In two minds…

The market can almost be described as schizophrenic in simultaneously pricing in a 20% probability of another rate hike in June, while expecting a 27% chance of a rate cut in July

Market taking what Chair Powell is saying with a pinch of salt (Source: TradingMemes IG)

• Last week saw the 10th consecutive month of declines in the year-on-year headline inflation rate, while the sticky components of core inflation also showed signs of slowing

Headline CPI (Source: TradingEconomics)

• Meanwhile, Initial Jobless Claims hit an 18-month high in potentially the first sign of a weakening employment market

Initial Jobless Claims climbs to 18-month high (Source: TradingEconomics)

• The lower-trending inflation data and softening employment numbers along with the ongoing regional bank issues should be sufficient to warrant a pause in interest rate hikes at the upcoming June FOMC meeting
• However, current market pricing for 3 interest rate cuts by year-end would seem unrealistic (unless more banks go under or something else breaks). Thus, a reversal in these expectations likely leads to a reversal of the recent price action that we have seen in risk assets

FOMC meeting probabilities (Source: CME FedWatch)

• The U.S. debt ceiling debacle rolls on as Treasury Secretary Janet Yellen reiterates that the government could default on its obligations as early as on June 1 (Yellen reaffirms U.S. could run out of money to pay bills by early June)
• As the negotiations on raising the debt ceiling continues tonight, we may see political posturing and point-scoring on both sides, leading to higher volatility as the deadline draws nearer
• Crypto prices have taken a hit in May and traded towards support levels flagged in our previous note (Sell in May and go away?) while U.S. equities have shown relative resilience
• The weak price action leads us to continue to trade cautiously in the short-term as crypto could now be vulnerable to weakness in risk assets and further dollar strength

Could we see BTC overshoot on the downside towards $23k? (Source: TradingView)

• We continue to like short-term downside protection structures with low cost and potentially high maximum payoffs, for example:

BTC 02-June-2023 $25k/$23k 1x2 put ratio
Premium: $250 per option
Max Profit if BTC settles at $23k on 2-June: $1,750
Payoff Ratio: 7x
Potential for higher losses if BTC settles below $21k on 2-June

Payoff assuming 50 BTC notional (Source: TDX Strategies)

• We also still like being long July out-of-the money gamma on expectations of a break-out of the current low realised volatility regime given the uncertainties ahead
• Whilst we may seem to be holding a fairly cautious view in the short-term, our longer-term bullish view on crypto has never been stronger
• Therefore, we will be looking to take advantage of any dips in prices to help our clients to increase their exposure to crypto, via our suite of structured products (Accumulators, FCNs, etc)
• Talk to us if you would like to chat about our outlook and potential strategies to express your market views