FED meeting and QT end: Key market catalysts

Topics covered:

• End of QT?
• This week's FED meeting.
• Talk out of the administration.
• Potential bounce in TradFi?
• How that might impact BTC.
• Cryptonary's take.

Disclaimer: This is not financial or investment advice. You are responsible for any capital-related decisions you make, and only you are accountable for the results.

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End of QT?

This is something we've seen doing the rounds, and we thought it was worth addressing.

Will the FED end QT before May?

We can see in the above, that on Polymarket, the odds that the FED will end QT before May have moved up to 100%. However, this isn't actually live on Polymarket, and the link we've seen has resolved to a 'Yes' outcome 6 weeks before May starts. So this is just strange, but it's still doing the rounds, so let's address it anyway, in the form of covering QT.

QT is Quantitative Tightening and it's essentially the opposite of QE (Quantitative Easing). This is the FED running off assets from their balance sheet.

The FED has been running a 'soft QT' which is letting assets on their balance sheet mature, without immediately refinancing them. 'Hard' QT would be them outright selling the assets, which they haven't been doing.

It is expected that the FED will end QT soon due to Bank Reserves running at low levels, and to increase cash in the money markets whilst the debt ceiling is being resolved.

QT has a net negative impact on overall liquidity. However, its pause doesn't mean liquidity will be significantly boosted. The ending of QT is a positive for overall liquidity; however, Bitcoin and crypto will likely need fresh liquidity stimulus to send prices higher. The ending of QT won't be enough for this.

This week's FED meeting:

This Wednesday's FED Meeting is the key macro event of this week. We have a FED decision and a new Summary of Economic Projections at 6 PM UK time, plus the Powell Press Conference at 6:30 PM UK time.

It's fully expected that the FED will keep rates unchanged. In the Summary of Economic Projections, it'll be interesting to see if the FED sees the Unemployment Rate remaining low, how much growth might fall off, and how much inflation might rise.

The market will probably look for growth to come down a tad and for inflation to remain subdued. If that then results in the FED forward guiding three cuts for 2025 (rather than the 2 interest rate cuts for 2025 that the last Dot Plot showed), the markets might take that positively in the immediate term.

The Powell Press Conference. We're expecting Powell to keep his cards close to his chest and be non-committal. And in this case, this is probably right. It's hard to know how Trump's policies and tariff uncertainty are going to play out.

Naturally, uncertainty can speed up slowdowns, so it would make sense that the FED cut interest rates more than twice later in the year. However, they don't need to be forward-guiding that now in March, and they can probably play it safe and wait.

Talk out of the administration:

Recently, we've seen members of the administration refuse to rule out that the US might enter a recession. We've seen Bessent say, "Markets shouldn't keep going up," and when asked about a recession, he said, "There aren't any guarantees that there won't be".

Alongside this, Trump himself refused to rule out a recession just last weekend, saying, "he doesn't expect a recession, but again he can't rule it out". But perhaps Commerce Secretary Howard Lutnick gave the game away.

He said that the "Donald Trump economy would get going in the 4th quarter", and therefore, anything before that would be 'Biden data', i.e., whatever pain is caused between now and Q4 of this year, they'll blame on the prior administration.

The markets are taking this at their word, which is that there isn't a Trump Put on the market falling here, and if there is one (a backstop for the market), it is lower than the current SPX and NDX prices. This is why we're struggling to see risk assets bounce and why we haven't seen 'dip buyers' stepping in with any confidence.

Potential bounce in TradFi?

Despite talk from the administration that they're not "focused on the stock market" and that there is "no Trump Put", they will have an eye on the markets, and currently, markets are phenomenally oversold.

We've seen a more than 10% correction in 20 days. This is the fifth fastest correction in the last 75 years. Covid was the fastest, reaching a 10% correction in just 8 days.

This is currently the most oversold that the S&P has been since January 2022 and September 2022.

SPX:

Now, whilst stock indexes are very oversold, that should suggest we're set up for a bounce/potential relief rally. However, we're wary of the fact that Bond Yields have held up over the last week (you'd expect Bonds to be bid whilst stocks have substantially sold off), and bond spreads have also moved substantially higher.

We showed this chart last week, noting that we'd be watching closely and we'd become more cautious if bond spreads continued to move higher. And they have done exactly that.

SPX against bond spreads:

Whilst the technicals suggest that we're due for a bounce and that this might be an area to bid the stock index, the fundamentals are still not great, particularly as the administration is the opposite of supportive.

So, it's possible we see a relief rally, but due to the fundamentals, we wouldn't have the confidence to play it/partake in it. And, if we do see a relief rally, it'll likely not be with size, and it'll likely be sold into.

How might that impact BTC and crypto?

We've already seen a big move down in Crypto (not so much BTC, but Alts/Memes) over the last month. Like the stock index, crypto is due to a small relief rally from a technical viewpoint.

The issue is once again the fundamental viewpoint. Therefore, we won't be looking to Short in the coming days at these prices simply because we do not want to Short at the beginning of a possible relief rally. However, if a relief rally does come, that'll set us up for new Short entries.

For now, we'd be targeting shorts on BTC between $86k and $89k, but we don't have high confidence that BTC can achieve those prices. So, we'll assess this day by day as this week plays out.

Below, we have tagged the BTC chart showing the zones we'd look to potentially Short at and where that's reflected on the chart.

BTC 1D timeframe - short setup:

Cryptonary's take:

With a FED Meeting and a Powell Press Conference, it'll always be a big week. We'll be watching Powell closely and the markets' reaction to the FOMC on Wednesday.

Whilst the outlook remains uncertain and therefore not attractive for risk assets, we'll remain as we are; in cash and sat on the sides. But, waiting and ready to pull the trigger when the time is right.

The opportunity that we're focused on this week is if the market does see a relief rally, we'll look at Short BTC and maybe some other plays - we'll see what moves and is attractive at the time depending on what BTC does. We've outlined the price zone in which we'd be interested in BTC Shorts in the section above (orange box on the chart).

A big week, and it can give us a lot of info going into Q2 and how the FED and Powell see the outlook.