The improvement of US-China relations drives the market to pump, the Fed may reconsider the monetary policy framework.

Recently, the talks between the United States and China held in Switzerland achieved significant results, marking a new phase in the trade relationship between the two sides. This breakthrough swiftly alleviated market concerns about trade friction, leading to a substantial rise in the US stock market and the cryptocurrency market.

Investors are now turning their attention to two key issues: the potential recession in the U.S. economy and when the Fed will start cutting interest rates. The inflation and employment data released this week show that inflation continues to decline, the labor market remains stable, and the impact of trade friction appears to be lower than expected.

The unexpected economic data has driven the US stock market to rise strongly this week, while gold prices have seen a significant drop. Meanwhile, Fed Chairman Powell mentioned in an important speech the possibility of re-examining the "monetary policy framework", which could accelerate the arrival of the rate cut cycle. However, Moody's downgraded the US government bond rating from Aaa to Aa1, highlighting once again the seriousness of the long-term debt issues in the United States.

Policy, Macroeconomic Finance and Economic Trends

On May 12, U.S.-China relations underwent a significant turning point. After talks in Switzerland, both sides announced a temporary tariff reduction agreement lasting 90 days. The U.S. will reduce the highest tariffs on Chinese goods from 145% to 30%, including a specific tariff of 20% and a base tariff of 10%. China will reduce the highest tariffs on U.S. goods from 125% to 10%, and suspend or cancel a series of non-tariff measures that have been implemented since April.

This agreement indicates that bilateral relations are gradually easing, and it is expected that there will not be a serious short-term impact on the global economy. This also explains why U.S. stock investors maintained an optimistic attitude throughout the week, driving the three major indices to rise significantly. The Nasdaq, S&P 500 Index, and Dow Jones Industrial Average rose by 7.15%, 5.27%, and 3.41%, respectively, achieving four consecutive weeks of gains. If the expectations for interest rate cuts further strengthen, the market may reach new highs in the short term.

The U.S. April Consumer Price Index (CPI) data shows that the seasonally adjusted monthly CPI increase is 2.3%, lower than expected, marking a decline for three consecutive months. Employment data released on the 15th indicates that the number of initial claims for unemployment benefits is 229,000, in line with expectations. The Producer Price Index (PPI) is 2.4%, slightly below expectations. These data collectively indicate that trade frictions have not yet had a significant impact on consumption, and alongside the decline in inflation, restarting interest rate cuts may become the best option.

In his speech this week, Powell stated that the monetary policy framework introduced in 2020, centered around a 2% average inflation target, may need to be adjusted in the current economic environment. He pointed out that frequent supply shocks (such as trade frictions and supply chain issues) make it difficult for the average inflation targeting to cope, necessitating a policy adjustment to better balance inflation and employment goals. This change could allow the Fed to take action based on shorter-term or even single-month CPI data, increasing policy flexibility to respond to data volatility caused by frequent policy adjustments. According to this new framework, the current CPI data is already very close to the conditions for a rate cut.

The deep reasons for the Fed's reassessment of the monetary policy framework may be related to the U.S. debt issue. This week, the yields on 2-year and 10-year U.S. Treasury bonds rose again to highs of 4.0140% and 4.4840%, respectively. According to analysis, the U.S. has added $1.9 trillion in debt this year, while the debt that needs to be refinanced this year could reach as high as $9.2 trillion, with $6.5 trillion due in June alone. 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. The massive debt will continue to plague the U.S. government, becoming a key factor influencing its political, economic, and financial policies.

On May 16, the rating agency Moody's downgraded the long-term issuer and senior unsecured debt rating of the U.S. government from Aaa to Aa1. This is the first downgrade of U.S. government bonds by Moody's since 1917, and it marks the loss of the highest credit rating from the three major rating agencies (S&P, Fitch, and Moody's). Previously, S&P downgraded the U.S. rating to AA+ (equivalent to Aa1) in 2011, and Fitch did the same in 2023.

Debt issues will become a key factor affecting U.S. interest rates and the stability of financial markets in the medium to long term.

Cryptocurrency Market Dynamics

Bitcoin has been consolidating at high levels for most of this week, until it suddenly surged to $106,692.97 on Sunday, ultimately rising 2.24% for the week. From a technical perspective, Bitcoin has been trading above the "first ascending trend line" throughout the week, approaching significant resistance levels. The overbought indicator has seen some correction, and trading volume is comparable to last week.

Capital Flow Analysis

This week, the cryptocurrency market maintained a strong inflow of funds, with $2.527 billion flowing in through two main channels, including $1.880 billion in stablecoins and a 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 decreasing over the past four weeks. On-site lending funds are in an expansion phase, and the contract market has entered the secondary expansion phase of this round of market.

Selling Pressure and Selling Situation

After Bitcoin returned to $100,000, some early investors took profits. With improved liquidity, some long-term holders also made slight sell-offs. Overall, the trend of "long-term holders reducing their positions and short-term speculators increasing theirs" has not yet fully unfolded, and long-term investors who have undergone multiple rounds of market tests seem to be waiting for higher prices.

Looking at the specific data, this week the inflow of Bitcoin to exchanges was 127,226 coins, a consecutive decline for 4 weeks, while the outflow reached 27,965 coins, the highest so far this year. The decrease in selling scale and the increase in buying scale, under favorable external conditions, usually indicate that future prices may rise quickly.

Market Cycle Indicators

According to eMerge Engine data, the EMC BTC Cycle Metrics indicator is 0.875, in a pump period.