Recession Expectations and Stagflation Risks: Analysis of Current Market Trading Logic

I. Market Trading Logic: Recession Expectations Dominate, Stagflation Risks Emerge

Recent signals from the interest rate market are clear: the 2-year U.S. Treasury yield is rapidly declining, the spread with short-term financing rates is widening, and the 10-year yield has fallen below short-term rate levels. This reflects that the market is pricing in the prospects of an economic slowdown forcing the Federal Reserve to cut rates, while the inversion of long-term rates strengthens the recession warning.

There is a contradictory phenomenon in terms of liquidity: although the consumption of government accounts has driven a marginal improvement in dollar liquidity, market risk aversion has led to capital withdrawing from high-risk assets and flowing into the treasury market, creating a paradox of "loose liquidity but reduced risk appetite."

II. Roots of Volatility in Risk Assets: Economic Weakness and Policy Uncertainty

In terms of economic data, the consumer confidence index has sharply declined, the job market is cooling, and coupled with potential tariff threats, market concerns about an economic "hard landing" have intensified.

The technology sector is facing a sell-off, primarily due to doubts about the commercialization prospects of artificial intelligence. Some believe that technological advancements may not meet expectations, which has shaken the AI narrative that has supported the recent rise in tech stocks.

The cryptocurrency market is also experiencing a chain reaction: the reverse structure of the futures market has weakened the attractiveness of arbitrage, coupled with the outflow of funds from investment funds, leading to a synchronous decline of Bitcoin and the stock market, with market sentiment entering an extremely fearful zone.

3. Key Game Points: Employment Data Will Set the Tone for the Strength of "Recession Trades"

Next week's focus will be on employment data. If February's non-farm payrolls continue to exceed expectations, or if the manufacturing PMI further declines, it will strengthen recession expectations, pushing bond yields down and putting pressure on risk assets. Conversely, better-than-expected data may temporarily restore "soft landing" expectations.

Potential policy risks still require vigilance, including possible details of tariff policies and statements from Federal Reserve officials regarding the interest rate cut path, all of which could trigger significant market fluctuations.

In the current environment, investment strategies are recommended to focus on defense while closely monitoring counterattack opportunities. The short-term pressure on cryptocurrencies mainly comes from the withdrawal of leveraged funds, but in the long run, improvements in the regulatory environment and technological innovations still support their growth potential.

Stagflation or Recession: Analysis of Market Trading Focus

Macroeconomic Environment Review

1. Changes in Liquidity and Interest Rates

The liquidity based on the US dollar has slightly improved, increasing by $39 billion compared to last week, but still remains below the level of the same period last year. The balance of government accounts has decreased from $800 billion in mid-February to just over $530 billion, which is the main reason for the improvement in liquidity.

The interest rate market has begun pricing in rate cuts and an economic slowdown. The yield on the 2-year government bond has quickly declined, widening the spread with short-term financing rates; the 10-year yield has fallen below short-term interest rate levels. This reflects several key trends:

• Economic data deterioration raises expectations for interest rate cuts
• The short-term financing rates remain relatively stable, indicating that the central bank is still controlling liquidity to prevent inflation from rebounding.
• Long-term interest rates are rapidly declining, reflecting an increase in risk aversion.

Overall, the market is pricing in the scenario of "economic slowdown forcing the Federal Reserve to cut interest rates."

2. Risk Market Performance

The stock market volatility has increased, with the VIX index remaining above 19. The significant decline in the Consumer Confidence Index has intensified recession fears, which only saw a rebound on Friday when inflation data showed a slight easing.

Tech stocks face challenges, primarily due to doubts about the commercialization process of AI. This has triggered a reassessment of the valuations of the entire tech sector.

The cryptocurrency market has experienced a significant pullback, with the Fear and Greed Index dropping to below 15, indicating extreme fear. The futures market has shifted to a reverse structure, reducing the attractiveness of arbitrage, while funds have flowed out of investment funds, exacerbating market sell-offs.

Future Outlook

The market is currently undergoing a period of expected severe adjustments, making investment more challenging. Pay attention to key economic data next week, especially the employment report and manufacturing PMI.

The latest GDP forecast from the Atlanta Fed indicates that there may be negative growth in the first quarter of 2025. Although this is partly influenced by seasonal factors, it also reflects an increase in economic downside risks.

Investment Advice:

• Stay cautious and avoid chasing highs
• Diversified allocation to increase the proportion of defensive assets
• Pay close attention to economic data, interest rate trends, and policy changes

Despite short-term market pressures, the long-term outlook for the cryptocurrency industry remains optimistic. The ongoing improvement in the regulatory environment and technological innovation provide a solid foundation for industry development. The current market adjustments are mainly due to short-term capital risk aversion and do not indicate a fundamental pessimism about the industry's prospects.