Macro Economy Weekly | Bitmidas
2023–08–28
The Federal Reserve Still Being Hawks & More US Banks Ratings Downgraded
This week, many officials of the Federal Reserve made hawkish speeches, and Powell’s speeches were cautiously hawkish. The expectation of interest rate cuts has been extended to mid-2024; the non-farm payroll was magically revised down, which confused many economists and the market; the chain reaction of US Banks’ ratings continues …
Important Data of the Week
The initial value of the Markit services PMI in the United States in August recorded 51, a new low in six months. The largest sector in the economy starts to cool down, affected by the high-interest rates.
The number of initial jobless claims in the United States recorded 230 in the week ended on August 19, lower than the previous value of 240 and the market forecast of 240.
U.S. government data released on Wednesday showed that this year, based on preliminary revisions from the Bureau of Labor Statistics (BLS), the non-agricultural employment population in March was revised down by 306k, and the largest downward revision is in the transportation and warehousing industry as well as professional and business services, with the former revised down by 146.4k, and the latter 116k, accounting for 85.8% of the total nonfarm revision.
According to data from the US job search website, the growth rate of wages in the United States continued to slow down in July, and the annual growth rate of wages was 4.7%, down from 8% in July 2022.
The University of Michigan’s one-year U.S. inflation expectations showed a modest rebound in expectations from consumers’ assessment of future inflation.
In August 2023, according to the BIE survey, business inflation expectations dropped significantly to 2.5%, and about 50% of companies expected that future sales would have little or no impact on prices in 12 months, contrary to consumers’ expectations.
The GDPNow model estimates real GDP growth (seasonally adjusted annual growth rate) in Q3 2023 of 85.9% on August 24, up from 5.8% on August 16.
Chain Reaction of Deteriorate Bank Ratings
S&P Global Ratings downgraded the ratings of five regional U.S. banks on Monday, following Moody’s downgrades of several U.S. banks two weeks ago. The rating was downgraded by one notch and a negative outlook was issued for several other banks.
The KBW Bank Index of major U.S. banks has fallen nearly 7% since the collapse of three regional banks in March, the worst monthly performance since the massive sell-off.
Federal Reserve Balance Sheet
Since Aug 9, the Federal Reserve’s balance sheet has continued to shrink, with a total reduction of $69.175 billion to $8139.066 billion. The plan to shrink the balance sheet is going as planned.
Recession Indicator-U.S. Debt Inversion
After Powell’s speech on Friday, the probability of raising interest rates in September increased to 23%. The annual rate of return soared to exceed 5%, a 17-year high and close to the peak level in 2006. As of the time of this report, the 2/10 inversion expanded to 84.65bp, a deep inversion, and the market is worried about the recession.
Market Performance
Federal Reserve officials made hawkish remarks, and the probability of raising interest rates in September increased to 23%, which boosted the US dollar. The US dollar index broke through 104.
The strong US Dollar puts pressure on gold, and the rebound of gold this week was affected. There is still downward pressure.
This week, the S&P 500 rebounded at the support of the 4330; while it was pulled down by the downgraded bank ratings. The short-term US stocks enter a sideways move.
Since BTC broke down the key support of $28,000 last week, it has continued to run under pressure and rebounded weakly under hawkish remarks. It’s running between $25800~$26000, with short-term $25000 being the key support and $28000 the key resistance.
Summary
The speeches of Fed officials this week were generally hawkish. Powell said in his speech on Friday that if appropriate, the Fed is ready to further raise interest rates. However, it will cautiously decide whether to raise interest rates again. The policy has shifted to a more prudent stage, and risk management is the key. The Fed is seeking a more delicate balance between economic growth, financial risk, and inflation. The Fed is trying to avoid recession while cooling the economy and achieving the long-term inflation target of 2%.
Recent research from the Cleveland Fed found that from the fourth quarter of 2020 to the first quarter of 2023, four-fifths of wage growth is contributed by inflation, not a result of a mismatch between labor supply and demand; business surveyed inflation expectations, which are more sensitive than consumer expectations, have fallen sharply to 2.5%, pointing to a brighter outlook. Wage growth has also fallen sharply, but the Biden administration currently believes that the number of people employed in the labor market is a key factor of the ongoing wage-price spiral.
This week’s non-agricultural data was revised down sharply, far below economists’ expectations, indicating that the US job market may not be as strong as before. In light of the Biden administration’s revisions, the market expects at least 300k or more jobs would “magically disappear” from previous data. The final revision is to be announced in February 2024 when the January jobs report is released. The figure will be reduced even greater.
Overall, the signs of wage-price spiral growth have not surfaced, and the recent strong economic data may result in sticky inflation. The overall outlook is positive, but the Fed needs to see more evidence of cooling. The overall market condition is still tightening, and the interest rates are close to hit the top. Maintaining high-interest rates is likely to continue. The rate cut is expected to extend into mid-2024.
Completion time of this report: 2023–0826–10:20 (UTC+8)
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