Fed's Quandary & Bitcoin's Resilience Amid Debt Drama
Fed's Quandary & Bitcoin's Resilience Amid Debt Drama
Macro Economics: The Federal Reserve's approach to interest rates has sparked a lively debate among its officials, with St. Louis President James Bullard advocating for two more rate hikes this year to counter inflation, while Minneapolis President Neel Kashkari urges a more cautious approach, calling the decision to raise rates next month a "close call". Kashkari is also pushing for higher bank capital requirements, a move that could have broad implications for the banking sector and the wider economy. Meanwhile, the bond market is signaling a potential return to the Federal Reserve's 2% inflation target within the next year, a prediction that is met with skepticism by a growing number of Wall Street asset managers.
Digital Asset Market: President Biden has reportedly declined to accept a debt deal that would protect cryptocurrency traders, as per a report on Cointelegraph. This decision could have significant implications for the digital asset market, as governments and regulatory bodies worldwide grapple with how to regulate cryptocurrencies. Meanwhile, Bitcoin Pizza Day, a celebration of the first commercial Bitcoin transaction, took a sour turn this year. CoinDesk reports that meme coin issuers profited over $200,000 from pizza-related rug pulls on the 13th anniversary of the event
Forex Market: The ongoing discussions about the US debt ceiling are causing ripples of concern among investors, with the looming potential of a US debt default posing a significant risk to currency values. Even with this backdrop, the bond market is signaling a potential return to the Federal Reserve's 2% inflation target within the next year, a prediction that is met with skepticism by the likes of BlackRock, VanEck, BOA, and a growing list of asset managers.
Equities: An AI-generated fake image of an explosion at the Pentagon recently went viral on social media, causing a brief but notable dip in the equities market. This incident underscores the market's sensitivity to geopolitical events, real or perceived. Amid this, the market continues to grapple with various economic conditions. The ongoing water crisis in the Panama Canal, a critical global trade route, could potentially impact stock values due to its implications for global shipping and trade.
Geopolitical: Shift in US-Ukraine relations, President Joe Biden has greenlit the training of Ukrainian forces on F-16 fighter jets operations, potentially leading to the provision of the aircraft, following months of internal deliberations and discreet ally discussions. Concurrently, TikTok Inc. is legally contesting Montana's ban on the app, deeming it an unconstitutional infringement on free speech rights and dismissing concerns over potential Chinese government data access as baseless.
View from our desk
Despite the recent debate and positioning by St. Louis Federal Reserve President James Bullard for further rate hikes, we continue to believe it is in the banking systems (and therefore the FRBs) best interest to not raise rates on June 14th. Raising rates combined with any increased capital requirements will push more regional banks into insolvency, and our view is partly based on our assumption that the Fed is in the business of working for the banking system as a whole, not just for the GSIBs. If the Fed does go through with one or two additional hikes, in conjunction with continued bond purchases, expect increased risk in the system and renewed concerns around regionals and demands for FDIC to revise the insurance limit to infinity.
We also believe that inflation indicators will continue to improve with some surprises throughout this year. That said, we are of the view that the Fed will hold rates at current levels longer than market expectation, leading to a potential overshoot of the 2% target in time.
Across the desk, we’ve seen increased interest on the buy side in Bitcoin and renewed strength in selling stablecoins for fiat currencies. As mentioned last week, BTC is continuing to find support around $27,000. We expect the prices to stay around this level for some time before continuing its upward trend. Of course, this is assuming business as usual for the coming weeks, and no unseen significant credit or geopolitical event happening (which there are many, as noted above).
We continue to view the debt ceiling issue more as political theater, than political reality. Helping the situation, Treasury will receive quarterly tax receipts on June 15th, removing some pressure and allowing a path for a ‘deal’ to be reached by July 1st. Until proven otherwise, America is not lucky enough to have politicians concerned about our country's indebtedness level and how our grandchildren’s grandchildren will pay off our present largess.
Happy Trading!
The 1Konto Team
Not Financial Advice Disclaimer