Rate Cut Incoming? Powell's Speech Fuels Market's 68% Probability for September Shift
Rate Cut Incoming? Powell's Speech Fuels Market's 68% Probability for September Shift
Digital Asset Market: The recent events of Germany's BTC sales and Mt. Gox reimbursements have injected uncertainty and selling pressure into the crypto market. BTC fell to a $55,000 level at one point and has since recovered. A German government entity has recently transferred hundreds of millions of BTC to exchanges. However, the crypto markets showed resilience, and macroeconomic factors such as major expansion, slowing inflation, and tech optimism suggest a promising outlook once these supply overhangs run dry. The lack of intermediaries in the market has also contributed to volatility and made liquidation more difficult. The July 4th holiday was another contributing factor to the reduced liquidity in the market. Despite the challenges, Bitcoin remains steady above $57,000, aided by sustained risk-taking and the German entity's decision to hold onto its remaining 40,000 BTC, worth $1.3 billion.
Macro Economics: Euro zone inflation eased to 2.5% in June, which aligns with expectations. Core inflation remained steady at 2.9%, slightly below analyst forecasts. Services inflation also stayed the same at 4.1%. The European Central Bank expects volatility in the consumer price index due to energy market fluctuations. ECB Vice President Luis de Guindos says the coming months may be challenging, but the central bank is confident inflation will reach its 2% target. Money markets predict two more rate cuts this year, but chances of a cut this month are low. The euro was slightly lower after the data release. Analysts say the latest inflation data may delay rate cuts due to concerns about the stickiness of services inflation. The interest rate outlook will depend on the ECB's staff projections. In June, they raised their projections for inflation in 2024 and 2025.
Equities: Stocks in the US continue their record-breaking rise despite concerns about a potential pullback. Federal Reserve chair Jerome Powell began his update to Congress on Tuesday, highlighting the Fed's view of the economy and the need for more "good data" before making changes. Wall Street is uncertain about the upcoming earnings season, with some predicting a correction in the market. In the corporate world, BP and Novo Nordisk faced setbacks in the stock market due to disappointing news. BP warned of a refining slump and factory-linked writedown of up to $2 billion.
The Fed and US Treasury: The Federal Reserve Chair Jerome Powell expressed worry that keeping interest rates too high for a prolonged period could harm economic growth. He also noted that the economy and labor market are strong despite recent cooling. However, Powell highlighted the importance of lowering inflation to their 2% goal. He also stated that reducing policy restraint too late or too little could harm economic activity and employment. The Fed is expected to begin cutting rates in September, but FOMC members have indicated just one cut during the June meeting. Powell emphasized the Fed's operational independence and the importance of their role in the economy. He also acknowledged that recent data has shown a slight increase in unemployment and a slowdown in GDP growth. Still, overall, the U.S. economy continues to expand at a solid pace.
Geopolitical: Russia has historically been the primary supplier of arms to Africa. However, due to international sanctions and the Ukraine conflict, Russia is facing challenges in maintaining its arms exports to the region. Taking advantage of this opportunity, China, the second-largest arms producer and fourth-largest arms exporter globally, is increasing its arms sales to Sub-Saharan Africa. Chinese weapons have been found in several conflict zones in the region, such as Sudan, the Democratic Republic of Congo (DRC), South Sudan, and Ethiopia. They are also being supplied to countries like Chad, Angola, Nigeria, and Mali. In Nigeria, Chinese arms factories have been set up, and weapons are being exported to other African nations, including Zimbabwe.
The US government's foreign policy regarding Russia and Ukraine has been inconsistent and erratic. It started with the expansion of NATO towards Russia's borders under President Bill Clinton and has continued to escalate in subsequent administrations. Implementing unilateral sanctions against Russia has proven ineffective, and the clear winner has been China.
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The simultaneous Mt. Gox and German liquidation over the July 4th weekend, when liquidity is low, raises suspicions of poor planning or a coordinated effort by relevant authorities to weaken the market. We tend to lean towards the latter conclusion. Previously, we believed we were beyond these large-scale liquidations, but the recent events have highlighted significant lingering uncertainty. While the crypto markets have shown resilience and bounced back, the situation may not be fully resolved, especially concerning the German holdings, which still amount to close to $1 billion in BTC. The recent liquidation could have been managed better, suggesting possible intentionality behind the timing.
In other news, the Federal Reserve is signaling readiness to cut rates. As of today, there is a 68% implied probability of a rate cut in September, a likelihood we now consider very plausible. This shift in stance marks a significant change, as the Fed acknowledges the progress made in lowering inflation and cooling the labor market over the past two years. Federal Reserve Chairman Jerome Powell's recent remarks encapsulate this balancing act, emphasizing the risks of both reducing policy restraint too soon and delaying necessary adjustments.
Powell stated, “We continue to make decisions meeting by meeting. We know that reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation. At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face. Reducing policy restraint too late or too little could unduly weaken economic activity and employment.” This nuanced approach underscores the Fed's delicate position as it navigates the complexities of current economic conditions.
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