“The time has come for policy to adjust.” – Jeremy Powell, Jackson Hole, 23 August 2024.
The Fed has 2 main objectives: Inflation and Unemployment. They have now indicated that inflation appears under control and that they are noticing stresses in the labor market. Together, this indicates that the Fed is ready to start cutting rates and keep other tools (QE!) handy to propel the markets.
Why are we in a dovish policy territory?
The Fed has been fighting a long battle against inflation, ever since the largesse of the COVID policy, combined with supply bottlenecks, resulted in high inflation. While the market was clamoring for rate cuts the Fed was steadfast that it would only consider cutting rates once it was comfortable that the inflation rate was at or close to its long-term target of 2% and did not have factors that would tend to take this number up again.
The Fed has now acknowledged that they are in this comfort territory.
In addition, the unemployment rate has been inching up, and the US employment figure revision indicated that the US economy added 818,000 fewer jobs between April 2023 and March 2024 than previously reported. (It is quite bizarre that the data standards of the US are so poor when the global economy so heavily depends on it. Or maybe this is on purpose?!)
Both these factors are now telling the Fed that the labour market is cooling, which will have a knock-on impact on future inflation.
Therefore, the US Fed is now almost certain to start cutting the rates, starting from September 2024. The market is pricing a 69% chance of a 25bps rate cut and a 31% chance of a 50bps rate cut.
What is the anticipated trajectory of rate cuts?
This is the more important question. The market has been expecting a pivot in the policy for a while, but it is the pace and rate of these cuts that’s important from a market performance standpoint.
The market anticipates that the Fed Funds Rate will be around 3.5% in 2025, which indicates around 2% fall in rates in the next 12 months. While this eases credit conditions and indicates a dovish policy, we are nowhere close to a ‘zero rate interest policy’ that was the hallmark of the market rallies post 2008 global financial crisis and the post-COVID era. We had significant pullbacks preceding both of these rallies, which prompted the Fed to drastically cut rates and infuse additional liquidity into the markets.
But we are not there just yet.
Is the Fed too late (again) and are we risking a recession?
That is the other important question. A recession will require the Fed to take drastic steps to restart the economy, similar to 2008 and 2020.
Most of the indicators – unemployment, corporate earnings, manufacturing, consumer defaults – indicate that they are getting worse. However, when compared to previous recessions these indicators are still well within manageable territories.
Cumulative Corporate Profits
Manufacturing New Orders
Credit Card Delinquencies
It therefore appears imprudent to expect an economy-wide recession in the short to medium term.
What is the outlook for risk assets (such as stocks and crypto) in this environment?
The stock market indices are already at or around all-time highs across the globe. They are being driven by an expectation of a dovish policy and the continued earnings momentum of the outperformers.
Crypto markets have been generally lagging behind the stock markets with capital flowing mostly into 3 categories:
- Bitcoin – propelled by a highly successful ETF in the US
- Meme coins – the area of focus for retail in this cycle (and therefore Solana)
- Narrative plays – such as AI, DePin, RWA, Restaking – have seen certain standout winners
A recession will initially result in a market pullback, however it is almost certainly going to be followed by a post-2008 or post-2020 type of ZIRP + QE environment which will create a violent rally across asset classes due to extreme levels of liquidity infusion into the system.
However, even in the absence of a recession, a lot of liquidity continues to be locked in the system through the Fed’s various avenues, such as reverse repo. Various market participants, such as the Treasury, can easily unlock this liquidity and continue to propel the markets much higher. Considering that the US fiscal deficit is 6.3% and the US debt/GDP ratio is 123%, these market participants are incentivised to let the market grind higher. Any liquidity unlocks will just help it in that direction.
Therefore, recession or not, the market is poised to rally on the back of liquidity infusions. It is just worth noting that the market is forward-looking and has already priced-in the rate cuts. Therefore it is entirely possible that we may see a leg lower when the Fed cuts the rates, before we move higher.
