MacroGuy1 Macro Report - 2022-03-25

MacroGuy1 Macro Report - 2022-03-25

Current World Economic Snapshot – Friday March 25, 2022

(All times expressed below are New York – Eastern Standard Time)

Ethereum Trend and Performance

Ethereum has gained 25% since March 15 as the network successfully moved one step closer to ETH 2.0. In addition, the lower gas fees that we mentioned in the last report have helped the price move higher.

Ethereum has underperformed Bitcoin since the start of the year following a prolonged period of deteriorating global risk sentiment, which has spilled into altcoin markets. While Ethereum is down 17% YTD, Bitcoin has lost just 8%. Yet, we can observe a reversal in this trend over the past ten days when looking at the Ethereum-to-Bitcoin price ratio, which can be used as an indicator of Bitcoin’s dominance relative to altcoin markets and has historically served as a gauge for investor sentiment. The reversal came after Ethereum moved one step closer to a transition to proof-of-stake, which should be completed sometime in Q2. More than 10 million ETH have now been staked in Ethereum 2.0 and investor confidence in the network is likely to increase in the run-up to the transition.

Economic Data

This week has been replete with speeches by various members of the Federal Reserve Committee. They have continued to signal faster and larger rate increases for at their upcoming meetings. James Bullard on Tuesday had a dissenting view that he would like the base rate to be 3% by the end of the year to bring down inflation, despite the fact that he considers 2% to be “neutral” (the rate that supports the economy at full employment/maximum output while keeping inflation constant).

Mester on Tuesday also stated that she would like the Fed to shrink their balance sheet as well as raise rates faster, to 2.5% by year end. She is confident that the US economy can handle it.

The more popular view on the committee is to hit 2% by the end of the year and then 2.4% by mid-2023. These statements were bad news for bond markets which fell heavily this week as yields rose, but stock markets were surprisingly resilient. Currently, the largest bubble is in corporate bonds and so we would expect them to be the most sensitive, but stocks which are currently overvalued but not in bubble territory should not perform well in a rational market.

The best explanation we can suggest is that the Fed has assured the market that the economy is growing strongly and that they will get inflation under control via their rate rises. As evidence of this, the yield curve inverted this week so that 10-year yields are lower than 3, 5 and 7-year yields. This signals a belief that rising rates will be swiftly followed by rate cuts as the inflation and the economy slow down. An inverted yield curve is also a sign of an impending recession, and when the Fed has seen this sign in the past they have often slowed down or reversed rate hikes.

Let us be very clear – the economy is not growing strongly based upon fundamentals. It is a debt-fueled bubble that can quickly collapse as prices rise and borrowing costs rise, so this week’s rally looks very much like a dead-cat bounce in a bear market. The long-term trend will be higher inflation and a weaker dollar as inadequate measures are taken to control inflation, which will be good for the prices of assets such as Crypto and commodities.

Crude oil inventories on Tuesday and Wednesday were much lower than predicted so as well as the Geopolitical tensions from Russia, we have oil stocks in the US dropping quickly. All incredibly supportive of the oil price to go even higher.

Durable goods orders yesterday were a big miss, but jobless claims were a positive surprise. Manufacturing and Services PMI showed very strong readings, so we are getting mixed messages as to how business in the US is doing.

Upcoming Market Events and Predictions

Friday

  1. Williams of the NY Fed is speaking today. He also spoke on Tuesday at a digital currency discussion organised by the Bank of International Settlements, where he discussed his support for a digital currency that would have a stable price and is linked to a mainstream currency or something such as gold. He believes it could be a great facilitator of global trade and cross-border payments, but would want them to be regulated.
  2. Michigan Consumer Expectations and Sentiment are expected to grow strongly, but at a slower pace than in Jan and Feb before the start of the war. These potentially could disappoint below forecasts and push down markets.
  3. Pending Home Sales are the most important piece of data coming out today. They were negative last month and forecast to be positive by 1.0% this month. All the homes sales figures that came out on Tuesday missed expectations, so if this also misses that will be an unexpected sign that the housing market in the US is really slowing down.
  4. Waller spoke yesterday but avoided discussing interest rate policy. Instead, he said he was worried about housing costs and unaffordable housing, which is something they will give more attention to for the future.
  5. Baker Hughes Oil Rig Counts at 1pm give an idea as to how quickly oil production in the US is increasing to meet the extra demand. They are a good signal to oil investors but not major market movers.
  6. We seem to be in Chinese company reporting season, so there has been volatility in Chinese markets as these earnings have been coming out.

Monday

  1. Monday only has the goods trade balance and retail inventories figures released. They are not big market movers, and they are likely to meet expectations, which are not set too high anyway. Politics regarding Russia and Ukraine will have more control over this Monday’s market movements than economic figures

Conclusion

The market is very complacent and has shaken off worries about rising rates and the war. The Nasdaq was up about 2% yesterday and Crypto moved up even more strongly with the Nasdaq. Ethereum has some fundamental changes taking place that are powering its gains, whereas for Bitcoin and the Crypto market in general it may be safer to take any gains and be more cautious over the next week.


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