Since the last issue of the newsletter, a lot has happened, and we have seen both financial markets and bitcoin perform well since then (Bitcoin is up by roughly 9.6%).
The big question now is:
- Is this a bear market rally where we will see a price dump once again in the near future? or
- Are we witnessing the start of the price recovery?
While I am leaning towards it being a bear market rally, particularly the speech by Jerome Powell after the FOMC meeting two weeks ago may have marked the end of the bear market.
Fed did hike interest rates by 75bps on July 27
Powell in speech hinting at slow down of monetary tightening
Fed becoming more data dependent
Markets reacting positively to Powell’s speech, possibly expecting pivot in early 2023 and pricing that in
Strong jobs report in the US 528,000 vs 250,000
75bps hike probability now at around 68%
Uncertain and volatile weeks ahead as Fed’s action less clear due to data dependency and not forward guidance
Probability that this is true recovery higher after Powell’s speach, but still leaning more towards it being a bear market rally
The day after I sent out the previous issue, the Fed announced another 75bps hike, the second 75bps hike in a row, taking the benchmark rate to 2.25%-2.5%. So far, so good, and nothing out of the expected.
More important is the speech by Powell that followed afterwards, where he explained the decision of the FOMC and their strategy going forward.
“And we’re going to be thinking about our policy stance and where does it really need to be? And I also mentioned that as this process, now that we’re at neutral, as the process goes on, at some point, it will be appropriate to slow down. And we haven’t made a decision when that point is, but intuitively that makes sense, right? We’ve been front-end loading these very large rate increases, and now we’re getting closer to where we need to be. So that’s how we’re thinking about it. In terms of September, we’re going to watch the data and the evolving outlook very carefully.”
While he also said that the Fed is committed to fighting inflation, markets appear to have interpreted his statement as a pivot or at least that monetary tightening is going to slow going forward.
The neutral interest rate is the interest rate where according to the Fed, the economy is growing at its potential (not overheating), employment is at its maximum and stable price growth is achieved. So anything that goes beyond that when it comes to monetary tightening puts the Fed in a restrictive territory where they potentially break something.
This may be one of the reasons that Powell then stated that they are becoming more data-dependent.
Not surprising, financial markets interpreted that as some sort of pivot or slowing down in monetary tightening and reacted positively to his speech. Maybe anticipating a pivot in early 2023 along the lines?
We have seen financial conditions loosen during that week, as the National Financial Conditions Index (NFCI) suggest. In the week ending July 29, the NFCI indicated a loosening of financial conditions as it went down to -0.19 from -0.17 a week before.
We will know if financial conditions have further loosened over the last week tomorrow on the next release date of the NFCI.
“Positive values of the NFCI have been historically associated with tighter-than-average financial conditions, while negative values have been historically associated with looser-than-average financial conditions.”