Market Overview

Abnormal Signal

Recently, the financial market has shown significant abnormalities:

• Triple kill in stocks, bonds, and currencies: U.S. stocks experience significant volatility, long-term Treasury yields surge, and the U.S. dollar index falls below 100.

• Differentiation of safe-haven assets: Gold breaks through a new high of $3200/ounce, the yen and Swiss franc strengthen, and the dollar's safe-haven status wavers.

Economic Data Contradictions

Early signals of stagflation appear:

• The overall CPI has declined, but core inflation ( housing + food ) remains high.

• PPI MoM -0.4%, reflecting the coexistence of shrinking demand and rigid costs.

Currently, the data has not yet reflected the impact of the new tariffs, and the market's pessimistic expectations are leading.

Liquidity Pressure

A sell-off spiral has emerged in the bond market:

• The sharp decline in long-term bonds has led to a decrease in collateral value, forcing hedge funds to sell off, which further drives up yields.

• The repurchase market spread has widened, reflecting a sharp increase in collateral financing costs and exacerbating liquidity stratification.

Policies and External Risks

• The trade war has partially eased, but long-term risks still remain.

• Nearly 9 trillion US dollars in Treasury bonds will mature in 2025, facing refinancing pressure. If foreign holders sell off, it will exacerbate liquidity pressure.

Outlook for Next Week

Market Logic Shifts to Defense

• Funds are shifting towards non-USD safe-haven assets ( gold, yen, Swiss franc ).

• Stagflation trading dominates, with long-term U.S. Treasuries and high-leverage equity assets facing sell-off risks.

Key Monitoring Indicators

• Will the liquidity of US Treasuries and the 10-year yield break 5%?
• Changes in China's bond holdings
• Bank of Japan currency intervention
• High-yield bond spread

Economic Data Analysis

Adjustment of Trade Tariffs

• The basic tariff rate is adjusted to 10%.
• The specific tariffs on China increased to 145%, and China correspondingly increased tariffs on the U.S. to 125%.

The trade tariff war is generally moving towards a de-escalation, and the peak of uncertainty has passed.

Inflation Data

CPI unexpectedly declined, but core items remain high.

• The decline in gasoline prices improves the overall CPI.
• Housing and food costs increased by 0.3% and 0.4%, respectively.

PPI month-on-month -0.4%, the lowest since the pandemic:

• The decline in product prices is the main reason.
• The demand-sensitive service industry has significantly shrunk, while rigid services remain relatively stable.

Data shows that the marginal demand is weakening, but the cost pressure on the supply side still exists, initially presenting early signs of stagflation.

Liquidity and Interest Rate Analysis

• The Federal Reserve's balance sheet has risen to 6.2 trillion, turning positive year-on-year.

• The yield on the 10-year government bond has soared to around 4.45%.

• SOFR term rates have rebounded, and the market expects the Federal Reserve may continue to tighten.

• The US dollar index fell sharply, hitting a new low for July 2023.

Analysis of Abnormal Phenomena:

1. Long-term government bond yields rose rapidly, while swap rates were suppressed by recession expectations, causing the basis to narrow and even invert.

2. Funds are flowing out of the United States towards Japan and Europe for hedging, rendering the traditional dollar hedging logic ineffective.

3. In 2025, the US debt will face immense refinancing pressure, and foreign holders may sell US debt to avoid risks.

The current situation shows that the market has cast a vote of no confidence in the credit of the US dollar, and there is a certain liquidity crisis in US Treasury bonds.

Outlook for Next Week

The market is shifting from "inflation concerns" to the dual impact of "dollar credit crisis + stagflation," which requires attention:

1. The risk of stagflation is becoming more evident.
2. Pressure in the bond market and tight dollar liquidity continue
3. Pressure on refinancing U.S. debt

Overall view:

• Maintain defense mode as the main focus
• Focus on the evolution of the stagflation pattern
• Monitor the liquidity crisis of U.S. Treasuries
• Assessing the Impact of the US Dollar Weakness on Global Markets
• Maintain a neutral attitude towards cryptocurrencies
• Focus on the evolution of tariff policies and changes in US Treasury yields