Avantis Macro Series #6: Fed Pivot Accelerates the Everything Rally
In this week’s macro series, we explore the dovish stance of central banks across the world (Federal Reserve / ECB / BoE) and its impact on the cross-asset rally 🧵
There has been a sea change in the macro perception since the start of November as almost all major Central Banks have been signaling the end of aggressive monetary tightening. A pivot was confirmed this week and the outlook for global liquidity became easier after dovish statements from the FED and ECB. This provided further impetus to the ongoing everything rally as the market extended 2024 rate cut bets and priced in ~150 bp cuts in US and ~145 bp cuts in Europe.
Equities extended gains, while US 10 yr yields went below the 4 handle and were trading at 3.90%. Corporate bonds (both high yield and high grade) posted one of their best 2 day rallies this year and DXY cratered to 101 providing a further tailwind to risk assets.
FOMC
The FOMC statement on 13th Dec was quite dovish and officials signaled 3 rate cuts in 2024 via an updated dot plot. This confirmed the end of the hiking cycle as Powell stated that “we are at or near the peak rate for this cycle”. The recent economic data has been favorable for the Fed and has raised hopes of engineering a soft landing headed into an election year. Inflation has been falling over the last few prints and is on the right trajectory barring any unforeseen shocks. The US economy is humming along without major recessionary signs. American consumers continue to spend with better than expected retail sales numbers going into the holiday shopping season while the labor market is still robust with lower than expected initial jobless claims. Fed’s projection for the unemployment rate for 2024 is also a low 4.1%,which is fully consistent with the soft landing narrative. (Nov unemployment print was 3.7%)
ECB
The ECB hiking cycle is also over with inflation receding more than expected in recent months, including in Nov when the print for headline inflation was a comfortable 2.4%. ECB removed reference to inflation warning from its policy statement but tried to balance it by accelerating normalization of its balance sheet. Christine Lagarde also tried to push back against market pricing of aggressive rate cut bets over the next year. She alluded to maintaining a higher for longer stance till inflation was firmly under control, however the market isn’t convinced as looming recessions in Germany and France have bolstered expectations of rate cuts in 2024.
The global macro shift continued with another major G10 central bank, the Swiss National Bank (SNB) also calling an end to its hiking cycle this week.
BoE
BoE kept rates on hold as expected for a 3rd consecutive meeting after 14 consecutive hikes. It faces the trickiest situation amongst all developed market central banks with the UK economy facing a stagflationary scenario with high inflation (5.6%) and slowing growth. The policy stance and forward guidance point to a long holding period with elevated rates till inflation comes under control, however the BoE might be forced to act and provide policy support if the UK economy falls into a deep recession. GBPUSD rallied above 1.27 mainly due to dovish USD bets as DXY fell.
Crypto
The global risk on impulse due to the changing macro narrative has been favorable for crypto. BTC is a risk asset and its trajectory has mirrored the changes in global money supply. As expectations of global liquidity expansion over the next couple of years get priced in, it will be a further tailwind for crypto.
BTC has had 8 consecutive green weeks as it moved from 28k to 44k (catalysts: BTC ETF and global everything rally) before retreating from the 44–47k monthly resistance band and looks set to post a red weekly candle. This week saw waning momentum as ETF expectations seem largely priced in and there was a healthy flush of leverage as the market got too exuberant leading to a reset in Open Interest. However the market is still primed for continuation of the rally amidst macro tailwinds as it awaits news on ETF approvals before the 10th Jan deadline.
BTC dominance has retreated from 55% level as alts have been rallying. ETH has rallied in USD terms but has still lagged the rest of the market with ETHBTC unable to breakout meaningfully above its support.
Alts have had a broad based rally as BTC has consolidated with alt marketcap above support. SOL continued its rally and is trading at 75 after having a healthy pullback to 65. AVAX has had a great run over the last couple of weeks and has picked up momentum after breaking out of its range while TIA continues to post new highs.
Read more from the author (and our macro researcher), Fractalmonk: https://medium.com/@fractalmonk999
Avantis is a an onchain leveraged trading and market-making platform. Trade cryptocurrency, forex and commodities with up to 100x leverage, or power trades on the platform as a liquidity provider. Avantis gives advanced risk management tools to traders and liquidity providers for the use and provision of trading leverage. Avantis is built on Coinbase’s Base blockchain, and is backed by industry leading investors such as Pantera, Founders Fund, Galaxy Digital and Coinbase Ventures.
