News

Jan 12, 2023

Current Market Update

Central banks have aggressively raised interest rates to combat inflation, with all eyes on the Fed as the US dollar is the world’s reserve currency.

Although inflation in the United States has started to decrease, the Fed has not backed down. This is simply because the Fed fears that stopping its rate hikes or lowering interest rates too soon may lead to a second wave of inflation, according to Fed Chair Jerome Powell, who intends to be like former Fed Chair Paul Volcker, who killed inflation in the 1980s by raising interest rates.

Meanwhile, the market is eagerly awaiting the moment when the Fed will take a pause.

In other words, the market is anticipating the Fed to stop raising interest rates now to clarify that a pause is not a pivot, meaning that interest rates will start to decline.

However, investors know that a pause means a pivot is not far away despite what the Fed may say, which is why the markets have rallied every time the Fed has hinted at a pause. The markets also rally when inflation readings come in lower than expected, and even when employment reports suggest that unemployment is on the rise because the Fed has cited strong employment statistics as a reason for continuing to raise interest rates.

During Jerome Powell’s press conference last December, it was revealed that the US economy is missing millions of workers due primarily to retirements caused by the pandemic. This so-called labor shortage has led to an increase in wages at a rate higher than the Fed’s inflation target of 2%.

 

Employment and Recession

The FED also has a mandate to ensure employment stays at about 4%, Jerome has repeatedly stated that reducing inflation was the only real way to do this, in other words, the only way to reduce inflation is to increase unemployment so that more Americans lose their jobs, thus slowing wage growth. In practical terms, this creates a recession that the market does not anticipate as eagerly. So far, a recession has not yet materialized or, at least, it is said, as such, the FED has continued to raise interest rates and is currently expected to increase them by 0.25% or 25 additional basis points at its next meeting, which is again scheduled for February 1st. This will bring the FED’s short-term interest rates between 4.5% and 4.75%, now this figure is important because most FED officials have agreed on a terminal rate of 5% or more. For those wondering how the high-interest terminal rate will go during the current tightening cycle as this 5% target approaches, markets will be extremely volatile as expectations multiply, and this brings me to the minutes of the FED’s December meeting. For context, the FED will decide how much the interest rate will increase, this rate would be revised every 6 weeks, this is announced immediately at a press conference by the FED chairman, but the minutes detailing the FED’s reasoning are only published weeks later, schedule (link: Calendars, statements and minutes of meetings (2017-2022)). The FED’s December minutes describe a breakdown of what is happening in the markets. I couldn’t help but notice a section that reads quotes in other market developments, the pro tem manager noted the failure of a leading crypto exchange. While FED officials add this quote while the fallout from the situation has been significant among other lenders and crypto exchanges, the collapse was not considered to pose broader market risks to the financial system. This makes me wonder what else they said about crypto, after all, the International Settlement Bank or BIS has also released standards for central banks to hold cryptocurrencies on their balance sheets starting from 2025. This is big news given that the BIS describes itself as a bank for central banks. (link: https://www.bis.org/publ/bisbull66.pdf)

Now, FED officials also discuss something that is often overlooked and that is the Fed’s reverse repo facility. The FED’s repo facility is beyond the scope of this article, but this facility is a place where institutional investors can park their assets to earn interest on said assets. To my knowledge, the reverse repo interest rate was higher than any so-called safe interest, higher were the rates offered for example on US government debt.

This translates into a record amount parked in the FED’s reverse facility by institutions, a figure that recently eclipsed $2.5 trillion (Reuters.com).

Logically, more money in the FED’s repo facility means there is less money in the markets, FED officials seem to indicate that the recent rally we’ve seen in the market is partly due to money coming out of the repo facility, but apparently, they do not believe this trend will continue according to the analysis of the current economic situation.

Fed officials have identified a decrease in inflation and an increase in the unemployment rate as two welcome developments, but they note that labor force participation has slightly decreased, contributing to the tightening of the labor market. Because of this, the average hourly wage for workers in the United States and Canada has increased by over 5% over the past year. Remember, this is more than double the Fed’s 2% target. As long as this figure remains high, the FED probably will not pause or pivot because higher wages mean higher prices.

Interestingly, FED officials also discussed the economic situation in other countries and regions, including Europe and China. They highlighted the decline in economic activity in Europe and China’s gradual reopening. This is noteworthy as it suggests that the FED may be concerned about the impact of these developments on other economies.

 

Financial conditions

The third section of the minutes takes a closer look at financial conditions. Fed officials highlight the ongoing crash in the housing market as well as the increase in interest rates on the most volatile types of debt, such as credit card debts and auto loans.

Note that credit card debt has recently reached a record level. It’s not surprising that this is hitting lower-income individuals the hardest, something the FED will acknowledge a bit later.

They also recognize that many people are starting to default on these debts and it appears that auto loans are leading the charge.
They note that this trend is likely to continue.

Economic Outlook

In the fourth section of the minutes, Fed officials revealed their economic outlook, they predict that labor market participation will continue to decline.
Many analysts believe this is why this recession will be different. People can’t lose their jobs en masse, because there’s no one else to hire. For Fed officials, however, all this means is that they will have to keep interest rates higher for longer to crush inflation.
That’s why they simultaneously forecast a gradual increase in the unemployment rate that could last until 2025. This would be a long recession.
Now, the common thread is that the FED also predicts that housing costs will start to decrease later this year and they are convinced that inflation of all sorts will decrease by 2025.
This of course assumes that nothing in the financial system will brake, but it seems that they are not banking much on this possibility, they have rather focused on the fact that inflation is more likely to increase than decrease in the short term and how the FED’s response is likely to trigger a recession in the United States later this year. This has been the consensus view for months now.

The only question now is how deep will this recession be and how long will it last?

Economic conditions

In the fifth section of the FED officials’ minutes: current economic conditions.
FED officials seem to imply that the reason why inflation is more likely to increase than decrease, is not due to a tight labor market, but due to the pandemic and the war in Ukraine. We are technically still in a pandemic (the remaining restrictions continue to choke supply chains, the war in Ukraine has contributed to this supply chain crisis and also disrupted, or even broken, energy and trade relations between Russia and the West, some bullish catalysts for the crypto market.

You know that an official end of the pandemic and a resolution of the war in Ukraine are two of these catalysts. It is too early to say when these issues will be resolved, but by the time they are, the FED could start easing its measures until this happens again, even though we will continue to be squeezed by a combination of high inflation and rising interest rates, for example, Fed officials have finally admitted that the supposedly higher savings rates they are ranting about only apply to the upper class, everyone else is getting crushed, that being said, there is reason to believe that the Fed’s approach to higher inflation would do more damage to the economy in the long term.

On the question of whether the FED is beginning to see convincing signs that inflation is returning to 2%, which is the target.
Investors got the impression that what the FED is looking for is a continuous decline in overall inflation, but the minutes suggest that this is not even enough, although the FED is happy with this decline.
That’s not what it’s looking for, it needs to see wage growth decline and unemployment rise. The FED is also obsessed with inflation expectations, because if people think inflation is going to continue, they will act in a way that ensures it becomes a self-fulfilling prophecy if you will, these are actually expectations obsessed with inflation expectations.
This is because if people think inflation is going to continue, they will act in a way to ensure it becomes a self-fulfilling prophecy if you want.
It is actually expectations that turn high inflation into hyperinflation, now Fed officials have congratulated themselves for acting so quickly to fight inflation. This is a bit rich given that Jerome Powell initially insisted that inflation was transitory in any case, they pointed out that the FED will slow its pace of rate hikes in the future, this is because the FED knows it takes time for its monetary policies to affect the real economy, the lag is between a few months and more than a year, Jerome Powell initially argued that there wasn’t much lag due to the financialization of the economy, but he has since been silent on this front, this is probably because the FED is starting to worry that something in the economy might break. If you’re wondering what that means, well, the short answer is that either a large bank or a company will go bankrupt, or the public debt markets will become illiquid, causing all sorts of problems and questions. And if you want to know what that looks like, look no further than the UK where the guilt of the government.

The market went anywhere after the poor fiscal policy decisions of former short-term Prime Minister Liz Truss, you can learn more about what is happening in the link (https://www.ledevoir.com/monde/europe/765821/liz-truss-jette-l-eponge-et-annonce-sa-demission).

 

Take note

Now, another thing that the FED minutes reveal is that:
the central bank is determined to keep interest rates at five percent or more until the end of the year

Despite a break of the type I just described, what’s annoying is that Fed officials give nothing like details about the accuracy of future rate hikes, participants noted that because monetary policy worked importantly on financial markets and an unjustified easing of financial conditions, especially if it was motivated by a public misperception, the committee’s reaction function would complicate the committee’s efforts to restore price stability translation if markets continue to rally as they have been for the past two weeks, the FED will be obliged to continue to raise interest rates or at least maintain much higher rates for much longer, this is the clearest sign that the FED has sent to financial markets so far that they want to implant everything.
Fed officials also reiterated that they wanted to see inflation fall below the Fed’s interest rate target before thinking about pivoting.
In the past, Jerome Powell has made it clear that interest rates across the yield curve must be higher than inflation, which means not only short-term interest rates, but also long-term to put things in perspective. The lowest interest rate on the yield curve is currently about 3.5%. means that inflation will have to fall below 3.5% for the FED to pump the brakes, note that this lower range could change as the FED continues to raise rates, let’s hope it goes up rather than down.

