To The Moon

High inflation expectation draged the Tuesday market?

The US stock market closed down on Tuesday, with the $.IXIC(.IXIC)$ experiencing the largest volume drop in history. Star stocks like $NVIDIA(NVDA)$ , quantum technology concept stocks like $IONQ Inc.(IONQ)$ , and $Bitcoin(BTC.USD.CC)$ concept stocks like $CleanSpark, Inc.(CLSK)$, my previous holding all fell.

Since I sold $NVIDIA(NVDA)$ at $146 in the early trading, I bought the Call of $ProShares Ultra VIX Short-Term Futures ETF(UVXY)$ , and last night I also bought the Put of $SPDR S&P 500 ETF Trust(SPY)$ .

However, I have a significant unrealized loss on a forward Sell Call of $Direxion Daily FTSE China Bear 3X Shares(YANG)$ , so my overall account only fell slightly (there are several screenshots of my trades at the end of the article).

Regarding the decline in the US stock market, I looked at several prominent macroeconomic news items:

• The ISM service industry inflation data hit a two-year high, and the market's expectation for a rate cut in March decreased;

• The yield on the 30-year US Treasury yields touched 4.86%, reaching a new high in over a year and approaching 5%;

• $USD Index(USDindex.FOREX)$ assets have been strong recently, while countries around the world are reducing their holdings of US gov.bonds and increasing their $Gold - main 2502(GCmain)$ reserves, which may also be due to expectations of high inflation and weak dollar assets?

Has US inflation really spiraled out of control?

In 2025, will the impact of rate cuts be greater or will the impact of rate hikes be greater?

• Regarding inflation: In the December FOMC (Federal Open Market Committee) meeting, the Federal Reserve raised the median US GDP growth forecast for 2025 by 0.1 percentage points to 2.1%, and lowered the unemployment rate forecast for next year. In terms of inflation, the year-on-year growth rate of the US Personal Consumption Expenditure Price Index (PCE) for next year was raised from 2.1% in September to 2.5%, and the year-on-year growth rate of the core PCE was raised from 2.2% in September to 2.5%.

• The market and the Federal Reserve's cautious expectations for inflation in 2025 mainly come from Trump's new policies after taking office. However, in terms of magnitude, after Trump's tax cuts and tariff policies were implemented in 2018, US inflation did not rise significantly. In terms of timing, if Trump's tariff, immigration, and tax cut policies are implemented later, US inflation will not have a significant upward risk in the short term.

• Trump previously stated during his campaign that he hoped to continue cutting interest rates in 2024, and he will push for energy prices to be halved within a year.

• The December FOMC meeting dot plot shows that there will be two rate cuts in 2025, and the market expects these two rate cuts to be implemented in the second half of 2025. The current market expects the timing of the rate cuts to be postponed from March to May.

• Investment bank $Goldman Sachs(GS)$ stated that the correlation between stocks and bonds has turned negative, and the stock market is weak in an environment where interest rates rise due to policy expectations. It is the real interest rate, not inflation, that has caused the market to pessimistically price US Treasury bonds, and the market is even pricing in the possibility of the Fed raising interest rates in the next 12 months.

Overall, inflation may be relatively controllable, and the expectation for rate cuts in 2025 is still there. However, if inflation spirals out of control and there is an early interest rate hike, the negative impact on US Treasury bonds and the stock market will be greater.

Perhaps the current US Treasury bond yield is just a short-term speculation on inflation?

Did the sharp drop in the US stock market come after the core benefits of companies like $NVIDIA(NVDA)$ appeared, and investors profited by selling on the news?

This week's volatility factor may mainly focus on the non-farm employment data to be released on Friday.

The non-farm employment data will reflect the future inflation expectations in the United States:

• In November, the US non-farm employment increased by 227,000, the largest increase in half a year, and the unemployment rate rose to 4.2% beyond expectations.

• After Trump takes office, there is a 76% probability that he will immediately expel illegal immigrants, which will have a significant impact on the US labor market in the short term (although it is difficult for Trump to completely expel illegal immigrants, it is easy for them to disappear from the labor market). After illegal immigrants exit the labor market, US companies will rehire domestic labor, but there is a lag in this process, so wage inflation stickiness may appear in the second quarter of 2025.

• Analysts believe that the US labor market has recovered from the impact of hurricanes and strikes, and may continue to grow steadily, which will consolidate the Federal Reserve's cautious stance on rate cuts. A Bloomberg survey shows that economists predict an increase of 160,000 new non-farm jobs in December.

• On Thursday morning Beijing time, the Federal Reserve will release the minutes of last month's interest rate meeting, which will reveal different opinions within the Federal Reserve about the path of rate cuts.

• On January 9th, the US stock market will be closed to mourn former President Carter, a tradition that has been in place for a century.

So far, my positions are very light, with only the long position of $ProShares Ultra VIX Short-Term Futures ETF(UVXY)$ remaining. I will look for other opportunities on Wednesday.