Project Spotlight
NEAR Protocol
NEAR is making headlines in blockchain infrastructure development, executing on sharding (Eth 2.0 vision) and chain signatures (abstracted blockchains). In August, Nightshade 2.0, the latest upgrade to the NEAR Protocol, was launched on Mainnet, introducing stateless validation to significantly improve the network’s scalability, performance, and decentralization. This upgrade allows validators to operate without maintaining the local state for shards, reducing hardware requirements and enhancing network security by lowering the barrier to entry for more validators. With these enhancements, NEAR expands its capacity to support more shards, aiming for 10 by the end of 2024, and positions itself to accommodate the growing number of users and applications within its ecosystem. The second major upgrade, Chain Signatures on mainnet, utilizes a decentralized MPC network to enable NEAR accounts to sign transactions on any blockchain protocol. By leveraging NEAR’s unique account model, Chain Signatures simplify multichain dApp development to a single smart contract layer on NEAR, allowing communication with all other chains. This innovation enhances development and UX while supporting every blockchain without the need for native integration, including Ethereum, Bitcoin, the Cosmos ecosystem, and soon, Solana.
MARKET NEWS
- The U.S. Commodity Futures Trading Commission filed and settled charges against Uniswap Labs for $175,000 in connection to the firm’s offering of “illegal digital asset derivatives trading.”
- The attacker behind India’s worst crypto hack began laundering some of the $234 million stolen in the incident from the WazirX exchange. The perpetrator moved 2,500 Ether tokens worth about $6.3 million to Tornado Cash soon after the briefing led by WazirX’s Dubai-based founder Nischal Shetty.
- Binance registered itself as a reporting entity with the Financial Intelligence Unit India (FIU-IND). Binance’s website and app are now fully available for Indian users.
- A U.S. judge approved a $12.7 billion settlement between FTX, Alameda Research, and the CFTC. FTX and Alameda are required to pay $8.7 billion in restitution to those who suffered losses and an additional $4 billion in disgorgement.
- Non-fungible token (NFT) marketplace OpenSea received a notice from the U.S. Securities and Exchange Commission (SEC) that it intends to pursue an enforcement action. The SEC is threatening to sue OpenSea because they believe NFTs on the platform are securities.
- Pavel Durov, the founder and CEO of Telegram, was arrested in France. Durov faced 12 potential charges relating to activity on the messaging app, including complicity in illegal acts such as the distribution of child pornography, the sale of narcotics, and organized fraud. Durov spent four days in custody before appearing in court, where he was released on a 5 million Euro bail.
- TON stopped producing new blocks due to an “abnormal load” which prevented “several validators” from cleaning the database of old transactions leading the network to lose consensus.
- Sony unveiled the public testnet for their Ethereum layer-2 blockchain Soneium. Sony Block Solutions Labs also launched an incubation program, offering up to $100,000 in funding for qualified developers and projects on the Soneium Minato platform.
- Crypto exchange Kraken must face a lawsuit filed by the US Securities and Exchange Commission accusing it of operating an unregistered securities exchange, a federal judge ruled in denying a bid to dismiss the case.
- Genesis completed its bankruptcy restructuring and began distributing $4 billion in crypto and cash.
- Grayscale and Bitwise are asking regulators to approve options for their spot Ethereum exchange-traded funds, according to a filing on the U.S. Securities and Exchange Commission’s site.
- Ripple was fined $125 million as part of its years-long litigation with the U.S. Securities and Exchange Commission, according to a court filing. Ripple’s fine is lower than the SEC’s proposed $2 billion. Ripple had argued it should be closer to $10 million. The SEC had noted its proposed penalty was large but said Ripple’s proposed penalty would be a “slap on the wrist” in a filing posted in May.
If this newsletter was forwarded to you and would like to receive it directly in your inbox, sign up here.
Questions? Feedback? We’d love to hear from you! Simply reach out to us at contact@woodstockfund.com
Warm Regards,
Woodstock Team
