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Macro update 25.7.22

This week sees the Fed meeting and a raft of key economic data, ranging from US Q2 GDP (‘wen recession, ser?’) and durable goods to inflation-related measures like June PCE and Q2 ECI.

The market expects a 75bps hike at Wednesday’s FOMC meeting, but there will be a lot of attention on the Fed’s views on recession risks and how this impacts the policy path going forward. The chart below shows that this is the fourth consecutive month of declines in leading indicators and this has occurred during or just prior to every recession since 1960. We expect the Fed to stay hawkish, but Chair Powell could still say something dovish along the lines of ‘the slowdown in sentiment indicators are being monitored’. This may suggest to markets that the Fed is less myopic about squashing inflation, thus supporting a further rally in risk assets.

Source: Bespoke, The Market Ear

Indeed, should a recession become more likely in the Fed’s view, the table below implies that inflation will come down and so should the Fed’s hawkishness.

Fool me once…

Source: Bitcoin Magazine

The Fed’s balance sheet could be the avenue via which the dovishness comes. As the chart above shows, there have been multiple false dawns on the QT front, so the Fed may communicate that its balance sheet would shrink more slowly should growth concerns rise. This is likely to be the first port of call for the Fed before slowing down rate hikes.

Peak, weak sentiment?

Market sentiment and investor positioning are at such low levels (see charts above) that even a marginal change in the macro backdrop should be enough for risk assets to rally. Indeed, the market may now actively look for anything dovish given growth concerns. Again, this is likely to be supportive of risk assets in the short-term.

Strong and stable

As we stated last week, “further monetary debasement and this type of theme could be supportive for the likes of Bitcoin”. The chart illustrates this and suggests that if the pace of decline in M2 eases (e.g. QT stalled, again), this should push Bitcoin higher.

Source: Morgan Stanley

At the same time, as the charts below show, it is likely that upside for Bitcoin is limited and further downside could be forthcoming in Q3, unless the macro backdrop changes significantly.

More broadly, within digital assets, there have been a number of encouraging signs recently, including optimism for the ETH Merge to be completed in September and the muted reaction to Tesla selling 75% of its Bitcoin holdings. One metric to keep an eye on is the staked Ethereum (stETH) peg. Its recovery suggests reduced liquidations pressures for now and may be a useful barometer for sentiment.

Kind regards

Lyndon Barreto, CFA

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.

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