Risk appetite continues to cool! U.S. inflation resurfaces alongside tariff storm, credit panic rises to a seven-month high

According to the latest economic data, inflation in the United States is showing signs of a "comeback." Coupled with the potential impact of the "reciprocal tariff" policy that the Trump administration is about to announce on prices and signs of weak consumer spending, one of the important indicators measuring global financial market risk appetite—the key indicator (US Credit Fear Gauge) that quantifies concerns and panic in the US credit market—has risen to its most alarming pessimistic position since August of last year, indicating a sharp decline in risk appetite.

On Friday, the "Markit CDX North America High Yield Index," known as the "credit panic gauge," continued its recent downward trend, falling 0.6 points to 105.14 points. The continued decline of this index reflects an increase in credit default risk, with the overall risk appetite in the financial market sharply declining. After rolling adjustments, this index recorded its worst performance in seven months.

As credit market risks rise, the general spread of investment-grade bonds (which is positively correlated with credit risk) jumped 2 basis points to 61.2 basis points, the highest level in over two weeks, reflecting market panic or default expectations even for generally high-rated investment-grade bonds.

An upward risk appetite indicates that investors prefer riskier assets, such as stocks, while a downward trend indicates a preference for fixed-income assets, such as government bonds and money market funds. When risk appetite is on an upward trend and near its peak, risky assets (like stocks) often receive a significant premium, and asset prices may be boosted. Conversely, when risk appetite is on a downward trend and in the bottom region, prices of risky assets may continue to be under pressure.

As financial market risk appetite sharply declines, stocks, cryptocurrencies, and other risky assets generally weakened significantly on Friday, reflecting heightened concerns in the financial market regarding the so-called "reciprocal tariffs" led by the Trump administration that will take effect next week.

Under the dual pressure of inflation and the threat of "reciprocal tariffs" on April 2, the three major US stock indices fell sharply, marking a "Black Friday." All three indices declined for three consecutive trading days, with the NASDAQ Composite Index experiencing a nearly 3% drop in a single day. In terms of weekly declines, all three indices closed lower this week, ending the strong rebound at the start of the week, with "AI chip giant" NVIDIA (NVDA.US) seeing a weekly drop of 6.82%. The seven major US tech giants (the Magnificent 7) collectively fell 2.95% this week, and the Philadelphia Semiconductor Index dropped over 6% this week.

The economic data released on Friday further heightened market concerns about the US economic outlook. The Federal Reserve's preferred inflation measure—the core PCE—shows that inflation is making a comeback, with long-term inflation expectations among Michigan consumers at their highest level since February 1993, prompting a rise in panic sentiment in the market ahead of the "US reciprocal tariff day" on April 2, leading to significant sell-offs of risky assets.

It is understood that Susan Collins, the Boston Fed president and a voting member of the 2025 Federal Open Market Committee (FOMC), stated on Thursday that tariffs will "inevitably" push up inflation (at least in the short term). The inflation data released by the Bureau of Economic Analysis on Friday showed that the Fed's preferred inflation measure—the core PCE, excluding food and energy prices—rose 0.4% month-on-month, marking the largest increase in a year, while the year-on-year increase reached 2.8%, both figures exceeding previous values and general economist expectations

Expectations of "Stagflation" in the U.S. Economy Significantly Rise

The S&P 500 index fell 2% on Friday, and the yield on the 10-year U.S. Treasury bond decreased by 11 basis points to 4.25%. Another data report released that day showed that U.S. consumer confidence dropped to its lowest level in over two years, exacerbating investors' concerns about continued pressure on the consumption side amid the escalation of the global trade war triggered by Trump, significantly boosting expectations of "stagflation." The final value of the University of Michigan's March report indicated that U.S. consumer confidence hit a new low in over two years due to tariff impacts, while long-term inflation expectations reached a 32-year high, exceeding previous preliminary data.

Zachary Griffiths, head of investment-grade bonds and macro strategy at CreditSights, stated on Friday morning local time: "We are witnessing a typical risk-off trading day—Treasury prices are rising, stocks are being sold off, and credit spreads that measure risk appetite are widening. Economic data further reveals signs of stagflation in the U.S. economy."

Iqbal Khan, President of UBS Asia Pacific and Co-President of Global Wealth Management, stated that amid the uncertainty in the market caused by current tariffs, the real risk facing investors is stagflation. Khan said at a summit on Thursday: "When it comes to the core issue of risk, the key is not the magnitude of economic growth, but the risk of stagflation. This is the real threat to the market and the situation that all parties are striving to avoid. Major central banks around the world, including the Federal Reserve, clearly regard this as a primary focus."

Coincidentally, Nick Timiraos, known as the "new Fed whisperer," wrote after the Federal Reserve's interest rate decision that expectations of "stagflation" may make it difficult for the Fed to preemptively prevent a slowdown in the U.S. economy through interest rate cuts this year, and noted that the Fed's latest forecast indicates that the U.S. economy is facing the risk of "stagflation," characterized by slowing economic growth alongside rising inflation rates