SignalPlus Macro Analysis: The market has seen a massive rebound, but the gains are concentrated in a small number of tokens

Original title: "SignalPlus Macro Analysis Special Edition: Asymmetric"

Original source: SignalPlus

After three consecutive inflation data exceeded expectations, the CPI data released on Wednesday was roughly in line with expectations. This result is enough to stimulate another round of large-scale rebound in risk markets. Review of market performance:

· SPX index hits new highs

· US 1 y 1 y forward rate sees largest one-day drop since early January

· 2025 Fed Funds futures pricing falls 25 basis points (equivalent to one rate cut) from April high

· US dollar index DXY sees largest one-day drop so far this year

· Cross-asset volatility (FX, equities, rates) falls back to medium-term and/or historical lows

Will the Fed cut rates soon? June Fed Funds futures show only a 5% chance of a rate cut, and July only 30%. Even in September, the chance of a rate cut is only about 64%. So what are you excited about?

As we mentioned earlier, the Fed has moved to a completely unbalanced position, where inflation pressures can be tolerated even if they persist as long as inflation does not re-accelerate, and any signs of weakness in the job market will be seen as a driver for policy easing. Therefore, while headline and core inflation remain above the Fed's targets of 3.6% and 3.4% respectively, the market is worried about re-acceleration of prices, which did not occur last month, which is in line with the Fed's theme of returning to "watching the timing of easing" as the two elements of "slowing job market" and "high but tolerable inflation" are being confirmed one by one.

Back to the CPI data itself, the core CPI rose 0.29% month-on-month in April, and after exceeding expectations for 3 consecutive months, the data result was only slightly lower than market expectations. The weakness mainly came from the decline in commodity prices and the controlled growth of housing prices and owners' equivalent rents. Core service inflation, excluding housing, rose 0.42% month-on-month, roughly in line with expectations.

After the release of CPI/PPI, Wall Street expects core PCE to grow by around 0.24% month-on-month in April, moving toward an annualized level of 2% and the Fed's comfort zone. Traders are still confident that inflation will continue to fall in the second half of the year.

On the other hand, retail sales data for April were significantly weaker, with broad weakness across spending categories. Retail sales were flat month-over-month, below consensus expectations of a 0.4%-0.5% month-over-month increase, with control group spending down 0.3% month-over-month, which was also revised down. General merchandise and even non-store sales saw their largest declines since the first quarter of 2023.

The weaker-than-expected retail sales data continued a string of recent weak consumer data, including rising credit card and auto loan delinquencies, the exhaustion of accumulated excess savings, and a deteriorating job market. While it is too early to call a significant slowdown, we appear to be approaching a turning point in economic growth, are high interest rates finally starting to eat into the U.S. economy?

As usual, the market is happy to ignore any slowdown risks and focus only on the Fed's accommodative policy for the time being. As a reminder, while the market is very forward-looking and good at incorporating all available information into pricing, please note that the market is not that forward-looking. Enjoy the party for a short while!

On the crypto side, BTC price continues to be influenced by overall equity sentiment, with price breaking out of this month’s highs, back to April’s peak of around $67k. ETF inflows have also been very healthy, with an additional $300m inflows following yesterday’s CPI release, and even GBTC seeing net inflows. However, performance across tokens remains highly variable, with ETH and some of the top 20 tokens still struggling to recover losses, and gains in the market increasingly concentrated in a small number of tokens (BTC, SOL, TON, DOGE) rather than overall market gains.

Expect this to continue, with focus remaining on BTC, the main beneficiary of TradFi inflows (13 F filings show some large hedge funds’ increasing exposure to BTC ETFs), and relatively less FOMO in native or degen tokens for this cycle. Good luck everyone!

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