No Rate Cuts Expected in 2024 as Fed Aims to Stabilize Economy Amid Inflation Concerns

1. Digital Asset Market: Crypto market faced selling pressure on Tuesday after the six newly launched Bitcoin and Ethereum ETFs  fell far short of expectations. Both BTC and ETH are down more than 5% in the last 24 hours, with BTC holding at 60,000 level and ETH at 2950. The six ETFs listed in Hong Kong had a combined trading volume of just $11 million, significantly lower than the expected $100 million. This is also much lower than the first-day tally of spot BTC ETFs in the U.S. which generated $655 million and have pulled in a total of $12 billion since their launch. The slower inflows have been stalling bitcoin's uptrend.

2. Macro Economics: The IMF managing director has expressed concern over the negative impact of high US interest rates on emerging markets, and made reference to the traditional problems this can cause such as expensive debt and capital outflows. While a monetary policy divergence between Europe and the US does not seem to be a major issue, the IMF chief stressed that this is a more significant problem for emerging market economies, as seen in Japan. In the eurozone, however, there is less worry about the impact of interest rates on the exchange rate. 

3. Equities: The employment cost index, a measure of worker salaries and benefits, rose 1.2% in the first quarter, exceeding expectations and adding to concerns about persistent inflation. The increase in compensation costs for civilian workers was at a level the Fed feels is above its inflation goal. State and local government workers, especially those belonging to unions, saw a bigger increase in compensation costs. Additionally, the Consumer Confidence fell sharply in April as inflation concerns and a pessimistic outlook on the job market pushed optimism to its lowest level since 2022. The Conference Board's consumer confidence index dropped to 97, below expectations, and consumers' expectations for the next six months also fell. The drop in confidence is driven by worries about future business conditions, job availability, and income. Those earning less than $50,000 remained stable, while those earning more showed weakened confidence. US economic data has been mixed, with inflation numbers coming in higher than expected. The core PCE index, a key inflation measure, rose 2.8% in March and is at a concerning trend. This could impact the possibility of rate cuts in 2024.

4. The Fed and US Treasury: Federal Reserve Chair Jerome Powell has expressed concerns over recent inflation data, stating that it has not met the central bank's expectations for price increases. This sentiment was reiterated after the release of the Bureau of Economic Analysis's estimate of first quarter US GDP, which showed a slower growth rate than expected. Additionally, consumer confidence declined in April to its lowest level since mid-2022, with Americans' outlook for the economy and labor market deteriorating. All of these factors point to a longer timeline for achieving the Fed's desired levels of confidence in the economy and inflation.

5. Geopolitical: A group of Columbia University students broke into and barricaded themselves inside Hamilton Hall on Tuesday after the school began suspending students who did not disperse from a pro-Palestinian encampment. On the other side, Netanyahu has stated that an invasion of Rafah will occur regardless of whether a hostage deal with Hamas is reached. He made this statement while addressing a group supportive of his hardline stance. Netayahu also mentioned receiving pressure from the Biden administration to pursue a deal, but insists on achieving total victory through an invasion. This position is supported by the Gvura and Tikva forums, who have urged Netanyahu and National Security Adviser Tzachi Hanegbi to continue the war and resist international pressure.

View from our desk

The recent developments in the Hong Kong ETF have indeed been underwhelming, marking a disappointing debut with only a fraction of the anticipated $100M in trading volume. Fueled by recent significant sell orders from major clients, this stark discrepancy between expectations and reality casts uncertainty on market sentiment and strategic positioning. However, it's worth noting the resilient performance of key cryptocurrencies amidst this turmoil. Bitcoin and Ethereum have maintained strong support levels at $60K and $3,000, respectively, suggesting robust confidence from long-term investors despite the pressures from short-term leveraged buyers.

On a broader economic front, recent data from the Employment Cost Index and Consumer Confidence surveys solidify the perspective that the Federal Reserve is unlikely to cut rates in 2024. This current interest rate environment, necessary for controlling inflation, appears beneficial for economic stability compared to potential rate cuts. Such a stance marks a significant shift from the norm experienced over the past 25 years, indicating that the financial landscape is indeed venturing into uncharted territory.

As we look ahead, it's evident that we are navigating a complex financial terrain marked by a blend of optimism and strategic caution. The robust support levels for major cryptocurrencies highlight a shield against short-term market volatilities, while the broader economic data suggests resilience in the face of changing fiscal policies. Investors and market watchers would do well to stay informed and agile, adapting to the evolving economic signals and market dynamics that currently characterize the global financial landscape.

For those interested in the full report, it’s worth a quick read: Jamie Dimon’s Letter to Shareholders

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The 1Konto Team

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