SignalPlus Macroeconomic Analysis Special Edition: Heat Check

We concluded a week that was volatile but ultimately ended within the range, with the latest inflation indicators showing a divergence: after a mild CPI (Consumer Price Index) in the previous week, the July PPI (Producer Price Index) unexpectedly surged significantly (MoM +0.9% vs expected +0.2%, primarily driven by a jump in professional services prices).

What makes matters worse is that the inflation expectations data from the University of Michigan is also high, with 1-year and 5–10 year price expectations significantly above forecasts (1-year: 4.4% vs 4.9% forecast; 5–10 year: 3.4% vs 3.9% forecast). Despite the disappointing inflation data, Treasury Secretary Becerra continues his dovish tone, claiming that according to their economic "models," the neutral interest rate should be 150 basis points lower. This is undoubtedly influenced to some extent by President Trump's ongoing agenda to maintain low-interest rate policies.

Despite the optimistic official stance, the market has its own judgments. Hotter inflation data suggests that tariff costs may be passing through to consumers at a faster-than-expected rate, leading to a rebound in the USD/Treasury yield and a drop in gold prices. Hopes for a 50 basis point rate cut at the September meeting quickly evaporated, and by Friday's close, the market priced in only about a 90% probability of a single rate cut (25 basis points). However, the market still expects slightly more than two rate cuts by the end of the year.

In the past week, cryptocurrency prices have stagnated, with macro factors adding short-term resistance. Treasury Secretary Basant announced that the value of BTC held by the U.S. government is close to $15-20 billion, rather than the over $23 billion that the market had hoped for, which disappointed the market. More importantly, he further disappointed observers by stating that the government would not purchase more BTC for its "strategic Bitcoin reserves," nor is it expected that the government will re-evaluate or sell its gold reserves (valued at $42.22 per ounce) in exchange for Bitcoin.

On the other hand, ETF capital inflows remain very strong. Bloomberg reported that BTC and ETH ETFs recorded the largest weekly capital inflow since their launch last week, making this pair among the top five of all equity ETFs. This trend is mainly driven by the surge in ETF capital inflows, with a weekly inflow amount reaching $17 billion, breaking the previous record.

Looking ahead, the focus will shift to the Jackson Hole meeting later this week. The speech by Federal Reserve Chairman Powell will be closely scrutinized by macro observers to assess the policy tone for the remainder of the year. However, given the current inflation backdrop, we do not expect many new dovish surprises. Unless the September Non-Farm Payroll (NFP) report is very negative, it is unlikely to drive the market to reprice the possibility of a 50 basis point rate cut. On the emotional front, we do need to remind ourselves that the current level feels somewhat overly enthusiastic. The divergence between American consumers' optimism about stock prices and their own income prospects has reached an unprecedented level in history. At the same time, as we enter the historically more volatile months of September and October, fund managers' cash holdings have fallen back to cycle lows (indicating that investments are close to being fully allocated).

Good luck and happy trading!