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

• Interest Rate Market Signals: The 2-year U.S. Treasury yield has rapidly declined, with the SOFR spread widening, and the 10-year yield falling below the SOFR rate, reflecting that the market is pricing in an economic slowdown ahead → The Federal Reserve is forced to cut rates, while the long-end yield inversion (10-year < SOFR) reinforces recession warnings.
• Liquidity Paradox: Although the consumption of the TGA account has marginally improved dollar liquidity, market risk aversion has led to funds withdrawing from high-risk assets (U.S. stocks, crypto) and flowing into the Treasury market, creating a paradox of "liquidity easing but risk appetite shrinking."

II. Roots of Turmoil in Risk Assets: Weak Economic Data + Policy Uncertainty

• Economic Fractures: A sharp drop in consumer confidence index, a cooling job market, combined with Trump's tariff threats, have intensified market fears of a "hard landing."
• AI Narrative Shaken: The controversy over "Scaling Law failure" following Nvidia's earnings report and the successive technological iterations from OpenAI have raised doubts about the feasibility of AI commercialization, leading to a sell-off in tech stocks (especially in the computing sector).
• Chain Reaction in the Crypto Market: The CME futures backwardation structure has weakened arbitrage attractiveness, coupled with ETF fund outflows, resulting in Bitcoin and U.S. stocks declining in sync, with the greed-fear index entering extreme fear territory.

III. Key Battleground Next Week: Non-Farm Data Sets the Tone for "Recession Trade" Intensity

• Data Focus: If February non-farm employment continues to exceed expectations, or if ISM manufacturing PMI continues to decline, it will strengthen recession pricing, pushing U.S. Treasury yields further down and putting pressure on risk assets; conversely, better-than-expected data may briefly restore "soft landing" expectations.
• Policy Risks: Details on Trump's tariffs and statements from Federal Reserve officials (especially regarding rate cut paths) may trigger significant market volatility.
• Strategy Recommendation: Focus on defense, waiting for opportunities to counterattack. The short-term selling pressure in the crypto industry stems from the withdrawal of leveraged funds, but regulatory easing and technological innovation still support long-term growth potential.

Stagflation or Recession, What is the Market Trading?

I. Macro Review This Week

1. Liquidity and Interest Rate Changes

Marginal improvement in liquidity, primarily due to the consumption of the Treasury's TGA account. With discussions on the U.S. debt ceiling still unresolved, this week saw a slight improvement in dollar-based liquidity, increasing by $39 billion compared to last week, but still in a tightening state compared to the same period last year. Further analysis shows that the consumption of the Treasury's TGA account has accelerated, decreasing from $800 billion in mid-February to the current $530 billion+.

Chart 1: Changes in Dollar-Based Liquidity Source: Gurufocus

The interest rate market begins to price in rate cuts, with long-term Treasury yields reflecting economic slowdown. Data shows that in recent times, the 2-year Treasury yield, which measures implied interest rate paths, and the SOFR, which measures short-term financing rates, have not shown significant large fluctuations. However, since this week, due to economic data and Trump's tariff impacts, the 2-year Treasury yield has rapidly declined, widening the spread with short-term financing rates; meanwhile, the 10-year Treasury yield has started to fall significantly below the SOFR rate.

Chart 2: Changes in Short-Term Financing Rates and Treasury Yields Source: Wind

The above trends are the result of global investors' trading, reflecting several facts:

l In the context of deteriorating economic data, the Treasury market's expectations for the Federal Reserve's rate cuts this year have risen sharply. Historically, when short-term financing costs are significantly higher than long-term rates, it generally indicates the end of the Federal Reserve's tightening policy.

l Short-term financing rates have not priced in rate cuts, indicating that the Federal Reserve is still managing liquidity through open market operations to ensure that short-term financing costs remain somewhat tight, preventing the market from excessively anticipating rate cuts, which could affect inflation control.

l The downward slope of Treasury yields is quite steep, indicating strong market risk aversion. As shown in the chart, this week the downward slope of the 10-year Treasury yield is noticeably steeper, indicating a rapid influx of funds into the Treasury market, reflecting strong risk aversion.

Overall, although the Federal Reserve ensures the tightness of financing costs at the short end of the rate spectrum through liquidity management, the trading results in the Treasury market indicate that the market is pricing in "forced rate cuts by the Federal Reserve due to economic slowdown."

2. Risk Market Review

In the U.S. stock market, this week saw significant volatility. Following the poor data from last week, the market continued to sell off, with the VIX index maintaining volatility above 19. The market's pricing of uncertainty has become increasingly pessimistic, shifting attention from inflation to economic data, particularly with the consumer confidence index released on Tuesday showing a substantial decline, marking the largest drop in three years. Recession fears once again loom over the market, intensifying selling and short-selling activities until Friday's PCE data eased market concerns, leading to a rebound in U.S. stocks.

