Welcome to TBL Weekly #23—here are your highlights!
Markets Analysis
Our monitor for the week ending Saturday, December 10th, 2022:
Refer to TBL’s Bitcoin & Macro Term Glossary: thebitcoinlayer.com/glossary
In the week ahead, we have CPI on Tuesday and the Fed’s rate decision on Wednesday:
CPI inflation is expected to decelerate further from 7.7% year-over-year to 7.3%. The core services and commodities components have been stickier and hard to bring down all year, though they have also begun marginally falling. Core inflation is expected to decelerate from 6.3% YoY to 6.1%:
The spread between the 2y UST yield and Fed Funds has tightened to 34 basis points. With the Fed expected to hike Fed Funds by another 50 bps on Wednesday, 2sFFs is primed to invert. 2sFFs inverting has reliably marked the end of every Fed hiking cycle for many decades. The length of the pause and time until cuts vary each time:
Why does a 2sFFs inversion mark the end of Fed rate hikes?
The Fed influences short rates by setting the rates on Repo, Reverse Repo, and interest on reserve balances (IORB). When another highly liquid short rate such as 2y UST yield is disobeying the Fed, it is a direct signal from the market that the hiking cycle is over. Investors are betting that the short-term rates they will attain in the future will be lower, and hence they should lock in today’s 2y yield. They do this because they see a slowing economy before the Fed does.
The Fed has already lost control of the long end of the curve, as the 10y yield has crossed below the Fed Funds upper bound by a significant margin. Historically, the Fed doesn’t have much influence over the long end when setting Fed Funds, but 10sFFs inverting is an early sign that its waning influence is making its way to the front of the curve:
On Wednesday, the Fed is expected to hike its policy rate by 50 basis points, and 2sFFs will invert, and ceteris paribus, a rate pause will ensue. Unless the 2y yield reprices upwards on Monday and Tuesday to reflect another 50 bps from the Fed, the Fed will either break precedent by ignoring the inversion and continuing to hike, or this may be the last hike for the cycle, with the terminal rate being set at 4.5%.
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Now, here are your quick links to all of the TBL content for the week:
Tuesday
We’ve long been readers of the research produced by the Bank of International Settlements (BIS). It is considered the central bank of central banks—a coordination mechanism, of sorts. The BIS publishes on topics that illuminate how our monetary system truly works, and it has just landed another serious punch.
It’s been unveiled that a whopping $65 trillion of hidden dollar debt exists at offshore banks and non-banks in the form of FX swaps, a revelation that an already gargantuan market is much larger than was previously known.
Global dollar shortages put all of that unearthed leverage at risk. Is it what Dr. Powell ordered?
Nik and Joe break down:
Offshore banks are stuffed to the gills with more US dollar leverage than expected.
As contracts mature on a <1-week basis, the risk of sudden funding shortfalls arises.
Who you gonna call? The lender of only resort.
Check out Hidden Leverage Reveals The Gargantuan Size of FX Swap Markets
Wednesday
Nik sat down with Cullen Roche, author, macro investor, and Chief Investment Officer at Discipline Funds.
Cullen discusses the current macroeconomic environment, similarities and differences to 2008, and how stocks will respond as we reach peak interest rates for this cycle. Check out this macro masterclass from the inimitable Collen Roche:
Thursday
Turbulence in markets looks to continue into year’s end, and our aim is to keep you informed during times of volatility and confusion. So, it’s time for some rapid-fire reorientation on the big-picture state of markets.
Joe breaks down:
Record-deep inversions point to a market-anticipated economic slowdown.
The Fed’s mission is to hold higher for longer—in times of high inflation, risk assets bottom only after rate cuts.
It’s a pivotal week for market confirmation, with both CPI and an FOMC meeting.
Check out Rapid-fire Macro Reorientation
Friday
Nik sits down with Jeff Booth, a technology entrepreneur and author of the Amazon #1 Best Seller 'The Price of Tomorrow'.
Jeff discusses inflating away the United States' immense debt burden, technologies' naturally deflationary trend, and how bitcoin paves the way for a return to prosperity growth free from centralized distortions to capital allocation. Don’t miss this tremendous Guest Lecture from one of the brightest minds out there:
Our videos are on major podcast platforms including Apple Podcasts, Spotify, and Fountain.
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That’s all for our bitcoin and macro recap—have a great weekend everybody!
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