BlackRock's Bold ETF Overhaul Paves Way for Banks, as Rate Cuts Beckon in 2024
Digital Asset Market: BlackRock's proposed spot bitcoin ETF has changed its structure to allow authorized participants to create new shares in the fund with cash, rather than only with cryptocurrency. This change opens the door for Wall Street banks, who cannot hold crypto directly, to play a key role in the ETF. The cash used by banks can be converted into bitcoin by an intermediary and held by the ETF's custody provider. This change has increased optimism for the approval of spot bitcoin ETFs by the SEC and could potentially bring in more liquidity providers. This also means that banks with large balance sheets may join in the ETF market-making process.
Macro Economics: The latest inflation report from the United States reveals promising signs as inflation rates continue to decline, reaching 3.1% in November, down from 3.2% the previous month. The Federal Reserve is expected to maintain their interest rates as they enter their final meeting of 2023, encouraged by these in-line figures. Housing prices showed an increase, counteracting a 6% decrease in gasoline prices, while food prices also rose, albeit at a slower pace. Despite concerns of a possible recession in the upcoming year, the report seems to support a "soft landing" for the economy, with decreased inflation and strong job creation. Consumer optimism regarding inflation has also spiked as a result of the strong job numbers and resilient holiday spending, providing a boost to President Joe Biden's reelection campaign, which has been facing challenges in combating economic uncertainty caused by high consumer prices.
Equities: Analysts and investors are feeling more optimistic about the stock market as the S&P 500 nears all-time highs and recession fears have largely dissipated. Many had expected a recession in 2023, but stronger-than-expected economic growth and earnings growth have eased concerns. The Fed's plans for interest rates are a key factor, but even if there is a slowdown, it may not have a major impact on stocks. Companies have been cutting costs and focusing on cash returns, which has helped boost their stock prices. Overall, there is a sense of positivity and momentum in the market, with the belief that potential risks are behind us rather than in the future.
The Fed and US Treasury: Inflation in the United States slowed to a 3.1% annual rate in November, with the consumer price index rising 0.1% from the previous month. Excluding food and energy prices, the core CPI increased 0.3% and was up 4% from a year ago. The Federal Reserve's target inflation rate is 2%. The decrease in energy prices and increase in food prices contributed to the overall inflation rate. The housing market continues to be a major factor in inflation, with shelter prices increasing but at a slower rate than earlier this year. The Fed's two-day policy meeting is expected to result in no changes to interest rates, but markets are closely watching for signals of future cuts. Overall, the trend in inflation suggests a gradual decline in prices, but they still remain elevated compared to pre-pandemic levels. The wider positive news is leading more economists to join the view that we will see a rate cut in Q2 24. Michael Brown from Goldman tweeted that the OIS is now “fully pricing” the 1st 25bp cut in June 24 vs Aug 24.
Geopolitical: Gas prices in the US have dropped by 19% since September and have reached the lowest point of the year ahead of the holiday season. Gasoline futures have also decreased, suggesting that prices at the pump will continue to drop. This is due to a combination of 12 consecutive weeks of declines and record US crude oil production. Retail gas prices are expected to stay low until at least January, and could reach the lowest point in 30 months. OPEC and their allies have promised oil supply cuts, but traders remain doubtful.
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Bitcoin and other cryptocurrencies have experienced a pullback from their recent peaks, yet they continue to demonstrate resilience. The initial excitement surrounding the potential approval of a Bitcoin ETF seems to have plateaued, with investors now seeking fresh catalysts to drive market momentum. The upcoming Federal Reserve decision is eagerly anticipated, as traders are keenly looking for any indications of impending rate cuts. This heightened interest is bolstered by improving macroeconomic conditions and sustained optimism about the eventual approval of a Bitcoin ETF. As the market navigates through this phase of anticipation and speculation, there is a general expectation that the bullish trend will resume, especially if the ETF news turns favorable.
The Federal Reserve's final meeting of the year is set to take place this week, with widespread expectations that interest rates will remain unchanged. However, there is growing speculation that the Fed might initiate rate cuts sooner than previously anticipated, largely due to a noticeable decline in inflation. Key indicators such as falling gas prices and apartment rents have contributed to easing inflationary pressures, providing a much-needed respite in the ongoing battle against inflation. The labor market's robustness further bolsters this positive economic outlook. The Fed's stance on rate cuts, particularly in the lead-up to the 2024 election year, is being closely watched, as it could significantly influence market dynamics and investor sentiment.
Retail sales data for November, which could reflect the impact of lower gas prices, is also due for release. The markets have generally responded favorably to the trend of decreasing inflation coupled with steady economic growth. This positive sentiment is expected to persist, with no immediate signs of a reversal in these trends. As investors and traders alike await the Federal Reserve's decision and other key economic indicators, the intersection of monetary policy, inflation trends, and market dynamics will continue to shape the investment landscape, particularly for cryptocurrencies and other asset classes.
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The 1Konto Team
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