Summary
- Tuesday’s CPI print might show a cooler than expected headline CPI, but we believe Powell is likely to double down on his “higher (than the ~5% terminal rate currently priced in) and longer (than the 2H23 pivot current priced in)” narrative on Wednesday’s December FOMC press conference.
- Economic weakness is emerging in the US credit market. A recession’s most direct impact is less marginal dollar that could be invested in risk assets.
Market Condition Updates
The Market remained subdued in anticipation of CPI data and December FOMC meeting: Though Friday’s weakness (despite not being an opex day) towards the market close may give us a hint that, as we believed and suggested before, this post-September CPI reading rally was symptomatic of a relief hiatus where between realized peak Fed hawkishness and the confirmation of economic weakness.
The Market has assigned a 25% probability of 75bp hike and a 75% probability for a 50bp hike. We believe the 50bp hike is likely even if we might see upside surprise in the core CPI data on Tuesday
The terminal rate is priced just above 500bp, which is expected to be achieved by the end of 2Q23, which is immediately to be followed by rate cut in 4Q23.
Focus on the terminal rate target and unemployment rate target in Dec FOMC’s SEP (Summary of Economic Projections): last (September) SEP was a la-la land, and Powell has already twice suggested that terminal rate need to be higher. Now that market has priced in ~5% terminal rate, diff to that would shed some light on Powell’s “higher and longer” narrative w/ numeric clarity.
- We believe that Tuesday’s headline CPI might have downside surprise (consensus 7.3%) while core CPI might turn out inline (consensus 6.1%). However, we do not think cooler than expected inflation data is indicative to an early pivot (i.e., rate cutting). The key question remains that how much pain the Fed is willing to tolerate to bring down inflation - and we have see neither marked weakness in the economy materialized nor inflation in a convincing down trend.
- Though highly unlikely, the black swan event would be the SEP hinting at a higher-than-2% long run inflation target to reconcile w/ its untenably low unemployment rate projection in 2023/24. We believe the likelihood will increase going forward as the US economy begins to struggle while core inflation stays sticky.
The rate hike might be slowing down, but the credit market tells us that this is hardly bullish for risk assets: as discussed last week, we would suggest market participants to turn their eyes to the credit market to see why the Fed pivot is not indicative of the returning of retail investors to bid up risk assets.
- US households have spent down its excess savings during the pandemic while the level of credit card and revolving debt have surpassed the pre-pandemic level.
- … while commercial banks have been net tightening extending credit lines to firms and households
- … while consumer real spending growth has outpaced the growth of their real income on historically low consumer sentiment - an unsustainable mismatch.
- Reals personal service spending buttresses growth (and inflation) for now while real personal spending on goods have rolled over -
- Despite interest rate on accounts that assessed interest reaching all time high, the US households might still have not felt the burnt as household income buoyed by a tight labor market. However, with real disposable personal income growth has entered negative territory since early 2022, we believe it is only a matter of time before the US households began to feel the pain.
- In short, we believe that the financial condition of US households are precarious - the necessary pain the Fed wants to induce to stifle runaway inflation. Without excess cash, credit, and optimism, retails might not return to long-tail risk assets very soon.
Crypto Market Highlights:
- NFT market activities remain subdued, with Blur as a clear exception (Source: Nansen)
- Blur’s volume spikes towards end of each epoch (e.g., Airdrop 2 in November) in anticipation of airdrops
- Yuga Lab recently launched its long-waited $APE staking pools, with the option to also stake BAYC/MAYC/BAKC-pair pools to boost APYs. APY current sits at ~400-600%. About 4% of all $APE are staked so far. (Source: Dune)
- Prices have appreciated leading up to the pool opening, and we have not seen the “sell the news” event in both the $APE and BAYC (Source: Nansen).
