US Stocks Plunge, Bonds on Edge, Currency Flows Near Reversal!

On July 25th, media reports indicated a massive plunge in the U.S. stock market, with the seven giants losing a staggering $550 billion!The S&P 500 index plummeted by 2.3%, breaking the record of 356 ...

On July 25th,media reports indicated a massive plunge in the U.S.stock market,with the seven giants losing a staggering $550 billion!

The S&P 500 index plummeted by 2.3%,breaking the record of 356 consecutive trading days since February 2023 without a drop of 2% or more.

The Dow Jones Industrial Average fell by 504 points,a decline of 1.2%.

The NASDAQ Composite index suffered a sharp decline of 3.6%,marking the largest single-day drop since October 2022!

Concurrently,the International Financial Times reported two major rumors circulating in the market: First,in the upcoming monetary conference,the Federal Reserve will remove the description of "elevated inflation"; second,current and former Federal Reserve officials have changed their hawkish stance,loudly calling for interest rate cuts.

In September 2021,after three consecutive months of inflation rates far exceeding the Federal Reserve's 2% target,the Fed began to describe inflation as "elevated."

Now,the Personal Consumption Expenditures (PCE) price index,which the Fed uses to set its inflation target,has dropped to 2.6% in May,making the same adjective seem less appropriate.

The market believes that the Fed may change its tune at the upcoming policy meeting,no longer using "elevated" to describe inflation.

This would be the most explicit easing signal to date,indicating that the Fed will cut interest rates in September,reversing the dollar circulation!

Additionally,Richard Clarida,who served as the Vice Chairman of the Federal Reserve from 2018 to 2022,stated that with inflation declining and the labor market cooling,the Fed is expected to cut interest rates twice this year,and possibly even three times.

Esther George,the former president of the Federal Reserve Bank of Kansas City,stated that the Fed has seen the signals they have been looking for to cut interest rates.

William Dudley,the former New York Fed chairman (the third-ranking Fed official),who consistently advocated for "keeping high interest rates for a longer time," made a sudden 180-degree turn,expressing a more aggressive stance than the "doves" – on July 24th,he published an article titled "I've Changed My Mind,the Fed Needs to Cut Interest Rates Now!

",arguing that the Fed should not wait until September to cut interest rates,as that would increase the risk of an economic recession.

Is the dollar hot circulation coming back?

What reasons make Dudley believe that the Fed should cut interest rates immediately,not even waiting for more than a month?

Is the urgent need for the Fed to cut interest rates related to the massive plunge in the U.S.stock market and the global stock market's wailing?

At the "Year-End Gala" in January 2024,the Hong Academy stated that (1) the Fed's exit from balance sheet reduction may be faster than expected,and the interest rate cut may be lower than expected.

(2) The dollar hot circulation will start in 2024.

The difference lies in whether it will be a gradual warm-up or a fast start.

Regarding balance sheet reduction,the Fed announced on May 1st that it would slow down the pace of balance sheet reduction from June.

The Federal Open Market Committee,responsible for open market operations,will reduce the monthly cap on U.S.Treasury holdings from $60 billion to $25 billion.

This is in line with the Hong Academy's expectations.

Regarding interest rate cuts,the Fed has not yet announced any cuts.

The market's expectations for how many times the Fed will cut interest rates in 2024 have been declining.

Also in line with the Hong Academy's expectations.

In the first half of 2024,from Israel to Mexico,from Switzerland and Sweden to the European Central Bank,about half of the world's major economies have already started cutting interest rates!

Among the G7,four countries – Germany,France,Italy,and Canada – have cut interest rates.

Although the Fed has not yet started the dollar hot circulation,globally,the monetary circulation has reversed,and overseas dollars have also started to gradually warm up with the interest rate cuts of various central banks,pushing the dollar circulation ahead of the Fed.

The situation in July has changed,and the mid-year analysis meeting is at a critical point in time!

The Fed's ostensible excuse is that the job market and inflation data are becoming increasingly "favorable," increasingly in line with expectations for interest rate cuts,and "the market has sent a signal."

But these signals themselves are suspicious!

It's not uncommon for the U.S.non-farm employment data to be released with higher-than-expected numbers,only to be significantly revised downward later.

For example,on July 5th,the U.S.non-farm employment data for April was revised from 165,000 to 108,000,and the data for May was revised from 272,000 to 218,000!

This has far exceeded the degree of statistical error!

If we look at the PCE price index from a macro perspective,the inflation rate in the U.S.has only slowed slightly and cannot be said to have completely defeated inflation.

What is the real reason behind the Fed's interest rate cuts?

(1) The liquidity in the U.S.Treasury market has seriously deteriorated!

The importance of the U.S.Treasury market to the global financial market need not be reiterated.

The serious deterioration of liquidity in the U.S.Treasury market will lead to increased volatility.

Increased volatility will significantly raise market risk,and high-frequency trading will amplify the risk.

A significant fluctuation could lead to a flash crash in high-frequency trading!

(2) Abnormalities in the repurchase market,reflected in the abnormal surge in the repurchase market interest rate SOFR.

The Hong Academy describes this phenomenon as the angina of the dollar's heart.

Since the Hong Academy's dollar circulation group discovered the abnormal heart murmurs in SOFR on June 25th,it has not returned to normal.

Getting closer to a heart attack!

(3) The abnormal growth of intraday overdrafts in reserve accounts.

In the week of March 6th,the amount of intraday overdrafts by banks at the Fed soared from an average of $6.6 billion in the previous two weeks to $11.9 billion,surpassing the period of the 2023 U.S.small and medium-sized bank crisis and setting a four-year high.

The amount of intraday overdrafts means that the amount of money banks withdraw from the Fed exceeds the amount in their reserve accounts at the Fed.

Banks need to borrow money in a short time to balance their accounts; otherwise,they may face a payment crisis and immediate bankruptcy!

If we view the U.S.financial market as a patient,it is suffering from three cardiovascular diseases at the same time.

These three diseases interact with each other,entwine,exacerbate each other,and also affect the whole body's organs.

Such a "seriously ill patient" needs to lie in the intensive care unit of the hospital for medication and surgery.

If there is no money to treat the disease,at least it should lie at home to rest quietly and carefully adjust.

However,the U.S.financial market is not quiet at all now,both internally and externally,it is in a "standoff and consumption."

The heart of the U.S.financial market – the Treasury market – is now only a facade of calm.

It is sliding towards the edge of instability,and at any time it may stop beating,causing the financial market to face a sudden collapse and the need for AED resuscitation in a huge crisis!

The real pressure facing the Fed is making the financial market more and more fragile!

This "Black Wednesday" in Eastern Time,"Crazy Thursday" in Beijing time,is an example!

The U.S.Treasury knows the financial market is "seriously ill," which is why Yellen is getting more and more excited.

The Fed knows the financial market "risks are huge," which is why the attitude of many members and former senior officials towards interest rate cuts has taken a big turn!

Therefore,it is imperative for the Fed to completely stop reducing the balance sheet,and the magnitude of the interest rate cut will exceed market expectations.

At 2 pm on July 27th,the Hong Academy's mid-year analysis meeting will be held in Beijing,which is to analyze the condition of the U.S.financial Treasury market clearly and logically,to establish a global logic for the market dynamics in the second half of the year,in order to have the real ability to see through the market dynamics and trends,and to lay out opportunities!

How will gold,exchange rates,stock markets,bond markets,oil,and bulk commodities evolve,and where are the pitfalls?

Understand market trends,clear market logic,and opportunities are everywhere!