According to market trading data, investors now expect that there is a 60% probability of three interest rate cuts this year.
1️⃣Let’s talk about the recent strong performance of the BTC market. Before last week's CPI data was released, BTC started to rise. Inflation data have improved significantly, market expectations for interest rate cuts have continued to recover, and the Federal Reserve has also relaxed its stance. However, the dot plot in June still made the market hesitate. Because it was shown at that time that Fed officials only expected one rate cut this year, and four officials believed that there was no need to cut interest rates, the market needed strong data to gain confidence. Last week's CPI is undoubtedly the strongest support for interest rate cuts, and the market's doubts about interest rate cuts within the year have been wiped away. At the same time, the Federal Reserve's determination to cut interest rates reduced concerns about future economic deterioration, and the market began to rotate. There began to be outflows from technology stocks that had been rising fiercely before, and instead flowed into U.S. stocks and other sectors that benefited from interest rate cuts, such as BTC. According to market trading data, investors now expect that there is a 60% probability that interest rates will be cut three times this year.
2️⃣At the same time, BTC also benefits from Trump Trade. The recent presidential debate and the weekend shootings have significantly increased the possibility of Trump winning the election. Trump advocates tax cuts, deregulation, and tariff increases, which are all beneficial to small-cap stocks, so the BTC market has received further support. Fundstrat founder Tom Lee has been bullish on small-cap stocks since the beginning of the year. In the latest CNBC interview, he said that June's CPI data gave the market a green light to invest in small-cap stocks. He believed that the surge this time will exceed the 26% at the end of last year, and may rise by more than 50%. The reasons are twofold. First of all, he said that the oversold situation of small-cap stocks is more serious this time. The trading strategy of institutions this year has been to do big technology and short small-cap stocks, so a larger short position means a bigger surge. Secondly, from a valuation perspective, small-cap stocks have even lower valuations. He pointed out that the current forward price-earnings ratio of small-cap stocks in 2025 is only 10 times the median. Therefore, he believes that this wave of market has just begun and has the opportunity to last for more than 10 weeks.
3️⃣As long as the economy is strong and inflation continues to fall, it will be able to support the continuation of the small-cap stock market, but whether the economy can remain strong is still uncertain. During this period, we have analyzed the situation of the labor market several times and believe that the labor market may not be as good as shown in the official data, so this is worthy of vigilance. However, before the market's concerns about the economy rise, the valuation release of small-cap stocks is one of the most certain transactions at present. In addition to small-cap stocks, the market has another trading strategy with strong certainty, which is to bet on the steepening of the Treasury bond interest rate curve. According to Bloomberg, the U.S. interest rate curve has been inverted for more than two years, that is, short-term interest rates are higher than long-term interest rates, but this state may soon change.
4️⃣Because of last week's CPI data, the possibility of a steeper interest rate curve in the future has increased significantly. Here, Aji will give some viewers a popular science about the interest rate curve and what affects it, so that everyone can better understand this transaction. The interest rate curve refers to the interest rate level of U.S. Treasury bonds at different maturity times. Generally, short-term interest rates are within two years, which are mainly affected by the monetary policy of the Federal Reserve. Ten years or more are called long-term interest rates, which are affected by many factors, including inflation, economic development, government deficits, etc. Last week's CPI data confirmed the expectation of the Federal Reserve's interest rate cut, so many traders believe that the future interest rate curve will become steeper. Because once the Federal Reserve cuts interest rates, short-term interest rates will fall rapidly. At the same time, Trump's recent winning chances have also made the interest rate curve steeper, which is mainly reflected in long-term interest rates. The article points out that if the components of the U.S. Treasury bond interest rate are split, it includes economic growth expectations, inflation expectations, and term premiums.
If Trump comes to power, the tax cuts and tariff policies will undoubtedly stimulate the economy and raise inflation, so this will increase long-term interest rates. On the other hand, tax cuts will further deteriorate the US fiscal situation and expand the deficit, and investors are likely to demand a higher term premium. This will also increase long-term interest rates. Last summer, the market was worried about the issuance of US Treasury bonds, which led to an increase in long-term interest rates, and the 10-year Treasury bond rate therefore stood at 5%.
5️⃣Bloomberg strategists said that as the probability of Trump's victory increases, investors may be more inclined to Bear Steepening transactions, that is, the interest rate curve becomes steeper, but the long-term interest rate will rise faster than the short-term interest rate. From the perspective of short-term interest rates, given that inflation is still high, the speed and magnitude of the Fed's interest rate cuts may be relatively limited. As for long-term interest rates, as long as Trump is elected, he will definitely cut taxes and increase tariffs. Therefore, the possibility of an increase in long-term interest rates is greater. Aji believes that from the two news articles above, it can be seen that the two hottest transactions in the market now are interest rate cut transactions and Trump transactions. Let's summarize the asset targets that will benefit under the two logics. It can be seen that when the two trading logics are very strong, small-cap stocks, Bitcoin, and steep U.S. Treasury bonds are all on the list, which deserves continued attention.
