More interest rate hikes are coming from the US Federal Reserve. At least, that was taken from the recently released minutes of 1scheduled tribe The February meeting of the Federal Open Market Committee (FOMC) kicks off early this Wednesday. This can be a major adverse effect for the medium term. crypto,
The FOMC, which consists of Federal Reserve governors and regional Fed presidents, raised interest rates by 25 bps to a 4.50-4.75% target range at its meeting earlier this month. This was a slowdown after a 50 bps rate hike in the previous meeting for 2022, which was followed by four consecutive 75 bps rate hikes.
The minutes of the meeting said that FOMC members expect further hikes in interest rates will be necessary to ensure that inflation returns to a consistent 2.0% target. “Nearly all” FOMC members favor a bearish 25 bps rate hike. The minutes said, “Upside risks to the inflation outlook remain a key factor shaping the policy outlook,” while some officials warned that an “insufficiently restrictive” stance could hinder progress in reducing inflation. Could
Hot US Data Forces Markets To Up Fed Tightening Bets
Financial markets have raised their Fed tightening bets over the past few weeks after the latest Fed meeting minutes were released. To be more specific, at the end of January, most analysts were predicting just two more 25 bps interest hikes – one at the February meeting, which was delivered, and then the last one at the March meeting.
Some market participants were also betting that this could be the Fed’s last cycle of 25 bps rate hikes in February. This was demonstrated by the fact that the currency market at that time implied the possibility of no rate hike in March, and rates remaining in the range of 4.50-4.75% were about 20%, according to CME data.
However, this month’s stronger/warmer than expected US data releases including the January jobs report, CPI report and ISM PMI survey results triggered a major shift in market expectations. With the US economy still humming along nicely and inflation still too hot for comfort, markets now see a 27% chance the Fed could hike interest rates by 50 bps (5.25-5.50%) next month.
Meanwhile, with interest rates now seen to peak in the range of 5.25-5.5% in June, there is about a 30% chance in the money market that they may go up by an additional 25 bps to the range of 5.50-5.75% by July. This has triggered a rally in the US Dollar Index (DXY) and US yields, especially at the short end of the curve, and has been, of late, putting pressure on US stocks.
crypto It has been able to rally so far despite these macro headwinds – weak stock prices, a strong dollar and higher yields have historically influenced crypto prices. But as the rally continues to extend, some traders worry that the risk of a correction is rising.
Why Sustained Fed Hikes Could Hit Crypto
Crypto prices, especially the prices of major blue chip names such as Bitcoin And EthereumThere has been a fairly strong positive correlation with US equities, especially the big tech names, over the past few years. This correlation has weakened somewhat this year, with crypto outperforming all major US equity indices such as the S&P 500, Nasdaq 100 and Dow Jones Industrial Average.
But, with crypto still in its early days and still viewed as a “risk asset” by most macro investors, the correlation is unlikely to be fully broken anytime soon. And that could be a problem for cryptocurrencies going forward. This is because the equity bear market that started in early 2022 is not over yet.
Analysts at JP Morgan made some important observations in a note issued earlier this week. US equity indices such as the S&P 500 never go down before the end of a Fed hiking cycle, and usually only go down after the Fed has already made a series of interest rate cuts.
In other words, with the Fed still expected to hike three more rates, this is the way to bet soon that US equities bottom out. The implication is that the S&P 500 and other major indexes could soon go back to their 2022 lows printed last October.
A weak Q4 2022 corporate earnings season, which strongly suggests an earnings slowdown is on the way in 2023 along with an increasingly toxic interest rate outlook, could certainly send shares lower in the near term. Crypto traders should temper enthusiasm until the outlook for US equities improves. Perhaps there are downsides to this bear market – on-chain and a litany of technical indicators suggest this is the case – but the outlook ahead remains difficult.
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