Last night, the United States released the PCE price index, and the information revealed came as a great surprise to the market. It appears that inflation is set to make a strong rebound, and as a result, the Federal Reserve's interest rate hikes could far exceed market expectations.

In response to this, U.S. Treasury yields have climbed significantly. The U.S. stock market has also experienced a corresponding decline.

01, U.S. Treasuries plummet

After U.S. Treasury yields hit a recent high in October last year, the prices of U.S. Treasuries rebounded. Just when everyone thought the heavy burden on U.S. Treasuries had been lifted, the recent economic data has once again put immense pressure on the U.S. bond market.

Following the resumption of the decline in U.S. Treasury prices a few days ago, the latest price index was announced last night, and U.S. Treasury yields have experienced another rapid increase, causing the U.S. Treasury market to collapse once more.

A few days ago, the yield on 6-month U.S. Treasuries had already broken through 5%, and yesterday, the winning bid yield on 7-year U.S. Treasuries set a new historical high. As of last night, the two-year yield has risen to 4.8%, which is the highest level since the subprime crisis. Additionally, the yield on three-year Treasury bonds has currently reached 4.56%.

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The balance of U.S. Treasuries held by China is continuously decreasing, having returned to levels prior to mid-2010. After recently falling below the $1 trillion mark, it has once again dropped below the $900 billion threshold in the past few months. The extent of China's sale of U.S. Treasuries in 2022 reached $200 billion.

The continuous decline from 2022 to the present has caused significant losses for countries and institutions holding U.S. Treasuries. This is not the biggest issue; considering the possibility of U.S. Treasuries defaulting in the middle of this year, the greater risk lies in their credit risk. Therefore, the continuous selling of U.S. Treasuries has become a common choice for many countries.

02, U.S. stock market plunge

In addition to bonds, the U.S. stock market also saw a significant decline last night. For the S&P 500 index, it has now fallen for three consecutive weeks, but the decline this week has further widened to 2.67%.The industry sectors covered by the S&P 500 Index experienced a near-universal decline last night.

The Nasdaq Index fell by more than 1.5%, with tech giants seeing significant drops, including Microsoft, Netflix, Tesla, and Amazon, all down by over 2%, while Apple declined by 1.8%.

Chinese concept stocks suffered even greater losses, leading to a 3.86% drop in the Nasdaq China Financial Index.

Xpeng Motors fell by 7%, NIO dropped by 5%, and Li Auto fell nearly 4%.

Alibaba and NetEase's declines approached 5%, while JD.com and Baidu saw drops reaching 4%.

03, Inflation Exceeds Expectations

If the decline in U.S. bonds and stocks had already begun prior to this, the drop last night was exacerbated, primarily due to the release of the latest PCE price index.

This index showed a year-over-year increase of 5.4% in January, with the core price index also rising by 4.7%, which seems to be far from the Federal Reserve's target.

In the past, I have repeatedly pointed out that when looking at inflation data, one cannot solely focus on year-over-year figures, as the price base in January of the previous year was already very high, making year-over-year data prone to distortion.

Therefore, we need to pay attention to the fact that the core price index in January rose by 0.6% month-over-month, which also exceeded the market's expectation of 0.4% and increased significantly from the previous month's 0.3%.Quarter-over-quarter comparison takes the data from the previous month as the base, which fully indicates that the current U.S. prices are still rising at a high level, and the inflation in the United States is still not under control. The previous optimism seems to be blind optimism.

It is clear that, with the current data support, the Federal Reserve will continue to raise interest rates, and even significantly, with the final interest rate possibly settling far above previous expectations. In other words, it would not be surprising to reach 5.5% or 6%.

The new expectations will inevitably mean new adjustments in the market.

The Federal Reserve's interest rate hikes will also stir up global financial markets.