Macro Economy Weekly | Bitmidas
2023–10–24
The hawkish Wind Blows Again; Interest Rate Cut Postponed
Many officials from the Federal Reserve announced that they would maintain high interest rates for a longer period; the escalation of the Palestinian-Israeli conflict disturbed the world, and crude oil shipping prices soared. U.S. Treasury bonds were sold off again, with yields soaring nearly 5%, and the IMF issued a U.S. debt warning…
Important Data of the Week
The Palestinian-Israeli conflict has escalated and intensified, causing more than 5,600 deaths on both sides.
The Palestinian Ministry of Health announced on October 20 that this round of Palestinian-Israeli conflict has resulted in the death of 4,218 Palestinians, including more than 4,137 people were killed and more than 12,000 injured in Gaza; 81 people were killed and more than 1,400 injured in the West Bank. The Israeli health department reported that since the conflict broke out, as of 4 p.m. on the 20th, a total of 4,932 people in Israel had been injured.
After the Palestinian-Israeli conflict escalated, Iran called for an oil embargo on Israel. Market expectations for crude oil supply tightened, and the crude oil shipping prices index rose to its highest level since May.
The market expects possible tightening of crude oil supply caused by Iran and Saudi Arabia increased. WTI Crude oil reached a high of $89.85, and Brent crude oil rose as high as $93.77.
Geopolitical instability increased risk aversion sentiment. Countries increased their gold holdings, and the holdings of the world’s largest gold ETF surged.
On Wednesday, October 18, U.S. Treasuries once again suffered a massive sell-off, with the benchmark 10-year U.S. bond yield approaching 5%. The closing rate soared 11.8 basis points to 4.845%, reaching 4.9880% on the 19th, the highest since July 25, 2007. In the 30-year U.S. bond market, the closing interest rate was 4.927%, the highest yield since 2007.
The liquidity crisis in the U.S. Treasury market worried the market: once a debt default occurs, the price of U.S. Treasury bonds will plummet, thus triggering turmoil in global financial markets. The IMF recently warned that the U.S. debt situation looks increasingly unstable — with high-interest rates, corporate default rates will rise.
In addition, the results of the just-concluded 30-year U.S. Treasury bond auction were dismal. The yield on this 30-year U.S. Treasury auction is the highest since August 2007, which is nearly 50BP higher than the previous bid. The sluggish demand has exceeded traders’ expectations. The primary market sellers had to take over 18.2% of the treasury bonds that were not bought by other bidders.
On October 18, data released by the U.S. Department of the Treasury showed the top three U.S. debt holders in August: Japan and the UK increased their holdings, while China reduced their holdings.
Federal Reserve Balance Sheet
The Federal Reserve’s balance sheet continues to shrink, and its size has shrunk to US$7,933.162 billion. The balance sheet reduction plan is still as planned.
Recession Indicators-U.S. Debt Inversion
U.S. Treasuries suffered a massive sell-off this week, with the 10-year U.S. bond yield soaring to nearly 5%. The 2/10 inversion relatively converged, but the market’s concerns about a recession looms.
Market Performance
Several officials from the Federal Reserve stated that the overall interest rate will be maintained at a higher level for a longer period of time. The US dollar index holds the support and reached 106 this week. The market fluctuates at a high level and is generally pro-rise rather than fall.
The Palestinian-Israeli conflict escalated, the Middle East faced the risk of expanding war. The safe-haven asset gold rose sharply to $ 2,000.
The U.S. debt yields rose sharply and corporate default risks also increased, dragging down U.S. stocks. The S&P 500 took pressure and pullback.
The news that the BTC spot ETF is going to be approved helped BTC break the short-term pressure to suppress price resistance, driving capital inflow from the outside.
Summary
This week, many officials from the Federal Reserve gave speeches, generally maintaining high interest rates for a longer period of time, but Powell also pointed out that the current economic data suggests that the current interest rates do not appear to be particularly restrictive. There is still room for subsequent interest rate increases.
The Palestinian-Israeli conflict has intensified. Many countries and major ETFs have significantly increased their gold holdings. If the situation in the Middle East continues to expand, energy prices will face strong upward risks, thereby pushing up various inflationary factors.
The United States stands with Israel and requires more funds for assistance in Ukraine and Israel. The amount of debt issued is far greater than what markets could take. The sales of 30-year note bonds were dismal, and the sell-off in U.S. debt has intensified. Moreover, the Fed shrinks its balance sheet at the same time. The overseas demand declines.
It is still the peak of the cycle of monetary tightening. The world is facing increased uncertainty and risks that geopolitical conflicts may expand, and energy tensions are pushing up prices. Risks are piling up.
Completion of this report: 2023–1021–12:00 (UTC+8)
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