A step closer to cutting rates

TRADERS’ RISK CALL 21 Mar 2024

This week, we discuss the following:

  1. We just had the Federal Reserve meeting yesterday. What does Vee think about it? 
  2. We also had the UK inflation print yesterday. What are Vee’s opinions about it?
  3. Crypto price action has been quite chaotic. So, how should we approach this?

Transcript:

We just had the Federal Reserve meeting yesterday, so what do you think of it? 

I think it was quite important that the Fed Chair Powell came out during the press conference being quite a lot more dovish than the market expected. The dot plots were the first surprise. There were some fears that the median projections for this year would reflect only 2 interest rate cuts of 25 basis points each, but they projected in December 3 rate cuts of 25 basis points each. That, to me, is very interesting in that market fears were that they would move to 2 because of recent disappointments in the inflation data that was slightly higher than expected. But the Fed essentially brushed that off, saying that yes, they are watching it. They’re not dismissing it, but it is pretty much expected that the path to a 2% target inflation, hitting 2% target, will be bumpy. So they expected this and are not worried by this. They did not change their projections because in December they were not excited about extremely low surprises to the upside because they expected some surprises to the upside in the process of heading towards 2%. So, the Fed believes nothing has yet changed their projections for 3 interest rate cuts this year. So that was quite dovish. That was also a surprise to some commentators who were expecting 2 rate cuts instead of 3. And then, what was also interesting is that they revised their projections for growth higher for the year, and they revised unemployment rates lower. So, they think the economy will be stronger than expected, and the job market will be stronger than expected. And then, they kept the inflation projection, but they did revise the core inflation rate in 2024 to be higher, slightly higher. It’s 2.6% now versus 2.4%, and yet they remain with 3 cuts. So, they’re kind of saying that inflation may be higher, but that doesn’t change the outlook that they consider for interest rate cuts if everything remains as they project. So, it’s okay if inflation is slightly higher, as long as it’s lower as well, and the path remains that it’s not going to surprise too much to the upside.And also, sending a message like this, where they allow for higher inflation but are willing to cut, could spook the markets and cause long-term interest rates to go higher because then maybe the bond traders will think the Fed is more accepting of higher inflation in the long run, then bonds will sell off. But they controlled that by saying that they will be adjusting the amount of bonds that they sell to reduce the balance sheet fairly soon, so it’s “worth it fairly soon.” So I think the market will take it as soon as the next meeting. The earlier expectations before the meeting were for them to consider doing this in June, so this has been brought forward. So, the market celebrated to grind higher, and in a few basis points here and there, but the strong market reaction from the S&P markets, I think, is quite telling in that the markets were not expecting that and were surprised by this. And I think going forward, you will see more repricing of risk assets given that the Fed has pretty much declared that it will cut interest rates this year, and they still believe that it’s 3 cuts. That’s a very good environment for risk assets.

We also had the UK inflation print yesterday. Do you have any opinions about it? 

Also, part of the good news that we saw yesterday, the inflation in the UK has been the stickiest, I would say, in the developed economies at first, when it went above 10%, more than double, uh, double digits inflation. But now it’s surprising to the downside. Inflation, the headline inflation rate, dropped to 3.4% versus the 4% seen in January and December, so this is a big drop. It was expected to be just 3.5%. So it’s lower than expected. So that’s quite good, and even the core inflation rate dropped from 5.1% to 4.5%, and expectations were just 4.6%. That the expectations were a slow and aggressive drop, I think this will reinforce the view that the central banks are now thinking that the inflation threat is pretty much under control, and they are not ready to cut interest rates at some point in the near future.

Crypto price action has been quite chaotic. So, how do you think we should approach this? 

Leading up to the Federal Reserve meeting, the market showed notable weakness. Bitcoin, for example, experienced a downward trend, at one point dipping below 61,000, yet it also reached highs above 68,000. Currently, in the Asian time zone, the market has rebounded somewhat, driven by data indicating continued outflows from ETFs, including a significant outflow of approximately $261 million just yesterday. Since the beginning of the week, total outflows have approached $750-760 million, contrasting sharply with the $2.5 billion inflow observed last week. A major portion of these outflows can be attributed to high fees from certain funds like Grayscale, although typically, such outflows would be balanced by inflows into other ETFs. It appears investors may be adopting a wait-and-see approach in anticipation of the Fed’s actions. However, with the Federal Reserve’s stance on easing becoming clearer, we anticipate an increase in inflows as confidence returns. The Fed’s commitment to lower interest rates, potentially weakening the dollar, creates a favourable environment for stores of value like Bitcoin and Ethereum. This scenario presents a buying opportunity for these cryptocurrencies.