Rising inflation and GDP falling short of expectations raise concerns of "stagflation" in the U.S. economy

This month, inflation in the United States has intensified, but GDP fell short of expectations, raising concerns in the market about the U.S. economy falling into "stagflation." Amid these worries, coupled with the impact of geopolitical conflicts, the capital markets saw a pullback this month. U.S. and Japanese stocks have pulled back significantly, while Europe performed relatively well, indicating that global investors are not overly concerned about so-called systemic risks in the global economy. Despite fluctuations in the crypto market, a black swan event caused Bitcoin to briefly drop below $60,000, but on April 29, the crypto market witnessed a historic moment: Hong Kong approved a crypto asset ETF, indicating that incremental funds are still consistently flowing in, and the market outlook is positive.

At the beginning of the year, driven by expectations of interest rate cuts from the Federal Reserve and the continuous decline in the Consumer Price Index ( CPI ), the market set aside concerns about inflation. However, subsequent inflation data continued to rise, and the expectations for interest rate cuts also declined repeatedly. Currently, the market still maintains the expectation that there will be no rate cuts in May, with even a very small number of people expecting possible further rate hikes.

According to current data, the United States seems to be entering a "stagflation" state—high inflation but low economic growth. The GDP growth in the first quarter was only 1.6% year-on-year, far below expectations; meanwhile, the core PCE price index exceeded expectations with a growth of 3.7% in the first quarter, which is already data excluding energy and food. In other words, even after excluding the recent impact of rising international commodity prices, inflation in the United States remains severe.

At the beginning of the year, the U.S. economy exhibited a "high growth, low inflation" scenario, and the "Goldilocks" economic narrative became the mainstream bet for global investors. In just a few months, the situation shifted from "all good" to "stagflation crisis," with the U.S. now focusing on how to address the "inflation" issue. Currently, only a small number of people in the market are even starting to bet on further interest rate hikes, but the likelihood of continued rate hikes is low; it is more likely that the timeline for rate cuts will be delayed, and the number and basis points of cuts will be reduced. The current inflation in the U.S. is influenced by multiple factors including upstream raw material prices, employment, and demand. As commodity prices trend towards rationality, the labor market rebalances, and the downward trend in used car prices continues, U.S. core inflation is expected to decline.

The current economic situation in the United States is exactly what the Federal Reserve hopes to see. There are various ways to break the "wage-inflation" spiral, and it is not necessary to choose to continue raising interest rates, which have a significant impact on the economy. This month, the Japanese yen and Japanese stocks experienced a sharp decline. In this situation, international investors will sell yen and buy back dollars, which also greatly helps to converge dollar liquidity.

Currently, the overall stance of Federal Reserve officials is dovish, and they have not released clear signals for further interest rate hikes, which may indicate that the United States has certain policy tools to address inflation issues. In short, the U.S. economy does indeed face the challenge of inflationary pressure at this stage, which has caused some concern in the market, but investors do not need to panic excessively about the inflation issue.

Moreover, there have been more geopolitical conflicts this month, which is also a factor leading to fluctuations in the capital market. From the current perspective, the relevant countries are maintaining relative restraint, with no signs of further escalation of conflict. Furthermore, in modern society, the possibility of large-scale war breaking out under the nuclear deterrence of major powers is extremely low, so the impact of geopolitical issues on financial markets is often sudden but short-lived. Even if wars break out between certain countries, the stock markets of the relevant countries have almost recovered all the losses since the war. Therefore, the impact of war this month is merely a sudden variable.

After the U.S. stock market experienced a sustained "mad bull" run for 5 months, a significant correction finally occurred — the Nasdaq index fell to the 120-day moving average, and a certain tech giant saw a drop of -10% on April 19.

The current trend of the US stock market reflects more the changes in interest rate cut expectations, with geopolitical conflicts being a secondary reason. The valuation of technology stocks is directly related to liquidity, and a delay in interest rate cut expectations will directly compress the valuation space of technology stocks. A certain investment bank downgraded the ratings of six major US technology stocks from "Overweight" to "Neutral" this month, citing that the earnings momentum previously enjoyed by this sector is facing cooling and the upward drive is diminishing. However, the bank's strategist also stated that this downgrade is an acknowledgment of "the difficulties these stocks face in comparison and the constraints of cyclical forces," rather than "based on predictions of valuation expansion or skepticism about artificial intelligence."

This rating adjustment is actually quite reasonable, as the valuations of tech giants have already reflected future profit expectations in advance under the influence of AI expectations. If these companies experience another surge in the future, it can only be because the development of AI has once again exceeded market expectations.

