Tuesday, Feb 14, 2023

Inflation strategy, liquidity triggers, BTC positioning, regulatory patience, institutional backing and more...

"Being deeply loved by someone gives you strength, while loving someone deeply gives you courage." – Lao Tzu ||

Hi everyone! I’m not going to add to the flood of Valentine’s Day references you’ll probably see in your feeds today – instead, I will throw in a reminder that, whenever we see pain and suffering out there, we also see love, and that is always worth celebrating.

You’re reading the premium daily Crypto is Macro Now newsletter, where I focus on the growing overlap between the crypto and macro ecosystems. Nothing I say is investment advice! Nevertheless, if you find this useful, do share with friends and colleagues.

If you landed here from somewhere other than your inbox, or if this was shared with you, do please consider subscribing to support my work (or try a free trial!). I’d really appreciate it. 😊

MARKETS

Inflation positioning

The S&P 500 opened the week with a rally as traders position for what could be a volatile trading session after the release of the US CPI data for January. Expectations are for a slight uptick in the month-on-month figure, to 0.5% from an upwardly revised 0.1% in December – but it’s the core year-on-year number that will merit the most attention, as a better indicator of inflation’s trend. Expectations are for a slight cooling there, down to 5.5% from 5.7% in December – this more or less coincides with the Cleveland Fed’s inflation nowcast, which is projecting 5.6%.

Over the past few days I’ve been listing some of the signs I see that suggest we may get a negative surprise later today. There’s the strong consumer as seen in both economic releases, car sales and earnings reports; there are signs that the US housing market has bottomed; there’s the uptick in the oil price which reminds us that the trend is not necessarily always going to be down; there’s the corporate submission to the need to raise prices to restore margins, in the face of rising input costs and shareholder pressure.

I really hope I’m wrong, and here are just some reasons why I might be:

• Oil and other key commodities are cheaper than a year ago

• Growth in the housing market is still much weaker than a year ago, and prices seem to be dropping

• A CPI index rebalancing gives home prices a slightly greater weight in the calculation

On the other hand, the consumer resilience in the UK is perplexing, given the dire straits of its economy and the grim daily life amid widespread strikes – part of this may be due to UK wages rising more than expected. Travel giant TUI said earlier today that summer bookings are ahead of 2019 levels.

If today’s number is good, in the sense that it shows a continued deceleration in core inflation, then we should see greater confidence in the soft landing narrative, renewed conviction that there could be rate cuts this year, and the return of more risk-on sentiment. Even this would be a temporary narrative, however.

If today’s number is bad, showing an uptick in inflation, it could temporarily dent the assumption that the war against inflation has been won, and we could see a reset higher in yields and rates expectations.

War against what?

One gaping disconnect I’m still seeing in markets is what looks like a lack of understanding of what the war against inflation means. It’s not about bringing a number down. That’s a rear-view mirror result of what the issue is really about: bringing down consumption. This involves squeezing consumers so that they spend less, through lower purchasing power – in other words, either consumers are earning less, or there is less that they can afford. This has to happen in an environment with relatively tight employment, especially in services, the sector in which spending seems to be concentrated. A likely result is businesses closing, which will bring down employment but also tax revenue.

The market seems to think this would be good news.

What’s more, this has to happen in politically fraught environments. Leadership elections are coming up next year in: the US, the European Parliament, India, Ukraine, Russia, Finland, Romania, Slovakia, Mexico, Peru, Indonesia, Algeria, South Africa, Egypt, Bangladesh, Sri Lanka, Ghana, Taiwan, and many others. Also, maybe the UK and Japan. Central banks are generally independent in most of the large developed economies, but fiscal spending can offset any rates tightening when populations need to be placated.