SignalPlus Macro Research Report (20230905): The Fed’s interest rate hike cycle will come to an end
Last week, after the dust settled on various data, there was little change in market expectations for the FOMC's upcoming interest rate decisions. The market still expects rates to "remain unchanged" in September, and the probability of another rate hike in November is only about 30%. In addition, although the U.S. economy remains strong, last week's employment data was clearly dovish, especially the significantly lower-than-expected JOLTS job openings on Tuesday and the weak non-farm payroll data on Friday.
In the later stages of the Fed tightening cycle, the negative correlation between asset prices and growth pricing with economic surprises has become increasingly apparent. The market responded positively to the moderate slowdown in data, and the traditional 60/40 investment portfolio performed strongly last week, closing up 1.6%. As long as the data does not weaken to the point of triggering a severe economic recession, the trading philosophy of "bad news is good news" may continue in the short term. This line is indeed quite delicate, and the current market behavior may seem short-sighted to neutral market observers, but such market behavior is not uncommon in the late stages of economic cycles in history.
In addition, the market has become more confident that the Fed is truly nearing the end of its tightening cycle. Interest rate volatility has diverged from stock and forex market volatility for most of this year, but it has finally seen a significant decline in the past three months. Although bond yields have experienced a strong bearish trend in the past month, implied volatility has declined. Despite ongoing price pressures, rebounding oil prices, and continued quantitative tightening as planned, the bond market seems more optimistic and does not anticipate a "taper tantrum" this time. In this sentiment, asset prices may continue to be supported, but there could be many changes in the winter, especially if oil prices continue to soar from current levels.
This week there are not many economic data releases, and the market focus will mainly be on the speeches of the Federal Reserve. Before the September FOMC meeting, there is only one CPI data release left, but it is unlikely to change the decision in September because multiple officials have confirmed that there is no need to wait for this data to make a decision. This week's Federal Reserve speaker list also includes some relatively rare names, such as Dallas Fed President Logan and Director Bowman, and Collins, Harker, Goolsbee, Williams, and Bostic are also planning to give speeches this week.
In terms of cryptocurrencies, prices have fallen again, and participation remains weak. Coupled with the loss of momentum, prices have the opportunity to break through the August low. In addition to the weak coin price, Opensea just announced that the number of active users in August reached the lowest level since July 2021, with only 126,000. At the same time, the overall NFT trading volume on major platforms (OpenSea, Blur, LooksRare, X2Y2) has fallen to a two-year low, totaling 407 million dollars.
In TradFi news, London Stock Exchange Group (LSEG) announced that they are planning to build a blockchain-based digital asset business. However, what is confusing is that the capital market regulators state that this new exchange "will absolutely not build anything around cryptocurrencies... [but] our idea is to use digital technology to make processes smoother, cheaper, and more transparent... and to regulate them."
He further stated that the mission of the group is to become the first large global securities exchange to provide investors with a complete blockchain-supported ecosystem, covering the entire lifecycle of financial assets. This business will be an independent legal entity separate from the London Stock Exchange and is expected to start operating in 2024. From reading between the lines, it seems that their efforts will focus on tokenization, which is currently the most concerning topic for TradFi institutions in the short term.
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