Macro Economy Weekly | Bitmidas
2022–08–13
US inflation decelerated by more than expected
2022–08–10 The US CPI fell sharply, with a market forecast at 8.7% and the actual published value at 8.5%, exceeding market expectations.
As the CPI dropped beyond market expectations, the US dollar index dived and US stocks and cryptocurrencies rallied sharply.
The trends in the financial markets are all bets on the anticipation that the Fed will lower, hold off, or even suspend interest rate hikes. This expectation brings with it the expectations of relaxation of funding, enhanced liquidity, so the non-US market turns bullish and a pull-up emerges in the market.
The Fed’s decision on interest rates will not be announced until 02:00, September 22, 2022. Therefore, the result is uncertain. If the interest rate increase is as expected by the market, the benefits will continue to be honored, otherwise, the market will be under pressure. At present, the composition and inflation of CPI in the United States are very high.
Although crude oil came down from the top, it still remains at a high level, and besides crude oil, CPI is influenced by other factors. Therefore, the decrease of CPI in a single month is not enough to alter the determination of the Federal Reserve at present, and more data is needed, as well as an obvious trend of continuous decline.
Employment data beat expectations
FOMC will also take into account the employment situation before making a resolution on the interest rate. If the employment data was optimistic, it means that the impact of a rate hike on the real economy is not significant and it reassures the Fed to raise interest rates, and vice versa.
2022–08-05 The U.S. Bureau of Labor Statistics released the latest employment data. The number of newly added jobs on the market was expected to be 250,000, but the published figure was 528,000, doubling the market expectation.
As the employment data exceeded expectations as ‘good’, it is generally believed that the Fed will take advantage of this opportunity to continue to drastically raise interest rates, which would have a much lighter impact on the market and the real economy than when the situation is worse.
Recession in the air
2022–08–10 The yield curve between the 2-year and 10-year US treasury notes has inverted to 49 basis points and narrowed to 33 basis points today. The inversion flattened but still exists.
The inversion is normally ahead of the recession. Each time an inversion starts, the US enters a recession cycle of varying lengths. The two typical cases are the 1978 US great stagflation period and the 2007 subprime crisis, both of which saw an inverted 2-year/10-year treasury yield curve, with the former lasting 425 days and the latter lasting 196 days.
The longer the inversion lasts, the greater the probability of recession and the wider the impact will be. This will not only bring a great impact on the financial market but also will be felt by the real economy.
If a recession is inevitable, lowering inflation may become the second target for the Fed, and the primary task may be shifted to saving the economy in general. The most effective way is to give massive stimulus, but this is also an expectation.
Nevertheless, in the aftermath of the COVID-19 pandemic of 2020, fixing the problem of liquidity oversupply requires constant rate hikes and tightening. Next time the Fed’s tools may not work so well.
Summary
The CPI data showed an inflection point, and all the financial markets (excluding DXY) were betting on a mild interest rate hike, but with caution. The Fed has won good feedback and more time to use their tools, and the attitude might be moderated. Although the current employment data is nice, it is not likely to change the determination of the Fed in the short term. At least 3 months are needed for CPI to hit the roof and drop and change the Fed’s decision; the US bond yield curve inversion could lead to recession. If it does happen, the Fed’s policy may shift ahead of schedule.
At present, the market is betting on the possibility that Fed will change its hawkish stance based on the data. If the Fed’s attitude changes, the market will turn bullish. If not, the market will continue to face pressure. Eventually, it depends on the real decision of the Fed.
The next interest rate resolution will be released on 02:00 (UTC+8), September 22, 2022. Before that, the market will leverage this relatively safe period to make a prudent pump within a certain scope.
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