Macro update 18.7.22
Data last week, especially June retail sales and CPI, were indicative of healthy demand and elevated inflation, but the market reaction to these datapoints, in our view, was more interesting including:
- equities and digital assets rallying after initially falling
- gains for commodities, including gold
- longer-dated UST yields and breakeven inflation rates falling
- yield curve flattening — the curve illustrated below has the best track record of predicting recessions (spread below zero)and pricing moved significantly closer to this over the past week
The above indicates that:
- inflation concerns are becoming secondary to growth concerns
- the market predicts the Fed will get to its terminal rate (3.5–4.0% Fed funds rate vs. 1.5–1.75% currently) in Q4 or early Q1, but that it can’t tighten much more before it has to stop since it may ‘break something’
- the form and timing of the next Fed pivot is what matters now, with expectations for a cut in June 2023 (see chart below)
The notion of peak inflation is supportive of risk assets. Market prices and data also support this notion. Specifically, falling commodity prices over the past month and a slowing housing market (see chart below), especially since shelter accounts for a third of CPI.
Moreover, market and consumer inflation expectations have already rolled over. This could support a less hawkish stance from the Fed in September and beyond.
In focus this week are US earnings from a number of bellwethers across sectors including: Tesla, Netflix, Johnson and Johnson and Verizon. Central bank meetings are also noteworthy as to how hawkish (ECB) or otherwise (Bank of Japan) the tone is, particularly relative to the Fed.
Not through at 22
In the short-term, digital assets are breaking through key levels (e.g. Bitcoin above $22K) for the first time in a while. As the chart below for Bitcoin shows, the weekly candle finished higher last week and this opens the door to a potential summer bear-market rally towards $29K. Easing selling pressure is also price supportive for Bitcoin in the short-term. Selling from liquidations related to Three Arrows Capital and Celsius look to be priced into the market. There has also been concerns over selling related to recovered Bitcoin from the Mt. Gox hack, but we believe that the impact is likely to spread out over months, if not years, as the recovery will take time and may come a bit at a time rather than all in one go.
In the background, there is also the notion that the next policy easing will lead to further monetary debasement and this type of theme could be supportive for the likes of Bitcoin and gold as hedges against this. Eroding purchasing power is now fresh in the mind of investors and charts like the one below carry more weight than a few years ago, again giving credence to assets that protect against monetary debasement, like Bitcoin.
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.