The U.S. FOMC meeting in May kept interest rates unchanged, in line with market expectations. U.S. inflation is temporarily stable, and interest rate cuts still need to wait, but the reduction of bank capital ratio policy is a precursor to interest rate cuts. Nvidia's performance continues to exceed market expectations, leading U.S. stocks to new highs. The AI narrative is still there, but the arrival of the interest rate cut cycle may change the market style. The crypto market has frequent positive news. The SEC has passed the Ethereum spot ETF listing standards. It is only a matter of time before the listing of related products of asset management institutions. The FIT 21 Act regulates the crypto industry and may become a beacon for the future development of the industry.
1. The Fed is still waiting to see the conditions for a rate cut, but the global rate cut cycle may have begun
Earlier this month, the Federal Reserve announced at the Monetary Policy Committee FOMC that the target range for the federal funds rate will remain at 5.25% to 5.50%, and that the rate will be slowed down from June. The entire meeting was basically still centered around "inflation is still high, and interest rate cuts still need to wait and see", which is in line with market expectations. Currently, the market believes that the probability of a rate cut in September is close to 50%, and a rate cut will definitely be made by the end of the year.
As time passes to the end of the month, Federal Reserve Governor Christopher Waller further clarified the specific conditions for future interest rate cuts, providing clearer guidance for the market. Waller said it would take another three to five months of better inflation data before considering a rate cut at the end of the year without significant weakening in the labor market.
Waller's words make sense. The latest US CPI data for April was in line with market expectations (up 3.4%). Although the labor market is temporarily lower than market expectations (non-farm payrolls increased by 175,000 in April), the number of initial unemployment claims is still at a historically low level, and the job market remains resilient. In addition, the Markit manufacturing PMI (preliminary value) rose to 50.9 in May, higher than the market expectation of 49.9 and the previous value of 50.0, and the service industry PMI (preliminary value) rose to 54.8, significantly higher than the market expectation of 51.2 and the previous value of 51.3. Therefore, the Fed does need to wait and see.
However, although the Fed is still waiting and watching, there are some signs that interest rate cuts are about to begin. On the 19th of this month, the Federal Reserve and two other federal regulators are developing a new plan that will relax the capital increase requirements for large banks in the previous proposal. The previous plan required large US banks to increase their capital by nearly 20%, and the new plan may be only about half of the original plan. This shows that the Federal Reserve has allowed banks to increase their loan ratios and ease the profit crisis, which is seen as one of the important signals for interest rate cuts.
From a global perspective, the interest rate cut cycle has almost started. Nomura Securities pointed out in its latest report that the global interest rate cut cycle is already underway, and more than a dozen major central banks have cut interest rates. Nomura predicts that from now until the end of June, the European Central Bank, the Swiss National Bank, the Bank of Canada, and the National Bank of Poland will cut interest rates. Against the backdrop of the global interest rate cut cycle, it is only a matter of time before the US cuts interest rates.
2. Nvidia continues to hit record highs, and the interest rate cut cycle may change the style of US stocks
Nvidia (NVDA) released its first financial report for fiscal year 2025 on May 22, far exceeding market expectations: revenue increased 262% year-on-year to $26 billion, far exceeding the market's general expectation of $24.5 billion, setting a record high; net profit increased 620% year-on-year to $14.88 billion, and adjusted earnings per share were $6.12, up 19% month-on-month and 461% year-on-year, and the market expected $5.59; data center revenue increased 427% year-on-year to $22.6 billion, and the market expected $22.1 billion, a record high; Q2 revenue is expected to increase to $28 billion, and the market expected $26.8 billion.
On May 23, Nvidia (NVDA) rose as high as 11.92% and its total market value exceeded 2.6 trillion US dollars, becoming the third largest company in the US stock market, surpassing the market value of the entire German stock market. Interestingly, except for Nvidia, the other six companies in the US stock "big 7" (Apple, Tesla, Microsoft, Amazon, META, Alphabet) all fell on the same day. Therefore, some people joked that "the US stock market is now supported by Nvidia."
In fact, this is not without reason. The gains of US stocks since last year have almost all benefited from the AI sector. Excluding the AI sector, the gains of other stocks are very small.
If we extend the timeline longer, we can find that the "big 7" that are strongly related to AI almost support the entire US stock market. Excluding these seven companies, the return on US stocks is not high, and the growth rate of other markets in the world excluding US stocks is almost 0.
Therefore, it can be said that the rise of the global market in recent years is almost entirely due to technological innovation in the United States. This is not a good phenomenon. The market driven by AI will inevitably usher in a huge decline due to the bursting of the AI bubble. Some people even say that "the day when Nvidia reaches its peak is the beginning of the decline of the US stock market."
