Nerves: Global Macro Update & Chart Pack
If the markets don't excite you right now, you're in the wrong business.
How are your investor emotions handling the current volatility? Fearful of the next leg down in risk? I’m hearing “sky is falling” narratives everywhere I turn, but today’s update is meant to quiet the nerves. The Bitcoin Layer is not calling for collapse or crisis, just calling it as we see it. Let’s dive into some charts and analysis. EXTENDED PREVIEW before the paywall today to welcome new subscribers!
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The Jackson Hole speech and this morning’s WSJ article are moving the market to a 75 basis point hike in two weeks.
Rates have scooted higher as a result but are showing a massive triple divergence.
By looking at the chart of bitcoin, nerves must be setting in. Support is thin.
The yield increase in Treasuries is entirely due to real yields, as inflation expectations have stopped rising.
QT and Japan are two factors that could be contributing to Treasury weakness. Oil now another victim to the dollar.
The Fed speaks through the Wall Street Journal, again
In June, a certain WSJ reporter, Nick Timiraos, was able to move the Fed Funds futures market by acting as the mouthpiece for FOMC decision makers. While the market had the Fed going 50 basis points, one article suggested two things—the Fed needed the market to price in an extra quarter point of hikes, and the Fed was now comfortable using the Wall Street Journal during the “quiet period” to communicate policy.
A reminder, the “quiet period” is the week-plus period in which Fed speakers must remain quiet about policy moves. It is a rule that is now merely a joke on those that don’t realize the infamous Nick Timiraos is an extension of the FOMC communication strategy. And like clockwork this morning, we see:
Why is the Fed delivering its policy moves via a newspaper? Why can’t it move the market where it needs to without a media leak? As a longtime Fed watcher, I am slightly confused but not at all surprised by the Fed’s current antics. It is an institution helplessly clawing at ways to preserve its reputation after 15 years of debauchery. The Fed might think it’s necessary, but I personally find it a little childish.
Many, including this writer, are calling for the Fed to pause as it becomes increasingly difficult to imagine a world with Fed Funds at 4% for an extended period of time as Powell tried to indicate with his Jackson Hole speech—the destruction to the real economy would go beyond what would be required to bring inflation back down to a more reasonable 3-5% range. The second-, third-, and fourth-order effects of monetary policy becoming materially more restrictive than the level it will reach in two weeks are staggering. The problems we are seeing with a housing market slowing, the dollar raging, oil prices collapsing, contractionary PMIs, and layoffs ticking up will get worse.
Right now, I’m trying to picture the Fed hiking rates past Thanksgiving and can’t. Based on the latest WSJ leak, here is my updated view on the path of monetary policy over the coming months:
September 13th - The latest CPI reading still has the ability to move the market but has moved to secondary versus the latest Timiraos article in importance.
September 21st - The Fed will likely hike another 75 basis points, given today’s WSJ leak. Upper bound moves to 3.25%.
November 2nd - The market currently has another 50 basis points priced for this meeting. Upper bound is expected to move to 3.75%. This is the point at which I would place the greatest likelihood of the market being wrong, given the number of factors that could change between now and the November meeting. HOWEVER, we would be foolish to discount the market with less than eight weeks to go. ***Jackson Hole sets the stage for the Fed to go ahead with a November hike even if we see continued negative monthly inflation, a third quarter of negative GDP growth, and weak risk markets. The Bitcoin Layer is still calling for a November pause because of falling monthly inflation but is ready to quickly reassess past the September meeting and minutes.***
The triple axel reverse twist
Are you tired of The Bitcoin Layer saying yields are heading back down? I’m almost tired of it myself, but the night is darkest before the dawn.
The first thing we should discuss on Treasury yields is the two-year reaching 3.5% and new highs for this cycle. Besides any traders that had an advance look at what the WSJ reported this morning, the simple math that November Fed Funds expectations above 3.5% means that 2s at 3.25% is too little compensation.
Looking closer at the recent highs this week, we see the divergence theme coming back—this time a triple divergence: three consecutive highs that corresponded with three consecutive lower readings on momentum. The Treasury selloff in the front end of the curve is losing steam:
We believe this is the market putting a larger probability of a Fed pause. Are you not entertained?
Hold the... line!
Ok, the moment of truth. Look at this trend line on bitcoin, clearly in jeopardy: