The Real Reasons Behind the Crypto Market Pullback

Last week, the crypto market experienced a significant pullback. Although the market generally attributed this to the so-called "hawkish rate cut" remarks by Fed Chairman Powell, which sparked concerns over inflation and economic recession, a deeper analysis reveals that this may just be a secondary factor. The real impact came from Trump's strong pressure on Congress's short-term spending bill in conjunction with Musk last Wednesday, as well as the uncertainty triggered by the threat to eliminate the debt ceiling rules, which ignited a risk-off sentiment in funding.

Macroeconomic data does not support the market's panic over monetary policy risk.

The FOMC interest rate decision early last Thursday met market expectations, concluding with a decrease of 25 basis points. The market generally attributes the decline in risk assets to two factors: first, the dot plot shows that there was no consensus among the committee members, with some voices leaning towards maintaining the interest rate unchanged. Secondly, the median target interest rate for 2025 was raised, with the expectation of rate cuts revised down from 4 times to 2 times.

However, a close observation of the changes in the U.S. Treasury yield curve reveals that, although long-term rates have risen, the impact on the 1-year yield is not significant. This indicates that the market has concerns about the long-term economic outlook, but the risks are not expected to materialize in the short term.

From the perspective of the price of the 30-day federal funds futures contract that expires on December 25, the market's expectations for the next two rate cuts were already reflected back in November. Therefore, the pullback is mainly attributed to the seeming lack of sufficient basis for the Federal Reserve's future interest rate decision risks.

Further analysis of macro data, including the PCE index, non-farm employment and unemployment rate, as well as GDP growth details, shows no obvious signs of deterioration. The PCE index remains below 2.5, the unemployment rate is stable, and the non-farm employment data for November even showed growth. GDP growth also tends to stabilize, with no significant decline in its details. These data do not support the judgment of renewed inflation or economic recession in the coming year.

The continuous decline of the Dow Jones Index is primarily due to the single-point risk associated with UnitedHealth Group, rather than systemic risk. The sharp drop in UNH's stock price is mainly influenced by the incident involving its CEO, which has sparked social concern over the issue of healthcare costs in the United States.

Trump's Threat to Cancel Debt Ceiling Triggers Market Risk Aversion

The main reason for the market's violent reaction lies in Trump's joint pressure with Musk on the Congress's short-term spending bill, as well as the uncertainty caused by the threat to abolish the debt ceiling rules.

Last week, the U.S. Congress engaged in intense negotiations over short-term spending. House Speaker Johnson reached a preliminary agreement with the Democrats, but it was quickly rejected after being criticized by Musk on social media. Trump then expressed support for abolishing the debt ceiling rule, raising concerns in the market.

Despite the passage of a new temporary spending bill that avoided a partial government shutdown, Trump's stance on abolishing the debt ceiling has clearly raised concerns in the market. Given Trump's influence within the Republican Party and the imminent arrival of new congressmen, the likelihood of abolishing the debt ceiling has significantly increased.

The U.S. debt ceiling is a statutory limit on the growth of government debt. Although the debt ceiling has been suspended multiple times in history, the current ratio of U.S. public debt to GDP has reached an all-time high, exceeding 120%. In this context, abolishing the debt ceiling would free the U.S. from fiscal discipline in the long term, and the impact on the dollar credit system would be difficult to estimate.

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Trump may hope to create space for his tax reduction policy by abolishing the debt ceiling, allowing him to get through the painful period of policy implementation. However, this approach has also undermined the narrative of using Bitcoin reserves to resolve the debt crisis, leading to profit-taking in the crypto market.

Therefore, in the coming period, observing the policies of the Trump team will become the focus of market attention, and its importance may exceed other factors.