Market Overview September 2023
Quick market overview: Interest rates, unemployment rates and BTC.
Happy Labor Day! Without further ado, lets get started.
September starts off with a very quiet week in terms of data. This week we got:
Monday: Labor Day
Wednesday: ISM Data
Thursday: Initial Jobless Claims
FOMC Meeting on the 20th September.
Currently the market is pricing in a 93% chance of a 0bps rate hike and a 7% chance of a 25bps. There is a possibility that there will not be a rate hike in the September FOMC meeting. Personally, I do not think the Fed will be looking too aggressively to add more hikes to the current rates.
If we take a look at the futures curve the market is forseeing a shift towards cutting rates or at least no further increases. The Dec 13th the Feds Funds Futures have shifted probability back towards 5.5%. Currently the EFFR (Effective Federal Funds Rate) is 5.33% and the market consensus on interest rates for the end of the year are the following:
5.5% = 5.25bp
60.4% = 5.5bp
32% = 5.75 bp
As I mentioned before on previous posts, I think that one of the key indicators of this market is the unemployment rate data. Currently the unemployment rate has reached a 3-year high of 3.8%, indicating that the Fed’s strategy to create a more relaxed labor market is becoming evident.
When unemployment starts getting higher that’s when we see the cracks in the economy. That is a cause of concern because the economy starts to slow down and that is further evidence that the Fed will consider cutting rates effectively. Historically, the Fed tends to pause its rate hikes when unemployment rate begin to increase and we are starting to see signs of that. The key question is: for how long will the Fed maintain interest rate high before considering cutting rates?
I think that there are a few things that need to happen before the Fed decides to start cutting rates. There is a market expectation of continued high interest rates with limited potential for significant increases. Perhaps there will still be minor increases but I would be more inclined to think that the Fed will choose to pause hikes and maintain high interest rates for the time being. In addition, unemployment data indicates a minor slowing down in the pace of improvement so this data will negatively impact the decision to keep hiking rates.
The economy is transitioning from a phase of acceleration to one of moderation. As a result of that, the Fed is likely to maintain elevated interest rates for an extended period of time. The problem is that if the Fed starts cutting rates too soon inflation may re-accelerate like it happened during 1970. In order to prevent this scenario, the Fed needs to curve inflation and get it back down to 2%. Eventually, the Fed is expected to initiate a cycle of rate cuts that will lead to the de-invertion of the yield curve.
The yield curve is a crucial metric to keep an eye on as well. The 2Y10Y (2 year and 10 year US Bond yield curve) has been inverted for a while now but slowing coming out of inversion. Historically, when the yield curves come out of inversion PMIs decrease and unemployment tends to gets higher. Those two things combined often signal that we are entering a recession... It is hard to say exactly when full blown recession will happen, but a good indicator to know when shit has hit the fan will be to look at the unemployment data with unemployment rates being around 5 to 7%.
BITCOIN
BTC has been in a downtrend generally speaking. Last week there was a very short lived rally that was triggered by Greyscale’s triumph over the SEC. However after the buzz died down, so did BTC. I think there is a real cause of concern when it comes to liquidity in the markets and cryptocurrencies. Bitcoin is one of those markets that we have seen being heavily impacted from time to time again by the overal liquidity in the markets. One of the key drivers of Bitcoin is that it is a high beta risk on asset compared to equities, compared to NASDAQ. It will out preform to the upside but it will also suffer to the downside. While equities are almost trading to their all time high, Bitcoin is subdued and staggering for the past 6 months between 20-30k USD.
In my opinion, it is not viable to see Bitcoin trading higher in the meantime. I doubt that the market is going to give you 6 months of re- accumulation at this level to trade back to 40k as unemployment is starting to show the cracks in the economy, as the yield curve comes out of inversion and PMIs decrease. The macro environment is not looking good for risk on assets.
As an investor you have to be prepared to the possibility that we are still in a macro range. Nothing has significantly changed, we are still in this fairly large macro range from 15k to 30k USD . We have got his key mid level at 25k USD. I think there is still a possibility that we could come back down to into the lower bound of the range at 15k. However, it is unclear wether we are going to hit similar lows, lower lows and get back inside the previous range. Remember: trading is not about guessing at which price point is the market going to go, trading is about understanding at which levels you want to do business.
If you did not catch a good short entry I would not recommend to start shorting the market around the mid level at 25k USD. Perhaps it would be wiser to wait for a better opportunity and find a better entry. From a higher time frame perspective I think it is worthwhile waiting to buy in at the bottom, however it is unclear how long will that take to play out.
Overall I am quite bearish on BTC, if we look at EMA 12& 21 are about to cross to the downside, indicating a bearish trend. BTC has rejected the EMA 21 level at 27.4k USD, that to me is a sign of weakness in the market. If price catches up a bit and pushes to 27.1k I think that would be a great opporitnuty to go short.
BTC has a lack of momentum and we are heading into somewhat unknown territory. Heading possibly into recession and heading into the lagging effects of tight credit. The Fed has aggressively hiked rates for the bets part of the last 12–18 months and now we will starts seeing the lagging effects of lack of credit facilitation, lack of money coming into the system and we are seeing the cracks in unemployment and the yield curve. So what does that mean for BTC?
The risk for me still remains to the downside, but there is a lot of opportunity that will come with it. If we head into recession, that will give you one of the best buying opportunities ever. So try to use this opportunity to increase your Bitcoin count, whilst remaining denominated in dollars. If we go below 25k, there will be a shift in people’s sentiment, where people will start talking about 20k, 18k and then 12k. It is all about patient and waiting for the right opportunity to start buying BTC.
So preserve your capital and then give yourself a great buying opportunity.
Love and Light,
Mariana
