Author：PSE Trading Trader @MacroFang

Macro Outlook 2024: Market Correction before 2Q24 Rally

It was a significant week for both the markets and various economic releases, drawing attention to the complexities of interpreting job report data and other economic indicators.

BTC: Bull Market Correction in Play

Bitcoin’s recent volatility spike, fueled by increased crypto leverage, contrasts with the expected volatility reduction from ETF introductions, aimed at broadening investor access and improving price discovery. However, the current environment shows elevated leverage, evidenced by rising funding rates for perpetual futures and a surge in open interest, partly from leveraged funds’ basis trades. Despite the potential for ETFs to stabilize the market, the path to reduced volatility is likely to be rocky due to the current high leverage levels, especially as events like the Bitcoin halving drive demand for leveraged exposure.

Amidst the backdrop of increased volatility and leverage within the crypto ecosystem, Bitcoin experienced a correction, moving from the \(73,000 level down to \)63,000. This pullback is viewed as a normal price correction within the market’s dynamics, setting the stage for a potential rally towards the $100,000 mark in the second quarter of 2024. Such corrections are common in the trajectory of digital assets, often serving as consolidation phases before significant upward movements.

ETH: Should Rally, 1 Month after Upgrade

Ethereum has markedly evolved with significant upgrades like the Beacon Chain in 2020, the “Merge” in 2022, and the Shanghai upgrade in 2023, aiming for enhanced sustainability and security. The forthcoming Dencun upgrade targets scalability, a key challenge that has fueled the emergence of rival blockchain networks. Amidst competition, these advancements underscore Ethereum’s commitment to infrastructure improvement. Ethereum’s price typically experiences a pre-upgrade rally, a subdued phase in the first 30 days post-upgrade, followed by a significant rally. However, factors such as Bitcoin ETFs, potential Ethereum ETF approval, and market leverage could introduce more volatility in Ethereum’s price actions post-Dencun upgrade, indicating complex market dynamics ahead.

ETH ETF Expectations

Positive expectations for Ethereum’s Dencun upgrade, along with anticipated regulatory developments like a potential spot Ethereum ETF, are poised to drive investor optimism. These factors, combined with Ethereum’s ongoing improvements for scalability and efficiency, set the stage for a favorable price rally in ETH post-upgrade. Such technological advancements and the prospect of increased mainstream adoption could significantly enhance Ethereum’s appeal to both retail and institutional investors, fostering a stronger and more sustained upswing in its market value.

US Macro: Analyzing the Job Reports

A month back, the job report for January was peculiar, showcasing a substantial increase in new jobs juxtaposed with a decrease in hours worked—a scenario often associated with recessions. This caused confusion about its implications. However, the anomalies observed in January’s report were largely revised in Friday’s release.

The latest job data for this month turned out to be positive, albeit with the unemployment rate slightly increasing from 3.7% to 3.9%. This minor uptick led to headlines declaring a 2-year high in unemployment rates, although it’s essential to note that such a rate has been observed and revised in the past. Despite this, the economy continues to exhibit low unemployment rates and overall robustness.

A critical aspect to watch is if unemployment crosses the 4.0% threshold in the upcoming months, potentially influencing monetary policy decisions. Additionally, the broader U-6 unemployment measure has reached a two-year peak, indicating challenges in immediate job finding for those re-entering the workforce.

Wage Growth: Strong Productivity, Inflation Under Control

Wage growth has aligned with expectations, reinforcing the notion that a 4% wage increase does not inherently lead to inflation if accompanied by strong productivity, which is the current situation. This scenario eases concerns about inflationary pressures on the economy.

Powell: Hawkish Tone, But Still Lower Rates

Recent comments from Powell appeared dovish, suggesting the Federal Reserve might be nearing a decision to lower rates, contingent on forthcoming CPI and PPI data. However, economic strength may lead to a hawkish tone in the Fed’s Dot Plot release, potentially unsettling markets temporarily.

FOMC Meeting Preview: Still Expect June Rate Cut

We anticipate a dovish outcome from the upcoming FOMC meeting scheduled for next Wednesday at 2PM, where Federal Reserve officials are expected to confirm their readiness to lower interest rates within the year. Despite potential concerns over hawkish signals, particularly through the “dots” indicating future rate projections, the consensus is for these to remain steady, showcasing an anticipated 75 basis points of cuts in 2024. The Federal Reserve, under Powell’s guidance, is reportedly gaining “greater confidence” in the economic outlook. However, Powell is set to keep the door open for rate cuts as early as the May meeting, highlighting the significant drop in core PCE inflation below 3.0% as a key factor. Discussions on balance sheet policies could lead to halving the cap on Treasury runoff to $30 billion per month from June, setting the stage for a rate cut in the same month.

On the flip side, market expectations might be skewing too hawkishly, ignoring signals that the Fed isn’t overly concerned by the initial uptick in inflation or the mixed job growth figures from the start of the year. January saw a robust addition of 353k jobs, but February’s 275k increase appeared softer when considering significant downward revisions to previous months and a rise in

CPI: Better than Expected

Tuesday’s Consumer Price Index (CPI) report is highly anticipated due to potential quirks in the January data that might impact inflation readings. An incident involving selective data release by the Bureau of Labor Statistics (BLS) has also raised eyebrows, emphasizing the importance of this upcoming CPI report.

Jobless Claims: Within Expectations

Last week’s jobless claims fell within the desired range, indicating healthy employment growth. Meanwhile, assets like gold and Bitcoin are reaching new highs, reflecting a broader trend in momentum investing. The tech sector, exemplified by companies like Nvidia, is under scrutiny for its valuation and growth potential, reminiscent of past market cycles.

Market: We are not in a Bubble

The current market scenario is distinct from the speculative bubble observed around 1999-2000. Today’s market valuations are more grounded, with a balanced outlook on earnings and sector growth.

BOJ: End YCCC

On March 19, 2024, the Bank of Japan (BoJ) announced a shift in its monetary policy by ending its negative interest rate policy (NIRP) and introducing a new policy rate target range of 0bp-10bp effective from March 21. This move, largely anticipated by markets, is seen as a nuanced approach to tightening while maintaining substantial support through continued sizable purchases of Japanese Government Bonds (JGBs) into the April-June period.

The BoJ’s decision to keep the purchasing pace stable, especially beneficial for the short to medium term sector amid reduced JGB issuance, signals a dovish stance towards rate hikes. Additionally, the removal of the yield curve control (YCC) target on the 10-year JGB yield and adjustments in other asset purchases and lending rates underscore a gradual shift in policy framework. However, the BoJ provided no clear guidance on future policy actions, leaving investors to await further insights from Governor Ueda’s press conference. The outlook suggests a slightly bullish bias for JGB yields, contingent on developments in the yen and the US, with expectations that the 10-year JGB yield may only approach 1% with a more tangible rate hike in view.