The market, which has been "slapped in the face" six times, is once again "believing for the seventh time" in the possibility of a soft landing in the United States and a shift in the Federal Reserve's stance.

The continuous slowdown in US inflation data and the resilient US economy have convinced investors that the Federal Reserve has ended its historic tightening actions and plans to cut interest rates in the first half of next year. Does this mean that the story of a "soft landing" for the US economy is now plausible?

Last Tuesday, the good news of slowing inflation sent traders and investors rushing into the US Treasury market. There was a significant turnaround in the trend of US Treasuries, ending a six-month decline and pushing the 10-year Treasury market up 2.6% in November, the largest increase since March. In just a few days, the "turbulent" US bond market launched a "counterattack" and the bond storm subsided.

At the same time, the US stock market also entered a "carnival". Small-cap stocks rose more than 5% in the past week, achieving the second highest weekly gain of the year. Meanwhile, all three major US stock indexes rose more than 2% this week, marking their best weekly performance since early summer.

High-yield bonds (junk bonds), which had been forgotten for three months, have re-entered investors' sights. In the past week, funds tracking high-yield bonds attracted nearly $11 billion, indicating speculative enthusiasm spreading in the market.

However, history seems to be constantly warning the market that the current pricing of a "soft landing" is too optimistic. There are numerous examples of cases where a seemingly soft landing after an interest rate hike cycle eventually led to a recession. Henry Allen, a macro strategist at Deutsche Bank London, pointed out that the bond market has misjudged the Federal Reserve's dovish turn six times in the past two years. So, will the market succeed this time?

Currently, the market's confidence in the Federal Reserve's upcoming rate cut may be justified, but Deutsche Bank also points out that the final stage of bringing inflation down to the 2% target level is often the most difficult:

"But as inflation begins to decline, the debate increasingly turns to the risks of excessive tightening and whether policies are too restrictive. It is difficult to know the answer in real time because monetary policy operates with a lag. Therefore, as the market prices in the 'policy shift' for the seventh time, it is worth considering whether the conditions for this to happen are truly in place."

Is the market too optimistic?

Analysts generally believe that while the lower-than-expected October CPI and PPI are good news, the data is clearly not enough to justify the 5.4% rise in small-cap stocks and even the 1.9% rise in the S&P 500 last week.

On one hand, while the economy maintains resilience, there is a demand for the Federal Reserve to cut interest rates, which requires inflation to drop to around 2%. This process clearly has a long way to go. Salman Ahmed, Head of Macro Research at Fidelity International, said: The high interest rates set by the Federal Reserve have led to a significant slowdown in economic growth, which has a longer lag effect. However, from a market perspective, this situation is likely to occur much faster.

At the same time, Goldman Sachs' Financial Conditions Index (FCI), which measures the tightness of the financial environment, has been consistently declining, dropping half of the gains from August to October in just two weeks. The United States is experiencing one of the largest scale of financial easing outside of a crisis.

It is worth noting that the current financial conditions are similar to those in January, which means that the interest rate hikes and hawkish statements made by the Federal Reserve this year have been almost ineffective, and more tightening measures will be needed in the future.

Deep and core issues may remain unresolved?

However, what is more concerning is that the Federal Reserve has yet to solve many deep and core issues.

Firstly, there is economic volatility. According to media analysis, the intensification of geopolitical conflicts indicates that changes may occur suddenly, which could lead to increased inflation and rapid fluctuations in bond yields. This year, there have been consecutive black swan events, more geopolitical issues, and political or financial shocks are entirely possible:

This has led to continuous extreme volatility in bond yields, which has had a significant impact on stocks and other volatile assets.

According to data from the ICE BofA Move Index, the average implied volatility of US Treasury bonds over the past year has reached its highest level since the bursting of the dot-com bubble and the 2008-2009 financial crisis.

Secondly, inferring market trends from economic changes. A soft landing in the economy means lower interest rates, lower yields, and higher stock prices. The current market speculation is based on the combination of "high corporate profits + Fed rate cuts", pointing to a perfect soft landing for the US economy. However, analysts believe that with inflation still significantly higher than 2%, if the Fed chooses to cut rates, the economy is likely to slow down significantly, making it unlikely for the market's expectations of high corporate profit growth to be realized.

If the economy remains resilient and companies maintain high profitability, there may be no need for the Fed to cut rates in the first half of the year, and discussions about "sustained economic growth + declining inflation + Fed rate cuts" in the market may ultimately be just empty talk.

The Federal Reserve has already shifted its initial prediction of a hard landing to a soft landing, but a soft landing still means a slowdown in economic growth, and the weakness in the economy could easily evolve into a recession. Finally, analysts believe that there is uncertainty in the long-term economic prospects of the United States. The global economy may be undergoing a profound transformation: interest rates may be higher than before, and inflation may occur more frequently, analysts explain:

As the trend of deglobalization intensifies, countries will focus more on themselves. In this process, labor and personal savings become scarcer, resulting in higher costs. In the long run, higher interest rates are possible.

If artificial intelligence can replace some of the workforce and improve productivity, this will also be a reason for central banks to raise long-term interest rates. On the other hand, deflation caused by excessive debt makes individuals and companies less willing to borrow.

Therefore, it is possible that the narrative of a "soft landing" for the US economy will continue for some time. Analysts point out that with less than 30 trading days left this year, it is difficult to imagine a scenario that could significantly weaken the surging US stocks and bonds. However, the market should not be too complacent, because the story may change again before the Federal Reserve truly begins to cut interest rates. Interest rates will remain high for a long time, and the narrative of an "economic recession" may reappear:

In the short term, perhaps the safest approach is to continue to expect the brilliance of US stocks, but at the same time, be prepared for more attractive opportunities that may arise.