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It’s been only a couple of months, but ever since our article identifying the inflection point for markets, stocks have recovered slightly and crypto has responded aggressively to signs of potential ease, perhaps an inflection after all? We’ll do a full victory lap if the trend continues through December.
Meanwhile, this was a big week for markets. FOMC and Non-Farm Payrolls were not as spooky as the markets feared, and given the amount of fear, it didn’t take much for markets to see the upside. Let’s dig into the details!
This was a largely anticipated move with a near 90% probability as implied by markets the day before. Of more interest is the communication for what was to come. On this, Chairman Powell delivered and mentioned the possibility of slowing down the pace of hikes by taking “into account the cumulative effects of tightening”. The trading session was volatile, however, ending the day in negative territory on Wednesday.
While this is not a blockbuster print, there was a little for everyone. For optimists, this is essentially what the path of a soft landing in labor looks like, consistent growth with still low levels of the unemployment rate. Have the recent layoffs in Big Tech companies been fully captured? Likely not, but the pace of drops is far less dramatic than many expect despite the convulsions in the real estate market.
For pessimists, the unemployment rate went up while labor participation went down, a double whammy of more people unable to find jobs combined with fewer people wanting to work. Should this trend continue, the Fed might find it more difficult to continue at the pace of its hikes.
In the back of my head, I envision someone at the Fed finally discovering Curve Finance, and doing a EURUSD trade for $5.
Although the article was light on details, it highlighted a key benefit of blockchain transactions that crypto natives sort of take for granted: atomic transactions. Atomic transactions are all or nothing. If the transaction is successful, then all conditions of the transaction are guaranteed to have been completed, otherwise, the transaction is canceled as if it never happened at all. This is in general not true in traditional finance. For example, long-short equity funds often have to buy and sell stocks in very intricate combinations, however, they cannot guarantee that they’ll be able to complete all legs of the transactions at their desired prices. One of the stock prices could have moved by the time the order hits the exchange. This problem is called slippage and can introduce a tremendous amount of risk in mundane transactions.
Relief rallies likely continue for the next few weeks regardless of what happens, it's been clear that selling pressure has dissipated since last month despite the barrage of news.
Separately, we are clearly seeing the trend of crypto breaking away on the upside as compared to equities. I think this trend continues simply because crypto is a bit more “uni-dimensional” in the current environment. Hikes will be slowing, so people are buying the rumor before it happens.
Now that the FOMC meeting and NFP have passed, what are we looking forward to for the rest of the year?
That’s all for now, see you next week!