Macro update 13.6.22
When doves die
A 50bps hike is priced in for Wednesday’s FOMC meeting. Friday’s May CPI print has also brought about suggestions of a 75–100bps hike this week, but we believe this is unlikely.
Instead, the FOMC quarterly projections and the post-meeting press conference are of more interest. We believe there are at least two potential avenues for hawkishness:
- Rise in FOMC rate projections, especially the terminal rate and
- Potential for rate hikes of 50bps or more in H2 2022.
Both outcomes are likely amid ongoing evidence of a strong labour market and continued, high inflation, as well as increased political pressure to tame inflation. This is what it sounds like, when doves die! The Fed’s mantra thus remains:
Who will be the most hawkish global central bank though? Other central banks (from Canada to Australia) are catching up with the Fed. Thursday’s Bank of England and Swiss National Bank meetings are set to reiterate this theme after last week’s ECB hawkish pivot and specific guidance. This could temper USD strength, though King Dollar is still likely to benefit from safe-haven flows in the current bearish environment. The Bank of Japan, however, is set to be the exception here as it remains dovish, leaving the yen on the backfoot.
US May retail sales are released on Wednesday and the optics look unfavourable for markets in either scenario:
- Stronger-than-expected number → More tightening needed and also concerns that consumption is being funded by credit, which may be unsustainable and suggestive of a recession (see chart below).
- Weaker than expected number → Stagflation fears.
Bitcoin still rules ok!
The bears are in control and the burden of proof is with the bulls. The same is true for digital assets. As volatility rises, the correlation between Bitcoin and equities is likely to reassert itself after having weakened recently.
Regulatory action on July 6 could give Bitcoin a boost, but there are substantial macro and sentiment barriers to a rally. Hence, further and significant downside seems likely, despite the current entry point for Bitcoin looking attractive on most metrics. Troubles within the Ethereum ecosystem are likely to support safe-haven flows into Bitcoin. Within digital assets, the macro backdrop favours Bitcoin too and we still believe that its dominance in the space will rise further.
Overall, that ‘achoo moment’ we spoke about in May could be imminent.
Chief Economist and Project Specialist
Disclaimer: The content above does not constitute investment or financial advice. All statements are opinion and not statements of fact.