Macroeconomic Weekly Report: Market Seeks New Balance, Defensive Sentiment Heats Up

1. Macro Review of This Week

1. Overall market performance

This week, the market has shown a significant adjustment trend, with investors entering a phase of correction in the pricing of risk assets. The three major U.S. stock indices generally retreated, with the Dow Jones Industrial Average falling by 3.1%, the Nasdaq Index down by 2.6%, and the Russell 2000 Index decreasing by 1.8%. Notably, the utilities sector rose against the trend by 1.4%, becoming the only industry to gain, reflecting a shift of funds towards defensive assets. The VIX volatility index remains above 20 but has not entered the extreme panic zone, indicating that the market is more about correcting the previously overly optimistic sentiment.

2. Product Market Differentiation

Gold prices have broken through $3,000 per ounce, setting a new historical high, reflecting a sustained increase in market risk aversion. Copper prices rose by 3.9%, indicating that manufacturing demand still has some support. The energy market shows a mixed performance, with crude oil prices remaining stable around $67, but futures net positions have decreased by over 9.6%, suggesting that market expectations for global demand growth are weak. Natural gas prices continue to decline, mainly affected by oversupply and weak industrial demand.

3. Cryptocurrency market adjustment

The overall cryptocurrency market is adjusting in sync with the US stock market. Although Bitcoin's weekly trend is still downward, the volatility has narrowed, indicating that short-term selling pressure has eased. Altcoins like ETH and SOL are showing weakness, reflecting a decrease in market risk appetite. The market cap of stablecoins continues to grow, but net inflows are slowing down, suggesting that market liquidity is becoming more cautious and the pace at which new funds are entering the market is slowing.

4. The impact of tariffs is becoming evident, and the supply chain is adjusting at an accelerated pace.

The Baltic Dry Index (BDI) continues to rise, indicating strong shipping demand in the Asia-Europe region, and manufacturing capacity may be accelerating its shift overseas. Meanwhile, the U.S. transportation index has fallen by 6.5%, reflecting weak domestic demand and a decline in local logistics demand. This divergence phenomenon reflects that, under the influence of tariff policies, the global supply chain is undergoing regional reconstruction, with domestic demand in the U.S. slowing down while manufacturing and export activities in the Asia-Europe region remain relatively active.

5. Analysis of Inflation Data

The CPI and PPI data for February were both below market expectations. After seasonal adjustment, the overall CPI and core CPI were both 0.2%, with the overall CPI year-on-year rate falling to 2.8%. The PPI data continued its downward trend, with core PPI declining by 0.1% month-on-month, marking the largest drop since April 2023. However, the University of Michigan's consumer inflation expectations data showed an upward trend, with one-year and five-to-ten-year inflation expectations rising to an initial value of 3.9%, higher than the expected 3.4%. It is noteworthy that there is a clear partisan divide in inflation expectations data, primarily driven by rising expectations among Democratic supporters.

6. Changes in Liquidity and Interest Rate Markets

From a broad liquidity perspective, the Federal Reserve's balance sheet size has shown a marginal recovery trend over the past two weeks, remaining above 6 trillion dollars, primarily influenced by outflows from the U.S. Treasury's TGA account. The usage of the Federal Reserve's discount window continues to decline, indicating that the overall macro liquidity is stabilizing.

In terms of the interest rate market, the federal funds futures market no longer anticipates a rate cut in March. However, the 6-month interest rates and the yield curve of government bonds still suggest that there may be 2-3 rate cuts this year. Short-term yields have decreased significantly, while long-term yields remain relatively stable, reflecting the market's gradual pricing of future rate cut expectations from the Federal Reserve.

It is worth noting that changes have occurred in the U.S. credit market. Over the past two weeks, corporate credit spreads have widened, with North American investment-grade credit default swaps (CDX IG) rising by more than 7%. U.S. sovereign CDS and high-yield bond credit default swaps have also shown varying degrees of increase. This reflects a growing concern in the market regarding the sustainability of the U.S. debt fiscal deficit and corporate credit risk.

2. Macroeconomic Outlook for Next Week

1. Key Variables

Next week, the market focus will be on the FOMC meeting, retail data, and global central bank dynamics. Investors need to pay close attention to the Fed's dot plot guidance on interest rate cuts, which is expected to indicate a possibility of 2-3 rate cuts. Additionally, whether QT will be paused will also become a key focus for the market, potentially affecting risk appetite.

2. Strategy Recommendations

In terms of the stock market, it is recommended to reduce the allocation to high β assets, increase holdings in defensive sectors, and pay attention to opportunities for undervalued quality assets. In the cryptocurrency market, it is advisable to continue holding Bitcoin for the long term, but to reduce exposure to altcoins, while closely observing changes in stablecoin liquidity. Regarding the credit market, it is recommended to reduce exposure to highly leveraged corporate bonds, increase allocation to high-rated bonds, and remain cautious of the risk of U.S. debt deficits.

Key signals for future market turning points may come from the recovery of the credit market or clearer easing signals released by the FOMC. In the current environment of high uncertainty, investors should remain cautious and flexibly adjust their investment strategies.