Expectations of interest rate cuts rise, driving U.S. stocks to fluctuate; key data and policy directions become focal points

The US dollar recently plummeted, reversing its upward trend, driven by market re-pricing expectations for interest rate cuts. As economic data gradually reveals the true state of the labor market, investors are re-evaluating the Federal Reserve’s policy direction. Although the three major US stock indices saw slight gains, the market is essentially hovering at a critical crossroads, awaiting further confirmation from economic data.

Poor Non-Farm Payroll Data Reignites Rate Cut Expectations

Signs of weakness in the US labor market are becoming increasingly evident. According to the latest data, US job openings have fallen to their lowest level in five years, significantly below market expectations, and previous month figures have been revised downward. These developments clearly indicate a continued weakening of labor demand. Against this backdrop, market doubts about whether the Fed will maintain its current stance have grown.

In January, the Fed paused its three consecutive rate cuts and raised its economic growth outlook. The decision statement omitted the phrase “increased downside risks to employment,” which was interpreted by markets as a more optimistic view of employment conditions. However, subsequent job vacancy data contradicted this optimism. If upcoming non-farm payroll figures continue to show weakness, expectations for rate cuts will likely intensify again, potentially sparking a new upward momentum in US stocks. Currently, markets anticipate that non-farm employment will increase by 55,000 jobs in that month, with the unemployment rate holding at 4.4%. These figures will directly influence market judgments on the timing of rate cuts.

Fed Policy Shift: Gradual Balance Sheet Reduction Instead of Aggressive QT

The US Treasury Secretary recently stated that even with the appointment of a new Fed chair, the Fed will not rush to reduce its massive balance sheet. This reassurance has provided some relief to markets.

Citi’s analysis team further pointed out that, given the lessons learned from significant fluctuations in the repurchase market in 2025, policymakers are clearly more inclined to avoid repeating that tense situation. The threshold for restarting quantitative tightening (QT) has been substantially raised, and official decision-makers favor a more moderate approach to balance sheet management. The new Fed leadership is likely to gradually reduce the central bank’s approximately $6.6 trillion in assets, implying that liquidity will not be significantly impacted by aggressive asset runoff in the short term. As a result, US stocks are expected to maintain strength in an environment of relatively ample liquidity.

White House economic advisors also indicated that, based on a comprehensive assessment that the economy’s endogenous growth momentum remains relatively solid but labor demand is clearly declining, employment growth is expected to slow in the coming months. This further supports the expectation of continued monetary easing.

Geopolitical and Trade Tariffs: Uncertainty Persists

The US and Iran still have not reached consensus on key issues, but negotiations have not been halted, indicating efforts to find breakthroughs are ongoing. Another notable development is reports that high-level US-China interactions will take place in the near future. Market rumors suggest that senior officials plan to visit the East in April for talks focused on economic and bilateral relations. Progress in these negotiations will have a profound impact on the direction of US stocks.

Trade tariff uncertainties continue to cast a shadow over the US stock market. Although the overall macro environment is improving—assuming subsequent trade frictions and geopolitical conflicts ease—there is room for further short-term gains. However, medium-term risks such as the artificial intelligence bubble and de-dollarization trends pose significant structural obstacles, likely limiting upside potential in the medium term.

Software and Tech Sector: Largest Concentration Risk in Speculative Credit

German investment bank analysts issued a major warning: the software and tech industries represent one of the most significant concentration risks in the speculative-grade credit market to date. According to their detailed report, the software and tech sectors account for $597 billion and $681 billion respectively in the high-yield and leveraged loan markets, representing 14% and 16% of the total market—hitting record highs. These speculative debts include high-yield bonds, leveraged loans, and US private credit.

If defaults in the software industry begin to rise, the impact on overall market sentiment could be profound and widespread, potentially comparable to the 2016 energy sector crisis. This serves as a reminder for investors not to be overly optimistic, as risk assessments should incorporate this potential systemic threat.

Technical Analysis: The 7000 Level and Range Consolidation

From a technical perspective, US stocks are currently consolidating within the $6,800 to $7,000 range. A successful breakout above the $7,000 psychological level could lead to further advances toward $7,300. However, with the approaching of a key time window on February 23, the market may be building a larger-scale high-level consolidation pattern, possibly expanding the range upward to between $6,800 and $7,300.

This suggests investors should closely monitor market momentum. Under the dual influence of rate cut expectations and geopolitical developments, US stocks have a technical basis for further short-term gains. Nonetheless, medium-term risks should not be overlooked. Once rate cut expectations become clearer, market reactions will likely become more defined, prompting a reassessment of asset attractiveness.