In addition to the United States, the Japanese stock market has also experienced a significant pullback this month. The situation in Japan is mainly due to the recent drastic depreciation of the yen, which has led investors to sell Japanese assets. Furthermore, the strong correlation between the yen and the dollar, along with the delayed expectations of interest rate cuts by the Federal Reserve, is also an important reason for the recent fluctuations in the yen.

The unsatisfactory performance of the stock markets in the US and Japan has raised concerns among some that the inflation problem in the US could lead to a global financial crisis. However, it is still too early to draw such a conclusion, as the stock markets in other countries have not shown significant corrections: the stock indices in France and Germany have not experienced substantial declines and remain strong; the Indian stock market has also been fluctuating at a high level. This pullback in the US stock market is likely just a sudden reaction to changes in expectations and black swan events, and there is no evident systemic risk.

This month's cryptocurrency market performance has been disappointing, with Bitcoin's price dropping to a low of below $60,000 and Ethereum's price falling to a low of below $2,800. Since Bitcoin's price hit a new high in mid-March, it has entered a period of adjustment, which has lasted for a month and a half so far. During this period, black swan events such as geopolitical conflicts and worse-than-expected U.S. economic data have also exacerbated the already lukewarm cryptocurrency market, with the spike in mid-April being triggered by geopolitical conflicts in the Middle East.

Currently, the cryptocurrency market has entered a state that is highly correlated with traditional asset trends—Bitcoin prices have shown an astonishing correlation with the stock prices of a certain tech giant over the past year. This strong correlation is quite intriguing and currently lacks a widely accepted explanation.

If Bitcoin is indeed recognized by market consensus as "digital gold," then theoretically its price movement should correlate with that of gold, and the trend corresponding to geopolitical conflicts should be a surge rather than a downward spike. From the price trends of gold, it can be seen that during the days of conflict in the Middle East, gold reached a historical high, fully demonstrating its safe-haven property.

This situation may indicate one thing - the current trend of Bitcoin is indeed bound by the US ETF. Throughout April, the ETF has shown a trend of net outflows.

The trend of being bound by a country's assets is not particularly rational. The most notable decentralized attribute of Bitcoin has become a consensus value storage tool for everyone, with no one having the right to issue or destroy Bitcoin. This attribute, which is different from fiat currency, has become a breath of fresh air in the era of credit money. However, currently, single-country ETFs already possess the pricing power of Bitcoin. Although they cannot create or destroy it, there is indeed a certain divergence from the decentralized attribute.

Fortunately, following the United States, Hong Kong officially approved six virtual asset spot ETFs on April 29, including three Bitcoin ETFs and three Ethereum ETFs. These ETF products differ in their fee structures, trading efficiencies, and issuance strategies, providing investors with diverse options. Moreover, in terms of categories, they have already surpassed the United States, which has yet to approve an Ethereum spot ETF. Institutions predict that as market interest in these innovative ETFs continues to grow, these six ETFs will bring an incremental funding of $1 billion to the crypto market.

The latest news also shows that Australia will launch a Bitcoin ETF by the end of this year.

This multi-point blooming style of ETF listing is somewhat similar to the early mining farms and mining machines distributed around the world, which can fully maintain the decentralized nature of Bitcoin in the secondary market—no single institution or country has the authority to price Bitcoin independently.

Therefore, as more and more institutions in various countries or regions list Bitcoin spot ETFs, the holdings of the whales will become increasingly decentralized. At that time, the pricing power of Bitcoin in the secondary market will also show characteristics of decentralization, possibly returning to the intrinsic value of electronic gold.

In April, the Federal Reserve's hawkish remarks and geopolitical conflicts in the Middle East brought volatility to the capital markets, but the strategic stability among nuclear powers provided a certain degree of assurance for the markets. In terms of inflation suppression strategies, the Federal Reserve is actively addressing potential financial risks, and although the US and Japanese stock markets have experienced corrections, there have not yet been widespread signs of a financial crisis in the global capital markets.

At this critical moment, financial innovation initiatives in the Asian market, especially in Hong Kong, are particularly important. The approval and upcoming listing of the Hong Kong Bitcoin ETF not only marks a significant step for the Asian financial market in the cryptocurrency sector but may also become a new trigger point for the global capital markets. This development not only provides investors with new asset allocation options but may also promote the cryptocurrency market towards a more mature and standardized direction, signaling the emergence of new investment opportunities and market trends, while also driving the "decentralization" of Bitcoin pricing power in the secondary market.