Rate cuts on the horizon as crypto braces for a liquidity squeeze

We've seen the data be somewhat favourable recently, and based on today's data, we've seen the dollar come down and bond yields come down, yet equities and  rypto can't maintain a bid. 

This is, for sure, somewhat concerning in the short term, and we'll continue to track this and what further implications for crypto may be. 

Overall, though, it's as comprehensive an update as we could give you.

Although the report contains some more alarming elements, we hope you all enjoy the read. 

TLDR

• Macro update: Recent data shows disinflation, a steady job market, and slower growth. Dollar and bond yields are down, yet equities and crypto struggle—a short-term concern.
• Fed watch: Members are sending mixed signals, but the consensus is with Powell—more work on inflation is needed. A September rate cut is possible if employment data weakens, potentially sparking a risk-on rally.
• Treasury liquidity shift: The move from bills to coupons reduced liquidity, a headwind for crypto. High issuance, less demand for coupons, and fiscal deficit worries push yields higher.
• Bitcoin's resilience: Despite macro challenges, it is only 8% from ATH, thanks to positive catalysts (ETFs, halving, adoption). Tech analysis suggests a potential pullback to $63,400.
• Post-halving pattern: Expect "boring chop" until summer's end, then possible euphoria from Nov 2024 to Q2 2025. Stay patient; eye major dips.
• Bottom line: Macro is king. Fed's next moves and liquidity trends will shape crypto's trajectory.

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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Today and yesterday's macro data 

Yesterday, we saw GDP growth come in at 1.3%, which was below last quarter's 3.4% print. The economy is growing, just not quite at the rate it was over the last few quarters. However, this is somewhat to be expected, as we begin to see the effect of the FED's 500 basis point interest rate increase. 

But, alongside this, the labour market has held up, and once again yesterday, we saw a 219k Jobless Claims print. With only 219k people receiving benefits from the state, this number is historically low, so once again, this data point also suggests that the labour market isn't materially weakening as of yet. 

Today, we've had a Core PCE MoM print of 0.2%, which came in low but at consensus. It shows we are in a disinflationary environment for now. The markets' response yesterday and today has been Bond Yields down, the Dollar ($DXY) down, and risk assets have tried to catch a rebound bid but seem to struggle at the moment to get this bid. This may be due to risk assets running out of positive momentum currently. We'll explore this further down.

DXY

US 2Y

US 10Y

$SPX

The concern here is that with the Dollar and Yields falling, we haven't seen a bounce in equities.

Conflicting Fed-speak 

Over the past week, we have had conflicting Fed-speak, which is understandable considering that inflation has come down over the last year. Now, the Fed's dual mandate (stable prices and a strong labour market) is coming into closer balance—if the Fed remains higher for too long, it risks breaking the economy. Earlier this week, we had Neel Kashkari say that he can't fully rule out rate hikes. 

So, based on this, we wanted to pay close attention to FED Member Williams to see if a similar tone would be used. 

However, Williams towed a similar line to Powell's. They both feel that more work needs to be done to bring down inflation (it has been higher for longer), but they do feel that the journey down to the 2% inflation target is going according to plan. 

June's Fed meeting

We're currently experiencing disinflation and signs that the labour market may be beginning to moderate but is by no means weakening. 

Alongside this, we've had positive but also slowing economic growth. It is, therefore, possible that if we do see some weakening in the next 1 or 2 Employment data prints, this may actually open the door for the FED to forward guide a July rate cut. 

However, for now, we see this as unlikely and more likely that a rate cut would be forward-guided for the FED meeting in September - this is if the next 2 Employment data prints come in considerably weaker than expected. But, the point of the analysis here is to say that if a rate cut is forward guided for September, we would likely see a relatively big risk on rally going into September, and this would also potentially be the catalyst for larger wealth manager money that's currently sat on the sides to deploy into more risk on assets rather than overweight Bonds and to just be clipping the yields that the bonds pay. This is why we assess the macro data. 

The more the data pushes the FED towards a potential interest rate cut (and an interest rate cut that is merely a moderation of the rate rather than a cut/series of cuts because the economy is going into a recession), the more risk assets will likely catch a bid and see further momentum.

Stalling liquidity is a headwind for crypto

Last year, Treasury Secretary Janet Yellen shifted debt issuance more into bills rather than coupons, which allowed Money Market Funds to fund the purchase of these Bills. This meant the Reverse Repo Facility drew down (a liquidity injection). 

This also meant there was less issuance for the bond market to digest, and less issuance (than expected) meant the Bond market got a bid, which meant yields were lower and risk assets went up. 

Hence, we also saw Crypto rocket higher in Q3 and Q4 of last year. However, in the past few months, issuance has shifted back to coupons rather than Bills. With issuance being high as the US has a huge fiscal budget to Fund, there has simply been less demand for US debt (Coupons). This has meant Yields have moved generally higher since the start of February. 

And recently, yields have also bounced higher as more market participants grow wary of the fiscal deficit. With equities at relatively high valuations, we have seen a bit of a stalling out in the S&P over the last few weeks. Although QT has been going on for just shy of 2 years, Central Bank reserves have remained high due to the Treasury General Account and the Reverse Repo draining lower. 

This has supported liquidity despite ongoing QT. However, recently, reserves have declined as issuance has moved more into Coupons rather than Bills, which has seen increases in the RRP and the TGA. This is a reduction in liquidity and perhaps why we've seen risk assets stall out slightly. 

Bitcoin isn't too far from the highs, so that is definitely positive when you consider the above context. In short, the Treasury's move from bills to coupons has reduced liquidity and reserves in the system. Less liquidity has correlated with cryptocurrency prices not performing well. We will need to keep tracking this to see if liquidity improves in Q3.

BTC

After providing the context above, we are quite impressed that Bitcoin has been able to hold up only 8% from its all-time highs. This is most likely due to the fact that there are currently many positive catalysts for crypto: ETFs, BTC halving, further Institutional adoption, Election years, etc. 

Technical analysis

• It looks as if BTC will reject at the horizontal level of $68,900 and break out of the pennant pattern.
• There is local support at $66,500 and more major support at $63,400.
• On a zoomed-out perspective, the structure is still bullish, particularly if the price can remain in a tighter range and above $66,500.
• The RSI is in the middle territory and below its moving average, but this shouldn't be a concern.

Cryptonary's take 

Honestly, just keep this simple.

We get this after every halving; price is range-bound and boring for multiple months until supply begins squeezing, and then we go into a period of euphoria for 6 months. 

To me (Tom), it looks as if we have more of this boring chop for a few more months, potentially until the end of summer. Then, I think we could potentially see September and October be very positive and six months of euphoria from November 2024 through to Q2 of 2025. 

Remain patient and be interested in buying on any major dips. In the very short term, it's possible BTC will pull back, maybe even as far as $63,400. If it gets there, and the S&P has also had a decent pullback, chances are we'll see the $63k be bid.