SignalPlus Macro Analysis Special Edition: "The Time Has Come"

Some readers may remember the famous declaration of "whatever it takes" by former ECB President Draghi during the euro crisis, which marked an important historical turning point when the central bank effectively provided a floor for the market and prompted investors to enter a years-long "risk-on" mode.

There are high expectations for this year's Jackson Hole meeting, as historically, the Federal Reserve often uses this platform to announce significant policy shifts or strongly reaffirm policy inclinations. In August 2022, 24 months ago, the market experienced a sharp decline due to Powell's extremely hawkish remarks, with the stock market plunging 3.4% that day and falling 12% in the following month. As this meeting approaches, the market has just recovered from the "historic" single-day crash in early August and regained most of its losses, thanks to the market's anticipation of a dovish Fed, pricing in about four rate cuts by the end of the year, compared to less than two cuts a month ago. The market is very curious whether the Chair will meet our expectations this time or douse us with cold water.

We believe the outcome is already quite clear; "the time has come" may become one of Powell's most memorable lines during his successful tenure as Fed Chair.

Let us sincerely interpret some of Powell's statements from his keynote speech:

The risk balance of our two mandates has changed.

-- It is time to focus more on the labor market rather than inflation, that is, it is time to shift to an accommodative policy.

The cooling of the labor market is undeniable.

-- The economy needs rate cuts to help.

The timing for policy adjustments has matured.

-- We will cut rates in September.

"The direction is clear; the timing and pace of rate cuts will depend on the upcoming data, the evolving outlook, and the risk balance."

-- Interest rates will definitely be lowered; I cannot guarantee a 50 basis point cut in September, but if the economy needs it, we will cut by 50 basis points. The current "tail risk" is that the Fed will make larger cuts at each meeting, and the risk is on us.

Our current policy rate level gives us enough room to address any risks we may face, including further deterioration in the labor market.

-- The U.S. benchmark rate is very high, and we can make significant cuts if needed.

Powell stated, "We do not seek or welcome further cooling of the labor market." He added that the slowdown in the labor market is "undeniable."

-- We do not want the market to weaken before the end of the year (U.S. elections), but it is already weakening.

"In summary, the recovery process from the pandemic, our efforts to suppress aggregate demand, and measures to anchor expectations have collectively made it increasingly likely to achieve the 2% inflation target."

-- Inflation is over; the Fed has completed its task, and I did a great job.

Let me emphasize that the pandemic economy is different from any previous economic situation, and there is still much to learn from this unique period… The limitations of our knowledge were so evident during the pandemic, and we need to maintain a spirit of humility and questioning, focusing on learning from the past and applying it flexibly to our current challenges.

-- We have successfully brought the U.S. economy back from the pandemic without any unexpected events in response to unprecedented inflation surges; history should study our outstanding performance during this time. Inflation is over; now let us focus on rate cuts.

Essentially, this Jackson Hole speech is a "victory tour," celebrating the Fed's ability to control inflation, raising rates from 0% to 5%, and achieving recovery from the pandemic without any surprises. Even the Fed's long-term critics must give them a fair assessment; the performance of the U.S. economy has indeed significantly outperformed almost all other developed markets and major emerging market economies, with the SPX index continually hitting new all-time highs. Now the Fed believes the inflation chapter is "over," and it is time to provide support for the U.S. economy when necessary, with plenty of ammunition still in hand.

Needless to say, the market reaction has been very clear. The stock market rose, yields fell, the dollar weakened, the yen strengthened, volatility decreased, and the credit market improved. The yields on 2-year and 5-year U.S. Treasuries closed near monthly lows of 3.9% and 3.6%, respectively. The Nasdaq index returned above its 50-day moving average and important technical indicators, the dollar fell back below 145 against the yen, the market shifted to yen bulls, and completely reversed "arbitrage trades." BTC also rebounded to over $64,000, while gold stabilized above $2,500.

With these expectations now established, the market will refocus on weekly unemployment claims data and monthly non-farm payroll data. Unless inflation rises sharply for several months in a row, inflation data will take a back seat. Therefore, trading activity this week may be relatively calm, with Nvidia's earnings report after Wednesday's close potentially becoming the most significant event affecting the market, while the market may downplay the importance of Friday's PCE data, and the University of Michigan's consumer confidence index may still attract some attention to assess consumer spending.

The market may take a brief pause in the last week of summer before entering a busy fall, with the first non-farm payroll report after Labor Day expected to have a significant impact on risk sentiment for the fourth quarter.

In the cryptocurrency space, although prices have rebounded due to Powell's speech at Jackson Hole, recent fundamental challenges remain. Compared to other major asset classes, cryptocurrencies have performed very poorly since July.

Since its launch, ETF inflows have been minimal, especially for ETH, which has been affected by poor timing (August risk sell-off) and weak on-chain activity, with revenue concentrated in L2s, while L1 fees have fallen to multi-year lows.

Moreover, overall speculative enthusiasm has also declined, with the funding rates for perpetual contracts entering a flat/negative territory, particularly after the market sell-off in early August, when many long traders were forced to exit due to profit and loss control.

This has led to BTC's dominance continuing to rise unidirectionally, with cryptocurrencies increasingly viewed as an alternative asset class (like oil), while general mainstream investors tend to participate only in benchmark tokens (BTC), as it represents a straightforward value proposition of "store of value" for non-technical investors.

Unsurprisingly, focusing solely on BTC as an alternative asset class rather than on the cryptocurrency "industry" means that cryptocurrency prices are becoming increasingly correlated with overall macro risk sentiment, with the rolling correlation of BTC and ETH with the S&P reaching a one-year high.

On a positive note, Axios reports that cryptocurrencies have become a dominant force in corporate donations for this year's elections, contributing approximately $120 million so far, accounting for nearly half of total corporate donations. Although the donation amounts mainly come from a few major donors, the entire industry still hopes to gain more favorable political support in this election.

In any case, both parties have clearly stated their views on cryptocurrencies, and we expect prices to be increasingly influenced by changing election odds and expectations of rate cuts. Doesn't that sound just like other traditional macro assets?

Wishing everyone successful trading in the remaining summer!