts this year are still expected to be around 2-3 times. Recently, short-term yields have fallen sharply while long-term yields have remained relatively stable, indicating that the market is gradually pricing in future rate cuts by the Fed.

Chart 5: Government Bond Yields and SOFR Rates Source: Wind

Another noteworthy change is in the U.S. credit market, where corporate credit spreads have been widening over the past two weeks. The North American investment-grade credit default swap (CDX IG) reading was 55.28 by Friday, up over 7% this week. Meanwhile, U.S. sovereign CDS and high-yield bond credit default swaps have also shown varying degrees of increase.

The widening of sovereign and corporate credit default swap spreads indicates that: on one hand, market concerns about U.S. debt, including the sustainability of fiscal deficits, have increased, while concerns about corporate credit risk have also risen. These factors will gradually transmit to the capital market, further suppressing market upward movement.

II. Macro Outlook for Next Week

The current market is in a triple contradiction period of "cooling inflation but rising expectations," "rising credit risks but no economic recession yet," and "marginal liquidity easing but policy constraints." Market sentiment has not yet escaped the panic zone, and the uncertainty of Trump's tariffs continues to exert significant pressure on the formation of market stability expectations. Furthermore, in this week's report, we particularly remind investors to pay attention to the credit market, as it is an important leading indicator for risk assets, directly reflecting market confidence in the repayment ability of corporations and governments. Changes in the credit market often precede those in the stock market or other risk asset markets, and its turning points often signal changes in risk appetite.

Based on the above analysis, our overall view is:

1) Global Stock Markets: Focus on Defense, Look for Mispriced Opportunities.

l In terms of U.S. stocks, the market is still in an expectation adjustment phase, requiring a reduction in high-beta asset allocations and an increase in defensive sectors (such as utilities, healthcare, and consumer staples) to cope with market volatility. Meanwhile, the high VIX index indicates that the market remains in a cautious sentiment, so short-term excessive bets on high-growth, high-volatility sectors, such as technology stocks and small-cap stocks, should be avoided.

l Look for mispriced opportunities: A decline in market sentiment often leads to irrational selling, so it is advisable to focus on blue-chip stocks with high dividends and stable cash flows, especially leading companies with global competitiveness and declining valuations, as these assets may recover first once market sentiment stabilizes.

l Appropriately increase allocations in Asia and Europe: As the effects of tariff policies gradually become evident, global supply chain adjustments are accelerating, and export and manufacturing activities in Asia and Europe are relatively more active. It is recommended to increase asset allocations in the Asia-Pacific region (especially China, India, and Southeast Asia) and European markets to hedge against uncertainties in the U.S. market.

2) Cryptocurrency Market: BTC Still Holds Long-term Allocation Value, Reduce Altcoin Risks

l Bitcoin (BTC) has eased short-term selling pressure and still has long-term support. Although BTC showed a downward trend last week, the narrowing volatility indicates that market panic selling has weakened. From a macro perspective, the marginal recovery in liquidity and unchanged capital inflow trends provide long-term support for BTC, so it can continue to be held or added to on dips.

l Reduce altcoin allocations, as market risk appetite declines and funds remain concentrated in BTC. Other crypto assets may continue to face pressure in the short term, so it is advisable to reduce risk exposure and maintain a wait-and-see attitude.

l Monitor stablecoin capital flows, as the slowing growth of stablecoin market capitalization indicates that the pace of new capital entering the market is slowing, necessitating further observation of market liquidity conditions to determine the direction of the next phase of the cryptocurrency market.

3) Credit Market: Be Wary of Widening Credit Spreads, Debt Risks May Intensify

l Credit spreads are expanding, and market risk appetite is declining. The North American investment-grade credit default swap (CDX IG) rose over 7% last week, while U.S. sovereign CDS and high-yield bond credit default swaps also expanded, reflecting rising market concerns about corporate and government debt.

l Avoid high-leverage corporate bonds and increase allocations in high-rated bonds. As credit risks rise, high-leverage corporations may face greater repayment pressure, so it is advisable to reduce allocations in low-rated corporate bonds and shift towards investment-grade bonds or U.S. medium- to long-term government bonds to lower credit risk exposure.

l Be cautious of the impact of U.S. debt deficit issues. The rise in sovereign credit default swaps (CDS) indicates that market concerns about the sustainability of U.S. debt are intensifying. If the deficit issue continues to worsen, it may further elevate market risk aversion, thereby affecting the performance of overall risk assets.

Overall, the market is still seeking a new balance, and investors need to remain cautious while seizing potential mispriced opportunities for quality assets during market overreactions.

Key macro data for next week is as follows:

It is particularly noteworthy that the key point of contention in the upcoming FOMC meeting will be whether the dot plot indicates expectations for 2 or 3 rate cuts, as well as the inclination of Powell's remarks; additionally, another point of interest is whether the Fed will announce a pause in QT at this meeting. Given the current liquidity situation in the market and the reserves in the banking system, a pause in QT may be anticipated, which could significantly boost the current market.