SignalPlus Morning Briefing 09 Feb 2023

Asset markets saw a mixed performance with a muted data calendar (weekly MBA mortgage applications bounced +7.4% in the week ended Feb 3rd on lower rate) and a lineup of largely unprovocative Fed commentary.

• NY Fed Williams acknowledged that the Fed has more work to do and rates “need to maintain restrictive for a few years” with a ~5.1% terminal rate, but again failed to push back on easing financial conditions which “look inline with the likely outlook for monetary policy.
• Governor Cook reiterated that the Fed is “not done yet with raising rates”, but favors ongoing small steps (25bp) so that the Fed has “time to evaluate the effects of our last actions on the economy”.
• Minneapolis Fed Kashkari stated that the Fed needs to “complete the job it set out to do”, but “does not want to cause a recession” and the strength of the job market is his greater concern. He also chose not to comment on his precise forecast of where terminal rates will be, stating that it should only be >5% this year.
• Governor Waller shared similar views of more hikes coming, while acknowledging that there has been some moderation in wage growth but it not enough to quell the Fed’s concerns over a structurally hot labour market.

While none of the comments were particularly note-worthy after Powell’s interview, the bond market has been very quick to unwind a lot of the easing excesses post FOMC/pre-NFP with short-dated IRS projecting a much closer trajectory to the median Dec Fed projection in 2023, with the majority of the divergence to happen post 2024. Furthermore, Fed Fund Futures have also normalized to a much more normal shape with a short-term terminal peak at around 5.2% (vs 4.9% a week ago), and taking back the overzealous rate cuts that were already priced in for late 2023.

Furthermore, market dealers reported that large rate options trades have been placed to bet on higher rates in 2023. CME open interest confirmed that a single ~US$17mm premium bet (source: Bloomberg) was placed on Tuesday and Wednesday to bet on SOFR (Libor replacement) hitting 6% by September, a full +90bp above the 5.1% implied level currently.

Equities saw a larger 1–1.5% decline across the S&P 500 and Nasdaq, as markets gave back some of short-squeeze froth we saw immediately following Powell’s interview on Tuesday. On a micro basis, Lumen (fiber network carrier) was the largest decliner in the S&P after reporting significantly weaker estimates. Non-luxury handbag and apparel companies also saw large declines as they reported a grim consumer outlook as the squeeze on middle-class finances continued. However, the big (negative) headline on the day belonged to Alphabet, where shares dropped 8% ($110bln in market cap!) as its new AI chatbot Bard ran into “glitches” and was reported to give “inaccurate responses”. Your daily author is breathing a big sign of relief as his job is hopefully safe for just a little bit longer!

Over on crypto, BTC/ETH majors continued to be range bound as attention has to moved to altcoins, albeit with muted volumes. Overall crypto market cap was steady at US$1.1T. Stablecoin balance on exchanges continued to fall in the new year as CeFi platforms struggled to bring in new depositors in the wake of FTX-bankruptcy — a process which, coincidentally, has already raked up over US$20mm in legal fees over just 51 days of work

Volatility curve remains well behaved as BTC call skews continued to outperform ETH, with the latter expecting to see some profit-taking flows post the Shanghai upgrade as the ETH 2.0 staking balances finally get unlocked. Unfortunately, a tweet from Coinbase’s CEO Brian Armstrong states that he’s hearing rumors that the SEC might ban crypto staking for US retail customers, which would certainly not be a welcome development for the US ecosystem if that was to materalize.

Finally, outside of tokens, there has been some renewed interest on NFTs on the?Bitcoin?network with the Oridnals project generating over 13,000 mints since the project was launched in late December. This is the first project where the assets (JPEGs + videos) are directly inscribed on the Bitcoin blockchain without the use of a sidechain or additional token. On the other hand, a possible precedent-setting lawsuit has ruled in favour of Hermes over the “MetaBirkin” project, after a Manhattan federal jury ruled that the sale of the NFTs violated the brand’s rights to the “Birken” trademark, resulting in a $133k fine. The trial was the first case to examine how NFTs might be seen through intellectual property law, and might have longer term repercussions on NFT artists who might want to use conventional trademarks in their projects going forward.

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