However, as the interest rate cut cycle is about to start, the abundance of liquidity may offset the possible AI bubble risk. In the interest rate hike cycle, the market will first embrace the most certain sectors to meet the risk aversion demand, thus creating an extreme AI group market. The arrival of the interest rate cut cycle will increase the market's liquidity and risk appetite. At that time, the long-term "exhausted" non-AI sectors may also usher in spring, and the style of US stocks may usher in changes.
3. Cryptocurrency benefits come one after another, and Ethereum spot ETF is on the verge of being launched
"After years of hard work, a daughter-in-law finally becomes a mother-in-law." After a boring April, crypto investors finally ushered in a new wave of vitality in the market this month: Bitcoin returned to above $71,000, and Ethereum soared by more than 20% on May 21, and then reached a high of nearly $4,000.
The core reason for this violent rebound is the unexpected good news about Ethereum ETF from the United States. Although the market will not officially ferment until around May 24, the market ushered in a violent rebound on May 21, followed by a wave of cashing out. However, the market did not really decline, but entered a shock, which shows that the market believes that this positive news is long-term.
On May 24, the SEC officially approved the 19 b-4 filing for the Ethereum ETF, but the S-1 filing has not yet been approved. Among them, the 19 b-4 rule is a rule formulated by the SEC to regulate the trading of securities listed on the stock exchange trading floor. The rule requires that the stock exchange must formulate and implement reasonable rules to prevent manipulation, fraud, and unfair trading practices. The S-1 form is a registration statement form that the SEC requires listed companies to submit at the time of their initial public offering (IPO). In other words, the SEC has approved various details on the listing of the Ethereum ETF, but has not yet approved the official listing of any institution's spot products. Although the S-1 has not yet been approved, the rules have been formulated, indicating that the Ethereum spot ETF can be listed, so the future listing is a foregone conclusion.
Coincidentally, the FIT 21 bill was also voted through by the House of Representatives at the same time as the Ethereum spot ETF was passed. The bill regulates the regulatory framework for digital assets, clearly defines what digital assets are and the division of powers and responsibilities between the SEC and the CFCT, and provides guidance for more crypto assets to apply for spot ETFs in the future, as well as the path to compliance.
For a long time, the SEC has maintained an "ambiguous and rejecting" attitude towards the crypto industry, trying to exclude crypto assets with a "tough ambiguity". But now it has approved the Ethereum spot ETF in a manner that exceeds market expectations, which is really surprising. However, this sudden change may not be accidental. The two major parties in the United States may be using crypto assets as a bargaining chip in political games.
On May 16, some Democratic members of the U.S. Senate joined forces with Republican members to vote to repeal the SAB 121 Act, which establishes accounting standards for companies that custody cryptocurrencies, meaning that banks that custody cryptocurrencies must also hold corresponding cash. Although U.S. President Biden previously stated that he would veto SAB 121 to allow SAB 121 to continue to exist, it may only be a matter of time before SAB 121 is overturned. SAB 121 sends a key signal that some Democratic lawmakers have been following the leadership of Senator Elizabeth Warren on financial and technological affairs. Now they have broken with Warren and opposed the SEC's excessive intervention, which may mark a major shift in the Democratic Party's cryptocurrency policy.
On the Republican side, Trump even shouted the slogan of "ensuring that the future of cryptocurrency happens in the United States." Trump tried to win over crypto asset holders in a high-profile manner in the hope of winning their votes.
In short, the whole month of May can be described as a month of frequent good news. Crypto assets are being accepted by the traditional world at a rate beyond expectations, adding fuel to the bull market.
Conclusion
The global monetary policy easing trend is taking shape. Although the Federal Reserve is cautious about rate cuts, Powell's speech and Nomura's report both hint at the possibility of rate cuts. In addition, the rate cuts by other major central banks and the Federal Reserve's relaxation of bank capital ratio requirements all point to monetary easing policies around the world. These signals should be closely monitored and opportunities should be considered in the bond market and interest rate-sensitive assets.
The strong performance of the technology industry continues. Nvidia's financial report exceeded market expectations, and the continued record highs of the three major US stock indexes indicate the growth potential of technology stocks. Continue to focus on the innovative leaders in the technology industry and evaluate their long-term growth potential.
The SEC's possible abandonment of its view that Ethereum is a security and the emergence of the FIT 21 proposal both indicate that the cryptocurrency industry is gradually moving towards compliance, which not only brings positive development to the cryptocurrency market but also provides investors with new investment opportunities.
