The easing of US-China relations drives the financial markets to pump, and the Fed's policy adjustments attract follow.

Recently, the high-level contacts between China and the US held in Switzerland achieved significant results, marking a new stage in the trade relationship between the two sides. This breakthrough quickly alleviated the financial markets' concerns about trade frictions, leading to a notable pump in the US stock and cryptocurrency markets.

Traders are starting to shift their attention to a new focus: whether the U.S. economy will fall into recession and when the Fed will begin to cut interest rates. This week's inflation and employment data show that inflation continues to decline, the job market remains stable for the time being, and the impact of trade frictions seems to be less than expected. These better-than-expected data have driven U.S. stock indices to rise significantly this week, while gold prices have fallen.

In a recent important speech, the Fed chairman mentioned the possibility of re-examining the "monetary policy framework," which could mean that the interest rate cut cycle will soon restart. However, the rating agency Moody's downgraded the U.S. Treasury bond rating from Aaa to Aa1, further highlighting the severity of the long-term debt issues in the United States.

Macroeconomic and Policy Trends

Recently, the US and China reached a temporary reduction agreement on tariffs for a period of 90 days. The US will lower the highest tariffs on Chinese goods from 145% to 30%, while China will reduce the highest tariffs on US goods from 125% to 10%, and suspend or cancel some non-tariff countermeasures. This development indicates that the trade relations between the two sides are gradually easing, and in the short term, it is unlikely to have an impact on the global economy beyond expectations.

Driven by this positive news, the three major U.S. stock indexes all achieved a pump this week, with the Nasdaq, S&P 500, and Dow Jones Industrial Average rising 7.15%, 5.27%, and 3.41% respectively, marking four consecutive weeks of increase. If expectations for interest rate cuts strengthen further, the stock market is likely to reach new highs in the short term.

The latest economic data shows that the CPI in April rose 2.3% year-on-year, lower than expected and has declined for three consecutive months. In the job market, the number of first-time unemployment claims was 229,000, in line with expectations. The Producer Price Index (PPI) rose 2.4% year-on-year, slightly below expectations. These data collectively indicate that trade frictions have not caused substantial harm to consumption, while inflationary pressures continue to ease, creating favorable conditions for the Fed to restart interest rate cuts.

The Fed chair stated that the monetary policy framework introduced in 2020 may need to be adjusted in the current economic environment. He pointed out that frequent supply shocks make it difficult for the average inflation target to respond, necessitating a policy adjustment to better balance inflation and employment goals. This statement suggests that the Fed may formulate policies based on shorter-term inflation data, thereby increasing policy flexibility. According to this new framework, the current inflation data is already very close to the conditions for initiating interest rate cuts.

However, the U.S. debt issue remains a significant concern. This year, the U.S. is expected to add $1.9 trillion in debt, while the amount of maturing debt that needs to be refinanced could reach up to $9.2 trillion. If interest rates are not lowered quickly, the U.S. government will not only continue to bear high interest costs but may also face the risk of difficulty in bond auctions. Therefore, the debt issue is likely the fundamental reason why the Fed is considering adjusting its monetary policy framework.

The rating agency Moody's has downgraded the long-term credit rating of the U.S. government from Aaa to Aa1, marking the first downgrade since 1917. Previously, S&P and Fitch had downgraded the U.S. rating in 2011 and 2023, respectively. This series of downgrades highlights the severity of the U.S. long-term debt issues, which will become a key factor affecting U.S. interest rates and financial market stability.

Cryptocurrency Market Dynamics

Bitcoin has maintained a high consolidation for most of the week until it suddenly surged to $106,692.97 on Sunday, rising 2.24% for the week. From a technical perspective, Bitcoin has been operating above the rising trend line throughout the week, close to significant resistance levels. The overbought indicators have seen some correction, and the trading volume is comparable to last week.

This week, the cryptocurrency market as a whole maintained a strong influx of funds, with a total of $2.527 billion flowing in through two main channels, of which stablecoins accounted for $1.88 billion, and Bitcoin ETFs and Ethereum ETFs together accounted for $647 million. It is worth noting that the influx of funds through the ETF channel has shown a downward trend over the past four weeks. Meanwhile, on-chain lending funds and the contract market are both in an expansion phase.

After Bitcoin returned to $100,000, some bottom-fishing funds took profits. With improved liquidity, some long-term holders also made small sell-offs. Overall, the trend of "long-term holders reducing positions and short-term speculators increasing positions" has not fully unfolded, and long-term investors who have experienced more market fluctuations seem to be waiting for higher prices.

Data shows that this week, 127,226 bitcoins flowed into exchanges, marking a decline for four consecutive weeks; 27,965 bitcoins flowed out of exchanges, the highest level this year. With the reduction in selling scale and an increase in purchasing scale, this usually indicates that prices may rise quickly under favorable external conditions.

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