On July 31st, the Federal Reserve kept interest rates unchanged, maintaining the target range for the federal funds rate at 5.25% to 5.5%, in line with market expectations.

Since last September, the Fed has held steady for the eighth consecutive interest rate meeting.

In the statement of the Federal Open Market Committee (FOMC), policymakers did not publicly commit to a rate cut in September, but at the press conference following the rate meeting, Powell made a relatively clear statement that the Fed might consider a rate cut as early as September.

He said, "The question is whether the overall data, the evolving outlook, and the balance of risks are consistent with increased confidence in inflation and a robust labor market.

If this criterion is met, we might consider lowering the policy rate at our next meeting in September."

Nick Timiraos, known as the "Fed mouthpiece," commented that there was no clear signal for a rate cut in September at this meeting, but there were some very meaningful changes in the first half of the statement: the dual mandate is back, and inflation has been downgraded from "high" to "somewhat high."

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Timiraos added that the Fed stated, "The committee is paying close attention to both aspects of its dual mandate," removing the wording that policymakers have used over the past two years to describe a "high degree of concern" about inflation risks.

This shift is significant because it suggests that inflation may no longer be an obstacle to rate cuts.

Market analysts generally believe that the Fed has opened the door for a rate cut in September.

The Hong Academy has made it very clear in its mid-year analysis meeting that the U.S. Treasury market has already shown very clear risk signals.

Here are just a few points.

The U.S. Treasury market is divided into the primary Treasury auction market and the secondary Treasury spot market, the Treasury futures market, and the Treasury repurchase market.

U.S. Treasury bonds sold in the primary Treasury auction market can be circulated in the secondary spot market.

Investors can also arbitrage and hedge Treasury spot in the Treasury futures market, or pledge Treasury spot for financing in the Treasury repurchase market.

(1) On July 31st, the U.S. Treasury repurchase market interest rate SOFR showed anomalies again!

Under normal circumstances, SOFR should be around 5.31%, 2 basis points lower than the federal funds rate, and anything above 5.33% is considered abnormal.

Because SOFR is secured financing with Treasury bonds as collateral, it should be cheaper than unsecured credit financing.

U.S. Treasury bonds have been sold too aggressively, with the total amount exceeding $35 trillion, and primary dealers have encountered difficulties in clearing, leading to insufficient liquidity and the need to pledge Treasury bonds for financing, thus causing interest rate anomalies.

From the end of last year to the beginning of this year, SOFR had three "angina" episodes, which directly led Powell to change his tone and start announcing a reduction in the scale of quantitative tightening and considering rate cuts.

This round of SOFR anomalies began on June 25th, broke through the interest rate ceiling of 5.4% on July 1st, and then continued to maintain an abnormal state of 5.35%.

Just two days after falling back to 5.33%, it rose again to 5.38% on July 31st.

The increasing frequency of SOFR's upward fluctuations and the difficulty of returning to the normal range indicate that the problems in the U.S. Treasury repurchase market are becoming more severe!

(2) The liquidity shortage problem in the U.S. Treasury spot market is also still seriously deteriorating, and its severity has not only exceeded the 2023 mid-size bank crisis and four stock market circuit breakers but is also approaching the level when the Eurozone debt crisis erupted!

There are many other indicators that show that the three major markets of the U.S. Treasury spot market, Treasury futures market, and Treasury repurchase market are all abnormal.

The core logic of the U.S. Treasury market problem, which indicators to focus on to avoid risks or find opportunities, is detailed in the online version of the mid-year analysis meeting.

(3) The yen carry trade continues to reverse, putting continuous pressure on the U.S. Treasury market!

On July 31st, the Bank of Japan's board of directors decided by a 7 to 2 vote to raise the target for the overnight call rate from 0-0.1% to 0.25%, a 15 basis point increase, which is the highest level for Japan's short-term policy rate since 2008.

At the same time, the Bank of Japan also announced plans to slow down large-scale bond purchases.

By the first quarter of 2026, the Bank of Japan's monthly bond purchases will be reduced from the current level of about 6 trillion yen to 3 trillion yen.

Affected by the "hawkish" decision of the Bank of Japan, the yen continued to rebound, breaking through several important levels, with the lowest reaching 148.5060!

The strong yen squeeze may once again trigger a large number of yen carry trades to deleverage!

The yen carry trade uses low-yielding yen to fund investments in high-yielding currencies such as the Mexican peso, New Zealand dollar, or Australian dollar, or other high-yield investments.

When the yen appreciates significantly, this trade will depreciate, and may even trigger some funds' risk control alarms, leading to forced liquidation.

The Hong Academy pointed out in the mid-year analysis meeting that on July 1st, the futures contracts for shorting the yen in the foreign exchange market reached a peak of $14.7 billion since 2007.

Due to margin trading, the high leverage exposes a risk exposure that may be at the level of hundreds of billions of dollars.

Moreover, the rapid appreciation of the yen will prompt Japanese banks with a large amount of U.S. Treasury bonds and the need for liquid funds, such as the Norinchukin Bank and Japan Post Bank, to choose to sell some U.S. Treasury bonds at high prices for cash, to avoid the relative depreciation of U.S. Treasury bonds after the appreciation of the yen.

De-leveraging or selling at high prices both mean selling high-yield assets such as currency, bonds, and stocks at a discount to the market, buying yen, which leads to further appreciation of the yen and also puts pressure on the U.S. Treasury market, hitting the U.S. stock market!

Moreover, the continuous assassinations of Palestinian Hamas and Lebanese Hezbollah leaders by Israel have forced Iran to express its intention to retaliate, causing concerns about the expansion of war in the Middle East, leading some funds to choose to buy yen and gold for risk aversion, also putting pressure on the U.S. Treasury market and hitting the U.S. stock market.

Under these circumstances, Powell naturally turned "dove"!

However, it should also be noted that the current situation is turbulent, and black swans may emerge, bringing unexpected changes to the market.

The Hong Academy introduced in the July 30th article "Japan Post Bank 'explodes' again, adding to the troubles of the U.S. Treasury market!

": Bloomberg economists said, "The Bank of Japan may take two big steps towards policy normalization - raising interest rates again and starting to reduce bond purchases."

This action may bring turbulence to the global financial market!

So, the turmoil has begun.

Powell "doves," and the U.S. stock market rose sharply on Wednesday, but turned to a sharp decline the next day (Thursday).

The S&P 500 index closed down by 1.4%.

The Nasdaq Composite index closed down by 2.3%, giving up most of the 2.6% gain on Wednesday.

The newly released employment indicators, manufacturing indicators, and construction industry indicators are all poor, and some investors are even angry, why didn't Powell cut interest rates directly on Wednesday!

Currently, interest rate swap market data shows that traders have fully priced in three rate cuts by the Fed within the year on Thursday - the current expectation is a total cut of 82 basis points.

More and more people are also trading the possibility that the Fed will cut interest rates by 50 basis points in September, rising from 12.5% on Tuesday to the current 19%.

This proves that the Hong Academy's judgment at the mid-year analysis meeting is ahead of the market and is being continuously verified.

2024 is a turning point for the winter of globalization, the closer to the November U.S. election, the more black swans, the more intense geopolitical conflicts, the more uncertain the U.S. economy, the Fed may cut interest rates in advance, asset pitfalls overlap with the great battle of world destiny, the financial market is changing rapidly, so we investors must be more vigilant to cope with the unprecedentedly dangerous and changeable market situation in the second half of this year!