01, Weekly sell-off volume of $6.9 billion

Due to significant changes in market expectations for the Federal Reserve, the previous optimism has vanished, and last week U.S. stocks experienced a substantial decline, marking the largest drop of the year.

The Dow Jones Industrial Average, after four consecutive weeks of decline, has now completely erased its gains for 2023. The Nasdaq Composite, which once saw gains as high as 15%, now has a gain of less than 10%.

The continuous sell-off by investors in U.S. stocks can be observed through the data on U.S. stock funds. This week, U.S. stock funds have been sold off by a cumulative $6.88 billion, setting a new record for the highest weekly volume this year. The data indicates that capital is accelerating its exit from the United States.

Previously, global capital was flowing into the United States, and it seemed that the U.S.'s harvesting plan was about to commence. However, unexpectedly, capital outflow has occurred, undoubtedly signaling the failure of the harvesting plan.

02, Inflation has not decreased

The resumption of large-scale selling after a rebound in U.S. stocks is primarily due to a significant miscalculation in previous expectations.

Before January, the market was very optimistic, believing that inflation was under control and that the Federal Reserve's rate hikes would cease.

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The surface data at the time seemed to support this view, especially with the clear slowdown in year-over-year growth rates of CPI and PPI. The CPI had peaked at a year-over-year increase of 9.1% in the middle of last year, and it has now dropped to 6.4%.

However, many investors apparently overlooked one point: the 6.4% year-over-year increase in CPI in January of this year is based on the fact that the CPI had already risen by more than 7% in January of last year. The high base last year is the reason for the relative decrease in the current year-over-year increase.The PCE price index released on Friday showed an amplified month-on-month growth rate, which precisely indicates that current prices continue to rise at a high level.

03. The likelihood of recession may be increasing

It is hard to imagine that the Federal Reserve would actually halt interest rate cuts in this situation. On the contrary, the terminal interest rate may have to be raised to above 5.6%, and there is a strong possibility of a 50 basis point rate hike in the future.

In fact, as early as last year, after reviewing past data, I concluded that every time the U.S. stock market emerged from a bear market and experienced a significant rebound, it occurred after the Federal Reserve cut interest rates. Now, not only are interest rate cuts off the table, but even stopping the rate hikes is unpredictable, so the recent rebound in the U.S. stock market was only temporary.

U.S. Treasury Secretary Yellen has repeatedly stated that there is a possibility of a soft landing for the U.S. economy, with one of the bases for her argument being that the labor market remains relatively tight. However, this phenomenon actually indicates that U.S. inflation has not been controlled for the time being. For the Federal Reserve, in the process of controlling inflation in the future, it is inevitable that the labor market will see higher unemployment rates.

So, although it is difficult to determine when a recession will occur, more and more analysts believe that a recession is inevitable. The adverse effects of interest rate hikes may become apparent in half a year, but it could also take up to a year and a half to manifest.

04. U.S. Treasuries are also collapsing

At present, it seems that not only will interest rates continue to rise in March, but the likelihood of a rate hike in May is also almost certain. What the market may find hard to determine is the magnitude of the rate hike. Although most people believe that the rate hike in March will be only 25 basis points, there are also officials within the Federal Reserve who believe that a 50 basis point hike is appropriate.

Affected by this, U.S. Treasury prices have plummeted again, and the yield has correspondingly climbed significantly.

Please note that the translation provided is a direct interpretation of the original text and does not include any financial or economic advice.The two-year yield, which is most sensitive to monetary policy, has already exceeded 4.8%, a level that has not been reached since the subprime crisis.

Meanwhile, the ten-year U.S. Treasury yield, known as the anchor of asset pricing, is once again approaching 4%.