In this report:

• Data This Week.
• Liquidity Outlook.
• 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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Data this week

Lethal day yesterday, which sparked the sell-off (no, it wasn't due to some potential new virus coming out of Wuhan).

Yesterday, we had ISM Services PMI and JOLTs Job Openings data come out. ISM Services came out showing the prices paid for the component spiking higher. This was the highest reading of 2024 by a long way (excluding January 2024).

The market reacted poorly to this as prices paid increasing is inflation, and that's exactly what the FED has been trying to combat. So it was worrying to the markets to see this particularly as inflation has remained sticky throughout Q4 2024, and sticky, well above the FED's mandated 2.0% target.

ISM services prices:

Alongside this, JOLT's Job Openings came in at 8.098m, which is now a 2-month increase from the low of 7.370m. This means that Employers have more job openings and, hence, are looking to hire. However, the quit rate is down, meaning there isn't confidence in workers to quit their jobs (usually because they don't think they'd be able to find a new one).

Market reaction

The market reacted poorly off the back of this, and risk assets sold off while the DXY and Bond Yields pushed higher again due to the market pricing out the cuts.

The ISM showing a much higher Prices Paid component is obviously going to spook the market as it's inflation, and how does the FED combat that? Raising rates. However, in this scenario, the market just priced out rate cuts.

The market is now pricing in just one more rate cut (and that's not even nailed on), and that's in July. So, in other words, the FED is going to be on pause (not cutting rates anymore) for the foreseeable future.

Friday's data

On Friday, we have the release of the Non-Farm Payrolls and the Unemployment Rate. The forecasted consensus is for the Unemployment Rate to tick up to 4.3% from 4.2% and for non-farm to come in at 154k jobs added.

If these numbers came in like this, the market might get some relief, even though Unemployment comes in higher. However, worse data would potentially bring rate cuts back onto the table, and the market would initially cheer that.

However, we're expecting the print to be strong, with Unemployment Rate potentially coming in at 4.1%. When looking at the economy, a 4.1% Unemployment Rate is great.

But, the market would potentially sell down on this (stronger) print because it would confirm the pricing out of rate cuts and no interest rate cuts anytime soon.

The liquidity outlook

In all honesty, the liquidity outlook moving forward isn't positive. This year, the new US Treasury Secretary Scott Bessent will need to refinance approximately 30% of the US's public debt, and he'll need to do so by issuing Coupons (longer duration debt) rather than Bills - this is net negative for liquidity.

Last year, Janet Yellen (the outgoing Treasury Secretary) goosed markets by issuing a lot of debt via Bills (shorter duration debt). Bills allow banks and institutions to buy these bills, deposit them with the FED, and borrow against them, which is a net positive for liquidity.

But they can't do this with Coupons (longer duration debt). Last year, Yellen increased US debt issuance in Bills from 14% of the total to 22% currently. The maximum amount is supposed to be 20%. This was majorly net stimulative liquidity-wise.

However, this was to goose markets going into the Election as she was essentially trying to aid the Democrats and help them win the election - a good market may mean more votes.

However, the opposite is now the case. Bessent now has the job of essentially reversing this - reducing the total % of US debt in Bills and moving more into longer-term debt (Coupons).

The issue with this is that it's negative for liquidity, as Coupons can't be deposited with the FED and borrowed against. The market is realising this and knows this, and therefore, this has pushed yields much higher in 5Y, 10Y and 30Y Bonds.

Why buy these Bonds now and get a 4.6% Yield, say, when you know a tonne of issuance is coming in the upcoming quarters, and you'll likely get a Yield well north of 5.00%?

Alongside the above, there is only approximately $200b left to draw down in the Reverse Repo Facility. This just isn't enough to boost markets.

Plus, rate cuts have now been almost outright priced out, and Trump is continuing along the lines of a tough negotiator, which has sent the Dollar higher. And a strong Dollar is a bearish risk asset.

There is one potential outlet, the Chinese, who are desperately in need of fiscal stimulus, but as of yet, they haven't been willing to do so as they risk devaluing the Yuan. They can't print while the US isn't printing; otherwise, their currency will take a pounding.

Cryptonary's take

Looking at all the above from a macro viewpoint, this is where we stand:

• The data has been strong, but there are still signs that inflation isn't abating and is sticky. This has meant the market has priced out further FED rate cuts (maybe one more in July, but what's one more cut when you know it's the last)?
• Trump is coming in, but Crypto won't be the first item on the agenda. So regulation will take time, and then more time for companies to position themselves, raise capital, employ, etc.
• Trump is also negotiating on tariffs and that'll likely mean we see a strong Dollar continue. Risk assets may struggle under this.
• Markets were goosed with liquidity by Yellen in 2024. However, Bessent (incoming Treasury Secretary) is inheriting a pretty diabolical US debt setup that he'll have to refinance further out the curve. This is a net negative for liquidity. It also means yields are up in the meantime. This is again negative for risk assets.

The setup here is difficult and potentially for a few quarters, and the environment probably favours a trader who is more willing to rotate into the new hot sector. We still think we'll get new hot sectors (take AI over the last 6 weeks, for example).

Majors (BTC, ETH and SOL) have held up well, whilst we've seen pain in other sectors. But it's possible that the Majors will see a bit of a pullback over the coming weeks. If we see significant pullbacks, we'd be buyers.