MacroGuy1 Macro Report - 2022-04-12

MacroGuy1 Macro Report - 2022-04-12

Current World Economic Snapshot - Tuesday April 12, 2022

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

Crypto Developments

Recently, the Chicago Mercantile Exchange began offering market participants put and call options on Bitcoin and Ethereum futures.

Bitcoin and Ethereum took off on the upside when the CME rolled out futures contracts on the cryptocurrencies. Bitcoin futures began trading in late 2017; Ethereum futures became available in 2021. In 2021 as well, micro futures on the leading cryptos increased the addressable market for the burgeoning asset class by making it cheaper for traders to participate.

The CME's current move, which launched on Mar. 28, could once again boost the digital tokens as well as exponentially increase the number of derivative products available for trading those assets. Leveraged ETF and ETN products use options to turbocharge price action on the up and the downside.

Just as Bitcoin, Ethereum, and many of the other over 18,700 cryptos look set to move higher, options on the micro futures will improve liquidity and offer market participants more tools with which to achieve their investing goals.

Economic Data

Federal Reserve Governor Lael Brainard, who normally favors loose policy and low rates, said on Tuesday April 5 that the central bank needs to act quickly and aggressively to drive down inflation.

In a speech written for a Minneapolis Fed discussion, Brainard said policy tightening will include a speedy reduction in the balance sheet and a steady pace of interest rate increases. Her comments indicated that rate moves could be higher than the traditional increments of 0.25 percentage point.

This was followed by the release of hawkish Fed minutes the next day. These spurred another round of market turmoil, with rate sensitive growth and tech stocks experiencing the strongest losses. After a bullish start to April, crypto markets also underwent a sharp turnaround, with BTC and ETH down 15% and 16%, respectively from April 5th 2022 until today, April 12th 2022.

In the chart below, we can see that subsequent waves of QE had to be larger than the previous ones in order to have an effect upon markets, but these were carried out in times when official inflation was much lower. Then we see that the phase of Quantitative Tightening (QT) lead to average monthly stock market returns that were lower, but not negative - again this was when the economy was stronger with lower inflation, so the imminent round of QT may be far more damaging for stocks and crypto prices.

The Euro has been on a constant downtrend against most currencies and especially against the US Dollar since the outbreak of the war. However, the release of the EUR/USD index at 1.30 am today showed a surprisingly strong rebalancing in traders' positions. The index is a compilation of long and short positions based upon futures data. It shows that more than half of traders are now long Euro, which must be a result of more recent admissions by ECB officials that they will have to begin raising rates in order to combat inflation.

China released data regarding new bank loans for March today, and this was an upside surprise, showing that the economy in China is not necessarily slowing down as much as the market may be pricing in. Their inflation figures came in high on Sunday night as well.

Tuesday April 12, 2022

Upcoming Market Events and Predictions

Tuesday - April 12

Three Fed officials are speaking today. Williams, speaking at midday is the most senior and influential official. Bostic is the next most influential member and Bowman the least. They are all usually centrist in their approach, as opposed to being Hawkish or Dovish, but we can expect them to repeat how important it is to control inflation and Williams comments will be the main market mover today.

It seems that the Fed still thinks that markets and the US economy are strong, so expect Williams to double down with comments about how important it is to raise rates and reduce asset purchases, and consequently he will push markets down further with his comments.

Tuesday April 12, 2022

Wednesday April 13, 2022

The IEA energy report will give predictions of demand and supply of oil for the coming year. This is important for the oil market but less so for other markets. I expect them to highlight that a slowing world economy, coupled with severe lockdowns in China, will cause oil demand to drop and so prices may be softer for a while.

Eurozone Industrial production at 5 am should meet forecasts and not move markets much. 0.1% is the same as the UK registered on Monday.

PPI is the most important data point this week. In my opinion it is more accurate and less open to manipulation by government. Last month it was 0.8% for Feb, which translates to a 9.4% reading for the year. Within a month the forecast has moved to 1.1%, which would translate to 13.2% for the year! If we meet or exceed this figure, we can expect to see markets slide as they will then price in faster and larger increases in interest rates. When this data is released, it is not advisable to be  heavily invested in risk assets.

Thursday April 14, 2022

The ECB is expected to leave rates unchanged on Thursday. There could be a potential negative surprise if they raise rates, but more likely we will hear a statement emphasizing a desire to begin normalizing monetary policy later this year, even if there is no action this month.

US Core retail sales are expected to be up 1% for March. Retail sales are expected to be up 0.6%. It's worth bearing in mind that this is a dollar value and not volume of goods, so any increase does not mean that the economy is growing, but can instead just be that the same amount of goods are costing the consumer more than last month. If these figures miss, as I feel they may, then there will be negative effects upon markets and specifically retail stocks.

The scarcity of labour is still a factor that suggests the Initial Jobless Claims will be as low as forecast and no surprise is expected there.

Inventory data comes out at 10am, and the trend is increasing. This often means that businesses are struggling to sell their goods, but in the current inflationary environment it can also signal that they are producing and hoarding goods to benefit from increasing prices as time goes by. Nevertheless, the main market mover today will be Retail sales.

Mester, who is a reasonably senior and Hawkish Fed member, is speaking at 3.50pm, so expect her to be the bearer of bad news.

US stock markets are closed for the national holiday this Friday, but data is still being released and crypto is still trading.

This data is likely to be positive - various types of manufacturing data and that sector is still strong in the US, so these releases may have a good effect upon crypto markets and other markets around the world that are still trading on Friday, such as currency markets. Note that the Dollar index hit 100 today and by this Friday may be even higher.

Conclusion

Investors and traders should be cautious this week as markets still have room to fall and catalysts that may cause this abound. Crypto trading often increases during national holidays, so we may see a recovery in crypto prices over the coming Easter weekend as people are home and are free to invest their cash in crypto.


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