Market Update - September 22nd 2023

Following its September 20th meeting, the Fed announced that it would maintain its interest rates.

Could this have an impact on Bitcoin? And what challenges are posed by the 60% US budget deficit?

Consumer Prices rose by 0.6%, boosted by a 10.6% jump in gasoline prices. The core rose 0.3%, a bit more than we expected thanks to a surge in airline fares and an outsized jump in auto insurance prices. Retail Sales also rose 0.6%. Both allude to the idea that the US economy is on sound footing.

Meanwhile, we are closing in on the highest correlation on record between bonds and equities at 27%. Why should this be the case when economic growth according to the media looks so good?

Longer dated US treasuries (the largest asset class in the world) just puked 9% - at nearly 4.5% that’s the highest since 2008, this shouldn’t happen when the economy supposedly looks ok.

Is it pricing higher inflation? or perhaps much stronger growth? unlikely. We suspect it is pricing the fact that the fiscal situation in the US is increasingly stressed.

Looking in context, the US is 4% of the worlds population but makes up 60% of the worlds current account deficit, potentially a parlous state for the US economy if appetite for the US dollar wanes. There is always a buyer though, the FED will be the buyer of last resort, if there is a recession, as the yield curve suggests, the budget deficit as a percentage of gdp would rise by up to 4%, exacerbating the fiscal deficit.

Homebuilder sentiment came in well below consensus this week, perhaps the average 30yr fixed rate mortgage at 7.19% is the culprit? Which is highest since 2002. Housing affordability is also at the lowest point since records began in 1989.

Appropriately, the FED decided not to hike interest rates this month, as expected. The dotplot signalled one further hike this year, with a total easing of 75bp pencilled in for next year—though we think the Fed ultimately will choose not to raise rates further. The nuances from the press conference highlighted a neutral stance from the FED. While much effort was put into trying to convince the market they remained hawkish, by upgrading GDP growth forecasts to justify its interest rate predictions, there was hesitation expressed over those forecasts.

With the Federal Reserve taking a neutral stance, it is expected to have minimal impact on Bitcoin prices for now. However, upcoming economic challenges, including debt ceiling concerns and potential US shutdown fears, alongside anticipated events such as the spot Bitcoin ETF approval in early 2024 and the Bitcoin halving event in April 2024, are likely to be supportive for Bitcoin prices.

That’s a wrap for this week - follow CoinShares for more insights