The US-China tariff agreement promotes market Rebound, the Fed may re-examine the monetary policy framework

Recently, the first contact between the United States and China in Switzerland has achieved significant results, marking a new stage in the trade relationship between the two parties. This progress exceeded market expectations, and the US stock and cryptocurrency markets quickly absorbed the previous negative impacts.

Market participants are now more focused on whether the US economy will enter a recession and when the Fed will restart the interest rate cut cycle. This week's inflation and employment data show that inflation continues to decline, and employment remains stable for the time being, indicating that the impact of trade frictions is lower than previously expected.

Driven by these unexpected data, the U.S. stock indices surged significantly this week, while gold prices saw a decline. The Fed chairman mentioned in a recent important speech the possibility of re-examining the "monetary policy framework," which could accelerate the process of restarting the interest rate cut cycle. However, a rating agency downgraded the U.S. Treasury's rating from Aaa to Aa1, highlighting the long-term debt issues that the U.S. faces.

On the policy and macroeconomic front, both China and the United States reached a temporary tariff reduction protocol valid for 90 days. The U.S. will reduce tariffs on Chinese goods from a maximum of 145% to 30%, while China will lower tariffs on U.S. goods from a maximum of 125% to 10%, and suspend or cancel some non-tariff countermeasures. This progress indicates that the impact of trade friction may be gradually weakening, and in the short term, it is unlikely to cause an impact on the global economy beyond expectations.

As a result, the three major U.S. stock indices have all risen this week, marking four consecutive weeks of gains. If expectations for interest rate cuts continue to rise, the stock market is expected to challenge historical highs in the short term.

This week's US economic data shows that the CPI in April increased by 2.3% month-on-month, which is lower than expected and has declined for three consecutive months. Regarding employment data, the number of initial jobless claims was 229,000, which met expectations. The Producer Price Index (PPI) was 2.4%, slightly lower than expected. These data indicate that trade frictions have not yet had a significant negative impact on consumption, while inflationary pressures continue to decline, creating conditions for a restart of interest rate cuts.

The Fed chairman stated in his speech that the monetary policy framework introduced in 2020 may need to be adjusted in the current economic environment. He mentioned that frequent supply shocks make it difficult for the average inflation targeting regime to cope, necessitating a policy adjustment to better balance inflation and employment goals. This statement may imply that the Fed will formulate policies based on shorter-term inflation data, thereby increasing policy flexibility.

However, the U.S. debt issue remains a potential risk factor. This week, the yields on 2-year and 10-year U.S. Treasuries rose again to highs of 4.0140% and 4.4840%, respectively. Analysis indicates that the U.S. needs to add $1.9 trillion in debt this year, while also facing about $9.2 trillion in maturing debt rollovers. If interest rate cuts are not initiated soon, the U.S. government will not only continue to bear high interest costs but may also face difficulties in auctions in the primary market.

A rating agency has downgraded the long-term issuer and senior unsecured debt rating of the U.S. government from Aaa to Aa1, marking the first downgrade of U.S. Treasury bonds by the agency since 1917. This also means that the U.S. has lost the highest credit rating from the three major rating agencies. The debt issue has become a key factor affecting U.S. medium- to long-term interest rates and the stability of financial markets.

In the cryptocurrency market, Bitcoin maintained a high consolidation for most of the week, until it suddenly surged to $106,692.97 on Sunday, up 2.24% for the week. Technical indicators show that Bitcoin traded above the "first upward trend line" throughout the week, close to the upper edge of the "Trump bottom". The overbought indicator has seen some correction, and trading volume remained basically flat compared to last week.

In terms of capital flow, the cryptocurrency market maintained a strong inflow of funds this week, with a total of $2.527 billion flowing in from two main channels, including $1.880 billion in stablecoins and a combined total of $647 million from Bitcoin ETFs and Ethereum ETFs. It is worth noting that the inflow of funds through the ETF channel has been declining for the past four weeks. The on-chain lending funds are in an expansion phase, and the contract market has also entered the second expansion phase of this round of market activity.

In terms of selling pressure and sell-offs, after Bitcoin returned to $100,000, some bottom-feeding funds took profit. As liquidity recovered, some long-term holders also made slight sell-offs. Overall, the phase of "long hands reducing positions and short hands increasing positions" has not fully unfolded yet, and long-term investors who have experienced more market tests seem to be waiting for higher prices.

Data shows that this week, 127,226 bitcoins flowed into exchanges, marking a decline for the fourth consecutive week, while the outflow reached 27,965 bitcoins, the highest this year. The decrease in selling pressure combined with an increase in buying activity, under favorable external conditions, often signals that prices may rise rapidly in the future.

According to a certain indicator, the current Bitcoin cycle indicator is 0.875, in a rebound period.