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Jackson Hole rates reaction, TBL Weekly #9
Rates reprice slightly after Powell's Jackson Hole keynote, and we bring you our weekly update on TBL posts, videos, and market analysis.
Good morning from Austin, Texas. We’re writing to you from BitBlockBoom, where the TBL team is here for the conference, events, and watching Nik’s Saturday keynote!
Today we bring you the rates reaction and forward market implications coming off of Jackson Hole, as well as our TBL Weekly recap. Grab a coffee and let’s dive in!
Jackson Hole rates reaction & forward market implications section
Jerome Powell dashed hopes of a softer approach to hiking following deteriorating economic reports, cementing the Fed’s commitment to hiking until the inflation beast is slain, all the while being well aware that this approach will likely cause a recession. For the Fed, the path of least resistance is tuning out the markets, focusing on bringing CPI inflation down, and maintaining its reputation at all costs.
For the most part, he was less ‘hawkish inflation fighter’ and more so telling us what we already know with a stern demeanor and firm choice of words.
Here are the highlights, confirming mostly what we already know.
Restoring price stability will take some time, and will require using demand forcefully… reducing inflation is likely to cause a sustained period of below-trend growth.
The word ‘forcefully’ was chosen deliberately.
Higher interest rates, slower growth, and softer market condiitons will bring down inflation, they will also bring some pain to households and businesses… but a failure to restore price stability would mean far greater pain.
The committee understands that a recession could ensue, making the public aware that this is not something that would change its hiking and price stability mandate.
While the underlying data remains mixed, in my view the economy continues to show strong underlying momentum.
Regardless of deteriorating releases, Powell personally feels there is more juice to squeeze.
We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%… at some point as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.
All in all, Powell’s keynote was mostly a big nothing-burger. He reiterated what we know, that as the labor market unwinds and asset prices crumble, inflation remains the FOMCs tunnel-visioned focus. This lack of surprise was reflected in rates not moving materially at any point on the curve.
Two-year yields traded up after Powell semi-interpreted firmness (not so much hawkishness, more like an adult wagging his finger at the pouty market).
Fed Funds expectations moved up and out, again. Market digested the meeting and pushed terminal past 3.75% and out to March, holding until June and followed by small cuts.
The further out on the curve, the less it really matters. We focus more on a) what the next meeting is priced in and b) what is terminal and when is it achieved. Everything beyond that is mostly conjecture since anything can happen in 6-9 months.
Nik explained the GBTC discount/premium to NAV, what’s causing it, and why ETF approval would close this gap and bring GBTC in line with bitcoin price fluctuations:
Nik & Joe discuss several key macro topics: we’re already in a recession, a detailed case for the Fed reaching terminal and pausing at 3%, a rip-roaring dollar, China’s massive contraction, and the implications that its monetary easing has on US disinflation.
We’d highly suggest giving this a read to stay informed on all of the major macro components playing out:
If you prefer video form, Nik consolidates China’s economic contraction, its three-pronged approach to monetary easing of targeted fiscal stimulus, rate cuts, and weakening its currency to attract exports:
Here is our market analysis for the week ending Friday, August 26th, 2022. The Market Monitor is largely quiet during the week of choppiness, the only notable event being a minor widening in the 2s/Fed Funds spread, indicating that the market is pricing in slightly more breathing room for the Fed to continue hiking.
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