Head of Treasury, Ang Kok Wee
The Fed held its target range of 5.25 -5.50% for the Fed Funds rate last week as expected. What was not as widely expected though, was to see the other central banks which met last week (Swiss National Bank, Bank of England and Bank of Japan) also keeping their monetary policies unchanged!
In its updated quarterly projections, Fed Funds rate remains at 5.6% for 2023, unchanged from its June projection, though the revised DOT plot showed 12 of 19 officials favored another hike (0.25%) this year. Projection for Fed funds rate in 2024 was revised upwards to 5.1% (Fig.1).
This is underpinned by Fed’s belief that unemployment will stay low as inflation remains manageable going into next year (Fig.2).
Fig.1 – Distribution of participants’ judgments of the appropriate target level for the Federal Funds rate by year. Source: https://www.federalreserve.gov
Fig. 2 – Economic Projections by Fed participants – Sep vs Jun 2023. Source: https://www.federalreserve.gov
The updated economic projections corroborate the consistent message Fed Chair Powell has been repeating of late. He is due to speak on Sep 29 (Friday) yet again.
While the market could appreciate that the Fed is approaching the end of its tightening cycle, it was not convinced before if the latter could continue to keep rates at these lofty levels. In fact, the market was a lot more “bearish” on rates going into 2024. Bloomberg’s poll of economists put the probability of a US recession over the next 12 months at 60%.
Consequently, the entire US Treasury yield curve has since recalibrated along with the upward revision on rates forecast, particularly in the longer end (Fig.3). For example, the benchmark US 10-year Treasury currently yields 4.56%, up 21 bps from pre-FOMC. This level was only last seen 15 years ago, in 2007. An even larger sized move was seen in the US 30-year Treasury.
The velocity of change in the longer dated US Treasuries yields could lead to a bear steepening, a scenario which occurs when the yield curve steepens because long-term bond yields are rising faster than short-term bond yields. The exponential effect of duration can potentially wreak havoc on the cost of borrowing, both for existing debt as well as new capital raises. Corporate earnings projections may also have to be discounted further.
Fig. 3 – Change in US Treasury Yields Post-FOMC
The consolation is the effect of this disconcerting development usually pans out more slowly, which may give the Fed more runway to adjust its policies appropriately. At the same time, the opposing argument could be made for the latency of policy effects from central banks, and its tendency to “drive the car by looking at the rear mirrors”.
Potential Market Catalysts This Week
Sep 28 (Thursday)
- 2030 hrs: US Final GDP quarter-over-quarter (fc. 2.2%)
Sep 29 (Friday)
- 0400 hrs: Fed Chair Powell Speaks
- 2030 hrs: US Core Personal Consumption Expenditure (fc. +0.2% MoM)
Other noteworthy developments
- United Auto Workers (UAW) Strike -19,000 workers have been on strike against the Big 3 automakers in US for almost 2 weeks already and with no settlement in sight. This does not have immediate implication but may work its way into employment figures in Q4.
- Potential US Government Shutdown – On Oct 1, if Congress fails to pass a budget or stopgap measure by Sep 30. This would have a significant impact on the economy and federal workers. Hundreds of thousands of federal employees would be furloughed, meaning they would be temporarily laid off without pay. Importantly, this would reflect negatively on America’s credit rating, according to Moody’s, the only remaining major credit grader to assign the US a top rating.
These developments may muddy the macro-outlook and test the Fed’s projections. Meanwhile, higher for longer interest rates will continue to act as headwinds and set up a tough backdrop for risk assets. US equities look less attractive now with short term T-bills yielding more than 5% on a risk-free basis and equity risk premium being squeezed.
Ultimately, unemployment could be the metric that may break the Fed’s resolve, if it were to rise faster than anticipated. Our eyes remain peeled to the series of closely watched data by the Fed.
Even as macro factors may direct Bitcoin’s short term price action, its performance correlation with other risk assets such as S&P500 has been off last May’s highs and bottomed in Aug (Fig. 4)
Fig. 4 – Correlation between Bitcoin and S&P500. Source: CoinMetrics
Not surprisingly, Bitcoin’s recent price action have been more correlated with the ebbs and flow from headlines on the development of Bitcoin Spot ETF applications and Security Exchange Commission (SEC) legal battles with major crypto players. , among them Microstrategy (MSTR)
It is now made public that MSTR bought another 5,445 Bitcoin at an average of USD 27,053 since August. It now has accumulated nearly $4.7 billion worth of Bitcoin. The latest acquisition was made by selling a total of 403,362 MSTR shares. In August, MicroStrategy said it may raise up to $750 million by selling more stock and plans to use some of the proceeds to buy more bitcoin. This may continue to underpin Bitcoin’s near-term floor price.
Perhaps one could associate the growing accumulation of Bitcoin by MSTR as somewhat bullish?
Sep 29 will also be a significant option expiry date for Bitcoin. A total of 117,000 BTC options contracts and 1.1 million ETH options contracts, with a combined notional value of USD 4.8 billion, will expire on leading crypto options exchange Deribit. This is approximately a third of total option open interests. Over 60% of these expiring options are denominated in Bitcoin.
Considering that Bitcoin’s price action has been in a tight range of late, the upcoming large option expiry may reinforce this and pins it down till Friday. I would be more interested to see how some participants rollover their contracts, as this may then create a little more volatility than usual to the underlying price of Bitcoin post Friday.
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