Chart 3: Consumer Confidence Index from the Conference Board Source: NBER

From the perspective of U.S. stock market volatility, aside from the deteriorating signals from economic data, the most significant data last week was Nvidia's earnings report. Despite strong performance, the issue of "Scaling Law" failure has been amplified by the market, putting the AI narrative under immense scrutiny, especially after OpenAI launched ChatGPT 4.5. This concern seems to be turning into reality. With the market's AI narrative being questioned and economic data indicating a slowdown, U.S. stocks are facing a comprehensive adjustment of expectations and market pricing.

In the crypto market, this week has been clouded with uncertainty. Following last week's Bybit incident, the overall risk appetite in the U.S. stock market has worsened, leading to a flow of funds into the Treasury market for safety, resulting in significant pullbacks across the crypto industry, with the greed-fear index dipping below 15, entering extreme fear territory.

As analyzed earlier, although the marginal liquidity of the dollar has eased, when the market prices in rate cuts due to economic slowdown or recession fears, it does not significantly boost high-risk assets. Funds are more inclined to withdraw from high-risk assets and shift towards Treasury markets with positive carry yields.

At the same time, further observation of BTC shows that the price gap between the CME futures market and the spot market has rapidly narrowed, even entering a backwardation structure. This change in structure has diminished the attractiveness for hedge funds that rely on basis arbitrage through spot ETFs and CME futures, especially in comparison to Treasury yields exceeding 4%. This also partly explains why Bitcoin ETF funds have experienced significant outflows this week.

The entire transmission logic is: market fears economic recession - risk appetite declines - funds withdraw from high-risk markets - hedge funds begin to exit Bitcoin basis trades - ETF funds flow out - exacerbating concerns in the crypto market - accelerating sell-offs. Under the easing of Friday's PCE data, benefiting from the rebound in risk appetite, the market saw some recovery.

II. Outlook for Next Week

As analyzed earlier, the market is at a turning point of intense adjustment in expectations, with complex gaming factors increasing the difficulty for subjective traders. Close monitoring of the latest data and timely adjustment of expectations are necessary.

Key macro data for next week is as follows:

|----------|---------------|------| | Time | Data | Importance | | Monday (March 3) | U.S. February ISM Manufacturing PMI | Important | | Tuesday (March 4) | Japan January Unemployment Rate | Moderate | | Wednesday (March 5) | U.S. February ADP Employment Change | Important | | Thursday (March 6) | U.S. Initial Jobless Claims for the Week | Important | | Friday (March 7) | U.S. February Non-Farm Payrolls | Very Important |

Since the Atlanta Fed released the latest GDP NOW forecast data last Friday, the data unusually predicts a -1.5% GDP (seasonally adjusted) for the first quarter of 2025.

Chart 4: Atlanta Fed GDP Forecast Source: Atlanta Fed

Although the deterioration of this forecast data is partly due to seasonal factors affecting U.S. consumer spending, it indeed reflects that under the threat of Trump's tariff policy, the risks of economic slowdown are increasing. The current market is at a critical period of dual expectation adjustments of "strengthened recession expectations" and "impact of Trump's policies," and asset prices may continue to maintain high volatility. Especially with next week's non-farm data about to be released, it will be crucial in determining whether the market further strengthens the "recession trade."

Based on the above factors, we recommend:

• From a risk-averse standpoint, we advise investors not to chase high prices in the absence of clear market expectations; however, if risk appetite stabilizes and rebounds, there may be short-term corrective rallies, but volatility risks should still be monitored.
• Given the high uncertainty in the current market, we recommend diversifying allocations as much as possible, increasing defensive assets/quantitative arbitrage products to ensure a balance between risk and return.
• Closely monitor economic data, macro rates, liquidity, and policy-induced market expectation adjustments.

Despite last week's decline severely impacting market sentiment, investors need to focus on the fact that the easing of U.S. policies and regulations has not stopped, providing long-term growth momentum and vast growth potential for the crypto industry. The short-term market decline is a risk-averse action taken when the main trading line is unclear, especially for leveraged and short-term funds primarily from hedge funds. The withdrawal and liquidation of funds do not imply a bearish outlook on Bitcoin; it is merely a response triggered by market signals activating their risk management measures.

In the long run, we firmly believe that Bitcoin and the crypto industry still have ample upside potential, and we maintain strong confidence in this.

Disclaimer

The content of this article is for informational sharing only and does not promote or endorse any business or investment activities, nor is it financial advice. Readers are strictly advised to comply with the laws and regulations of their respective regions and not to engage in any illegal financial activities. We do not provide trading access, guidance, or issuance channels for any virtual currencies or digital collectibles related to issuance, trading, and financing.

The above content is original to 4Alpha, and any content without permission is prohibited from being reproduced or copied; violators will be held legally responsible.

The content of this article is for informational sharing only and does not promote or endorse any business or investment activities, nor is it financial advice. Readers are strictly advised to comply with the laws and regulations of their respective regions and not to engage in any illegal financial activities. We do not provide trading access, guidance, or issuance channels for any virtual currencies or digital collectibles related to issuance, trading, and financing.

The above content is original to 4AlphaTechnology, and any content without permission is prohibited from being reproduced or copied; violators will be held legally responsible.