Long-term macro observers and ‘old-hats’ might remember the famous ‘whatever it takes’ speech from former ECB President Draghi in the midst of the euro-crisis, which marked a significant historical turning point as the Central Bank effectively provided a floor to the market, and compelled investors into a multi-year ‘risk-on’ mode.
Expectations were high going into this year’s Jackson Hole, where the Fed has historically used it as a platform to signify a major policy pivot or to forcefully reiterate a policy bias. It was a mere 24 months ago in August 2022, when markets were ‘J-Powed’ by an exceptionally hawkish Powell which sent stocks cratering by -3.4% on the day and -12% in the month after. This time around, markets were coming off a ‘historic’ one-day meltdown in early August, which had recovered most of its losses thanks to the market pre-positioning for a dovish Fed with ~4 cuts priced into year-end, versus less than 2 just a month before. Would the chairman deliver what the market wanted this time or splash us with a cold dose of reality?
We think the verdict is pretty clear. In what might go down as one of Powell’s most memorable lines in his successful tenure as Fed chairman — ‘The Time Has Come’.
Let’s paraphrase some of the more expressive parts of his keynote speech and crunching it through our famed in-house ‘Fed-speak’ decoder (yours truly):
the balance of the risks to our two mandates has changed.
— Its time to focus on labor market more than inflation, ie. It’s time to shift to an easing bias.
the cooling in labor market conditions is unmistakable
— Economy needs help with rate cuts.
‘the time has come for policy to adjust’
— We are cutting in September.
“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks,”
— Rates are going lower, I’m not guaranteeing 50bp for September just yet, but you are going to get 50bp moves if the economy needs it. The ‘tail-risk’ is for bigger cuts at every Fed meeting for now. Fade at your own peril.
The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.
— US base rates are very high. We can afford to cut a lot if we need to.
“We do not seek or welcome further cooling in labor market conditions,” Powell said, adding that the slowdown in the labor market was “unmistakable.”
— We don’t want the market to weaken into the year-end (US elections), and it’s already weakening now.
“All told, the healing from pandemic distortions, our efforts to moderate aggregate demand, and the anchoring of expectations have worked together to put inflation on what increasingly appears to be a sustainable path to our 2% objective.”
— Inflation is dead, the Fed did its job. Good job me.
Let me wrap up by emphasizing that the pandemic economy has proved to be unlike any other, and that there remains much to be learned from this extraordinary period… The limits of our knowledge — so clearly evident during the pandemic — demand humility and a questioning spirit focused on learning lessons from the past and applying them flexibly to our current challenges.
— We did really well to recover the US economy out of covid, and handled an unprecedented inflation-spike with no accidents and history should study how well we did during this time. Inflation is dead, let’s focus on cuts now.
Basically, the JH speech was a ‘victory lap’ to celebrate the Fed’s ability to control inflation out of an unprecedented recovery out of covid without accidents while hiking rates from 0% to 5%. As a long-term critic of the Fed myself, I have to give them fair credit for this as the US economy has emerged as the clear winner vs nearly ever other DM and major EM economy globally, with SPX at a relentless pace for record highs day after day. Alas, the Fed now sees that inflation chapter to be ‘over’, and it’s now time to provide support to the US economy as needed, and they have plenty of bullets left in the chamber.
Needless to say, the market reaction was clear. Stocks higher, yields lower, USD weaker, JPY higher, vol lower, credit stronger. 2yr and 5yr yields ended close to MTD lows at ~3.9% and 3.6%, respectively. The Nasdaq climbed back above its 50d MA and above technically important levels with expected month-end inflows. USDJPY fell back sub-145, with the trading community now shifting to a JPY long bias and turning the ‘carry trade’ on its head. BTC rebounded to above $64000 and gold remains steady at above $2500.
With the proverbial gauntlet being laid down, the market will now have a renewed focus on the weekly claims data as well as the monthly NFP, with inflation data taking a back seat unless it spikes uncomfortably higher over a few consecutive months. As such, this week will likely be relatively muted activity wise, with Nvidia’s earnings after US close on Wednesday likely being the biggest market moving event, while markets are likely to apply a lower to Friday’s PCE, but the U-Mich sentiment gaining some intention to gauge consumer spending.
Markets will likely take a breather for the last week of summer into what is a busy autumn, where the first NFP after labour day will carry a massive weight on how risk sentiment fares into Q4.
In crypto, while prices have rebounded thanks to Powell’s JH delivery, underlying fundamentals have remained challenged recently, leading to a very poor risk (and vol) adjusted performance of crypto vs most other major classes since July.
ETF inflows have been meagre in BTC and especially in ETH since launch, with the latter suffering from a case of bad timing (August risk sell off) and poor ETH on-chain activity with L1 fees falling to multi-year lows as revenue accrual continues to be concentrated in L2s.
Furthermore, speculative fervor has also tried up across the board, with perpetual funding rates falling into flat / negative territory, especially post the early August sell-off with many long traders being forced out on PNL controls.
That has led to BTC dominance continuing to gain on a one-way move, with crypto increasingly seen as just an alternative asset class (such as oil), and the average mainstream allocator preferring to get involved with only the bellwhether token (BTC), and it’s straightforward value proposition as a ‘store-of-value’ for the non-technical investor.
Unsurprisingly, the singular focus on BTC as an alternative asset class rather than crypto as an ‘industry’ has meant that crypto prices are trading increasingly correlated with overall macro risk entiment, with the rolling correlation of BTC & ETH coming in at 1 yr highs vs the S&P.
On the positive side, Axios reports that crypto has dominated corporate election spending YTD, contributing ~$120M in YTD donations, and accounting for nearly half of the corporate total. While the donated amounts are supposedly concentrated out of a small group of significant donors, the industry is nevertheless hoping for a more political backdrop out of DC into and out of the current election cycle.
In either case, the two political parties have made their biases clear with regards to the crypto narrative, and we expect prices to be increasingly influenced by the ever-evolving election odds as well as the changes in expected interest rate cuts heading into year-end and Q1.
Gosh, that sounds just like any other conventional macro asset class, doesn’t it? Good luck and enjoy the rest of the summer friends!
