Tuesday, Jan 24, 2023

Signs of macro interest in BTC, a rates pause for the Fed, economic optimism vs rates fears in Europe, and unlisted shares get potentially more useful

“Believe those who are seeking the truth. Doubt those who find it.” – Andre Gide ||

Hi all! This email takes a break for one day, and look what happens.😊 It’s really nice to see more and more pieces drop into place in the-bottom-is-behind-us puzzle. I know I keep caveating with “but things could still go down”, and of course they could (and nothing I say here is ever investment advice!), but it does increasingly look like spring is not far away. This would be very welcome in all senses, as I don’t know about where you are, but here it is oh so cold.

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MARKETS

A wavering focus

Tentative economic optimism seems to be creeping back into European markets, given some good news this morning:

• The EU composite PMI for January came in above 50 (at 50.2 vs 49.3 in December and 49.8 forecast) for the first time since last June, showing an unexpected return to growth.

• The EU services PMI also came in above 50 (at 50.7 vs 49.8 in December and 50.2 forecast) for the first time since August.

• The EU manufacturing PMI was higher than expected at 48.8 (vs 47.8 in December and 48.5 forecast).

• Germany’s services PMI showed a return to growth for the first time since June.

Yet European markets are down, suggesting that the inflation-rates narrative still dominates. The strength in services is triggering some concern that lowering inflation will be tougher than expected, and ECB hardliners have been hammering the “higher for longer” message recently, suggesting that a rate hike pivot in Europe could be a ways off still. In a speech yesterday, ECB President Christine Lagarde hinted at “significant” interest-rate increases at coming meetings, and the ECB meeting next week is expected to deliver another 50bp hike.

Not so with the Fed – a 25bp hike for next week seems to be a sure thing, and markets are signalling an 85% probability of another 25bp hike in March. The S&P 500 continued its recent rally yesterday, confirming that economic concerns have temporarily taken a back seat to optimism around a less restrictive rates strategy going forward. The probability according to CME futures of a pause in US rate hikes in May has continued to climb and is now at almost 58%.

(chart via CME FedWatch)

But what of the economy, surely that still matters? US PMI data out later today is expected to show continued contraction although at steady levels, and yesterday the Conference Board’s Leading Economic Index – a composite of data points such as industrial production, employment and personal income – declined yet again in December (-1.0% vs -1.1% in January and -0.7% forecast).

(chart via The Conference Board)

And for global trade, things don’t look great either. The Baltic Dry Index, an indicator of shipping prices, is now down to levels last seen in the early days of the pandemic, signaling a drop in demand for goods transportation.

(chart via TradingView)

Part of this could be due to new container supply that has come on stream over the past few months, and part due to temporary factors such as the Chinese New Year break and rainfall in Brazil hurting iron ore exports – but the Bloomberg Trade Tracker currently has all indicators in negative territory, with six out of 10 notably so.  

The Fed’s blackout period in the runup to the FOMC meeting next week means we won’t be getting tightening reminders from officials (will anyone miss that?). This could push markets higher as a slowdown implies the inflation situation will continue to improve. On the other hand, it could trigger some pessimism regarding earnings downgrades and currency instability. We are in unusually fickle markets these days, with narratives flip-flopping all over the place.

This week we get not only Q4 GDP for the US (expected to show 2.6% growth vs Q3) but also core PCE data for December, which could show a continued deceleration year-on-year according to the average forecast (4.4% expected vs 4.7% in November). Month-on-month, however, it could show a slight increase, reminding us all that core can be sticky, and that the current levels are still much higher than the Fed is aiming for.

A renewed focus

The BTC price passing through $23,000 briefly yesterday did more than push bitcoin to price levels not seen since last August – it also seems to herald the re-emergence of upward momentum after a long winter of drops and then no movement at all. Of course, there could be more drops ahead. But, as I’ve been saying here often over the past few weeks, the fact that prices have not been falling on the multiple blows of bad news over the past few weeks shows that sellers at these levels are scarce.

What’s more, there are plenty of other signs that interest is picking up.