SignalPlus Macro Research Report (20230629): Market Lacks Enthusiasm, Central Bank Leader's Meeting Reflects Caution

Summer low liquidity conditions began to show, and trading activity in major markets became lackluster, and trading volume began to dry up. The economic data released on Tuesday was quite strong (US consumer confidence index reached its highest level since 2022, durable goods orders rebounded, house price index rose, and new home sales increased significantly by 12.2% compared to the previous month), and yesterday's focus shifted to the G4 central bank summit held in Sintra.

Powell (Federal Reserve), Lagarde (European Central Bank), Ueda (Bank of Japan), and Bailey (Bank of England) gathered yesterday for a highly anticipated group meeting. However, their collective performance was quite cautious, and each central bank leader strictly adhered to the script written in recent times, providing traders with little new information as trading material. A brief summary of their views is as follows:

Lagarde insisted that the European Central Bank is currently not considering pausing rate hikes and holds a pessimistic view on the European economic growth outlook.

Bailey tried to express confidence in the UK economic outlook, while other markets are concerned about the prospect of stagflation, making him the most hawkish member in the group in terms of managing rate hike expectations.

Powell reiterated that the entire Federal Reserve committee expects to have at least two more rate hikes before reaching the terminal rate, and the current interest rate policy has a faster transmission mechanism on the economy than in history. In addition, he admitted that he is not certain about the economic outlook and said that an economic recession "is not the most likely scenario... [but] is possible."

Last but not least, Ueda of the Bank of Japan is the most dovish of all. This governor jokingly said that the lag effect of the Bank of Japan could last "a quarter of a century" because they haven't raised interest rates in decades. Additionally, Ueda does not verbally support the weakness of the yen, as he believes that is within the jurisdiction of the Japanese Ministry of Finance rather than the Bank of Japan.

Overall, the four major central banks have successfully adhered to their respective scripts, and the market has been virtually unaffected - mission accomplished once again!

With the market activity declining as we enter the end of the quarter and summer vacation, and potentially remaining subdued for some time, we also note that global quantitative tightening is expected to resume in July. The European Central Bank has tightened TLTRO operations again, taking a big step towards reducing its balance sheet. Considering that the current level of stock indices relative to central bank balance sheet levels appears too high based on models, and with investors already rebuilding risk exposure in the context of reduced summer liquidity support, it is worth paying attention to whether the risk market will enter a new phase in the summer.

In addition, as mentioned earlier, initial jobless claims are a covert but important leading indicator for economic momentum, and this indicator has started to deteriorate (more unemployment) while yield expectations move in the opposite direction. We expect that the number of weekly initial jobless claims will have a greater impact on market trends in the second half of this year.

In terms of cryptocurrency, after a series of exciting Tradfi-ETF news, cryptocurrency prices have stabilized. Although there has been a decent rebound in the open interest of BTC perpetual contracts in the past two weeks, the depth of the secondary market is still challenging, and the liquidity conditions are still about 20-30% worse than the beginning of the year. In addition, despite overall improvement in spot prices, the activity in the underlying ecosystem and stablecoin flows continue to decline, and the volume brought by ETFs may take several quarters or even longer to occur. Therefore, we expect cryptocurrency prices to maintain this volatile pattern, with a chance of slowly trending higher.

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