 

FED summary

Maintenant, la sixième et dernière section du procès-verbal donne essentiellement un résumé de la position actuelle de la Fed.
Vous remarquerez maintenant que cette position peut être résumée comme une inflation trop élevée, un marché du travail trop serré, une pandémie avec la guerre en Ukraine, provoquant une pression inflationniste et une récession à venir.
Les responsables de la FED ont également noté que la FED continuera de vendre des actifs à partir de son bilan, c’est encore un autre facteur important de la Fed qui a été négligé.
C’est un problème parce que la vente par la FED de la dette publique et de la dette hypothécaire entraîne probablement une hausse des taux d’intérêt à plus long terme de la courbe des rendements dont la dernière section du procès-verbal mentionne également la facilité de prise en pension que j’ai mentionnée plus tôt, il note que le taux d’intérêt offert sur les actifs de la facilité de prise en pension devrait être fixé à un minimum de 4,5 % offrant effectivement un risque total -taux d’intérêt gratuit pour les institutions, cela soulève la question de savoir si la FED continuera d’augmenter le taux d’intérêt offert par la facilité de prise en pension étant donné qu’elle semble aspirer l’argent des marchés financiers et les fait s’effondrer.
Je suppose que nous le verrons quand la FED publiera son prochain procès-verbal de réunion fin février.

Oui, mais

Et maintenant, pour la grande question, qu’est-ce que tout cela signifie pour le marché de la cryptographie ?
Eh bien, tout dépend de la rapidité avec laquelle la FED atteindra son objectif de 5 % et du temps qu’il faudra pour que l’inflation tombe en dessous des taux d’intérêt sur toute la courbe de rendement.
Aussi divertissants que soient les autres facteurs potentiels, il est clair que la FED est en mission en ce qui concerne la rapidité avec laquelle la FED atteindra son objectif de 5%, il semble que cela se produira à la mi-mars, cela suppose que la FED augmentera de 25 points de base début février et de 25 autres points de base en mars, assez curieusement, cela serait cohérent avec les cycles de resserrement historiques qui durent environ un an maintenant, je veux dire que le marché de la cryptographie se redressera lorsque la FED fera une pause, mais je ne le fais pas pense que cela se produira en plus du fait que la FED dit maintenant explicitement aux investisseurs de se calmer, il n’y a pas de pénurie de facteurs macro et crypto qui pourraient faire baisser le marché de la crypto.
C’est maintenant la deuxième partie de cette équation où la crypto pourrait briller si l’inflation chute plus rapidement que prévu par la FED et si le marché du travail se refroidit suffisamment, la FED n’aura peut-être pas à maintenir des taux d’intérêt élevés très longtemps du tout le pivot ultérieur pour soutenir le l’économie pourrait provoquer un rallye crypto, puis à nouveau les pivots alimentés ont historiquement correspondu aux creux du marché, c’est parce que la FED n’a tendance à pivoter que lorsque quelque chose dans le système financier se brise ou lorsque l’économie est en très mauvais état.
Ce paradoxe du pivot est important pour rappelez-vous, mais je suppose que l’histoire ne se répète pas toujours dans le cas du marché de la cryptographie, il a été beaucoup moins corrélé au marché boursier récemment, je soupçonne que c’est parce que les institutions ont principalement encaissé leurs positions cryptographiques, cela signifie que ce sont principalement des investisseurs de détail impliqués et je pense que la plupart d’entre eux ne se soucient pas trop de ce que fait la FED, c’est que votre investisseur de détail ordinaire est probablement préoccupé par la hausse des taux d’intérêt et l’inflation élevée plus que la plupart des gens alors que les factures de carte de crédit et les paiements de prêt automobile continuent de grimper parallèlement au coût de la vie, nous pourrions voir beaucoup de ventes forcées dans les mois à venir, le fil conducteur de cette situation est que le marché de la cryptographie a un cycle comme toutes les autres classes d’actifs, nous semblons entrer dans la pire étape du cycle de la crypto où les creux du marché et les gens cessent de prêter attention, ne vous y trompez pas, c’est le moment où les gagnants sont faits.

Note: Il est important de se rappeler que le trading est une activité risquée et qu’il est important de se rappeler que les pertes sont possibles. Il est donc important de bien comprendre les risques associés au trading et de ne pas investir de l’argent qu’on ne peut se permettre de perdre. Il est aussi important de se rappeler que les performances passées ne garantissent pas les résultats futurs. Il est donc important d’avoir une stratégie de gestion de risque appropriée en place et de ne pas se fier uniquement à un seul indicateur pour prendre des décisions d’investissement.

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