With last week’s U.S. CPI data meeting expectations, the market broadly anticipates a downward trajectory for inflation, paving the way for potential rate cuts. As a result, U.S. equities, cryptocurrencies, and other major asset classes performed well, with the Nasdaq closing at a record high. This week’s economic data is relatively less critical compared to last week, likely causing limited market volatility. We recommend maintaining the current risk exposure in our global asset allocation.
Key events to watch this week include speeches from Fed Chair Jerome Powell and Treasury Secretary Janet Yellen, the Federal Reserve meeting minutes, U.S. PMI data, and the University of Michigan Consumer Sentiment Index. Given the lack of significant data releases prior to these speeches and the recent positive CPI figures, which are favorable for inflation control, the impact of Powell and Yellen’s remarks, as well as the Fed meeting, is expected to be neutral to slightly positive for the market.
However, it’s noteworthy that with the dollar’s continued strength and significant depreciation of the yen, the Bank of Japan is considering raising interest rates to support the yen, potentially involving a strategy of selling U.S. Treasuries. This might concern the U.S. Treasury Department, represented by Yellen, regarding potential Treasury sell-offs, leading us to believe her remarks might be bullish.
Following this, the U.S. PMI data is crucial. If PMI falls short of expectations, it could indicate economic weakness, bolstering the case for earlier rate cuts. Considering the previous quarter’s GDP data was below expectations, we believe the PMI data will likely support the case for rate cuts.
The University of Michigan Consumer Sentiment Index showed a significant drop in its preliminary release two weeks ago, heightening inflation concerns and causing notable market declines. This week’s final value will be released at the end of the week, requiring close monitoring. An upward revision would be favorable for rate cuts, while a downward revision could negatively impact market sentiment heading into the weekend.
In summary, the market is expected to remain relatively stable during the early and mid-week, reducing the need for intricate risk controls. However, it’s advisable to lower leverage and manage risk before the weekend to avoid unexpected pullbacks from the Michigan Consumer Sentiment Index. Domestic investors should adjust their positions and risk exposure before Friday’s close to avoid potential Monday price gaps, while overseas and cryptocurrency investors are similarly advised to adjust their holdings before the U.S. market closes.