CEO House View | Geopolitics Forces an Early Valuation Reset—The Market’s Inflection Point Is Taking Shape

💡Oil prices became the key factor influencing liquidity conditions and portfolio positioning, with MacroMicro's CEO warning that WTI crude oil prices breaching $70 per barrel could lead to a delay in Fed rate cuts, a higher probability of a broader market pullback, and the need to reduce position sizes.

💡The current market reaction is considered a valuation correction, not fundamental deterioration, because global macro data in February showed no clear signs of deterioration, and economic conditions continued their improvement trend. Markets are still framing this shock as a "short-term event," with the IEA swiftly releasing strategic reserves to contain the actual supply gap at approximately 3%–5% for about one quarter, preventing downward revisions of corporate earnings at the fundamental level.

💡Specific inflation indicators that showed signs of stirring in February and March include a surge in the "Prices Index" within the ISM Manufacturing sub-indices from 59 to 70.5 on March 2, with almost all purchasing managers reporting price increases. Additionally, the PPI recorded its third consecutive month-over-month increase on March 18, just ahead of the Federal Reserve meeting, further deepening market anxieties over mounting inflationary pressures.

💡Inflation expectations rapidly transmitted to the interest rate market, causing markets to significantly scale back expectations for rate cuts this year. Expectations are even beginning to reflect potential tightening pivots from central banks in Europe, the UK, and Canada, despite the Federal Reserve's repeated emphasis on a “wait-and-see” stance and high uncertainty.

💡The key difference in downside protection between the current situation and the Russia-Ukraine war lies in two factors: the current AI cycle is propelling productivity, which, coupled with already restrictive interest rates, reduces the urgency for aggressive rate hikes. Additionally, Donald Trump's stance, influenced by the midterm elections, pressures him to suppress inflation and prevent risks from spreading.

💡Two key reasons provide downside protection during the current market environment: first, the ongoing AI cycle is propelling productivity, and existing restrictive interest rates reduce the urgency for aggressive rate hikes. Second, Donald Trump's stance ahead of this year's midterm elections will pressure him to suppress inflation and prevent risks from spreading.

💡When oil prices rise above $100 per barrel, they begin transmitting to the demand side, transforming into a "demand-side shock." This impacts consumption momentum, causing it to fall significantly below the historical average, as observed in 2008, 2012, and 2022. For corporate inventories, ISM subcomponents show that if firms expect input prices to rise persistently for more than one quarter, inventories typically increase while new orders decline.

💡Investors should monitor the University of Michigan (UMich) inflation expectations, specifically whether the 1-year and 5-year inflation expectation revisions begin to climb from their current low levels, indicating market sentiment for short-term impact. Additionally, the CPI is a primary focal point, especially the critical April 10 CPI release for March data.

💡The projected CPI growth for March is expected to break above 3% in one swoop, compared to February's 2.41%, largely due to energy prices surging over 30%. The April 10 CPI release is critical as it will effectively test the market's reaction to these rising prices and a higher inflation figure.

💡Nonfarm payroll reports need to maintain a certain degree of resilience, specifically remaining in positive territory (above 0), to indicate that the US-Israel-Iran conflict has not infected broader economic fundamentals. This performance will be crucial following the February report, which was largely attributed to labor strikes.