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NOVEMBER 2, 2023

BOOM AMIDST HOPES

Bitcoin has reached a 17-month high as hopes of the Federal Reserve ending interest-rate hikes and anticipation of demand from the exchange-traded fund (ETF) industry fueled optimism. Earlier this morning, the digital token rose by 4% to $35,840, while smaller coins like SOL also saw gains. As already mentioned in the past few weeks, one of the key reasons behind Bitcoin’s impressive performance this year is the potential approval of Bitcoin-focused ETFs by the Securities and Exchange Commission, however, it is important to highlight that the recent rally has also been pushed up by the hints from Fed Chair Jerome Powell of a less aggressive rate-hiking cycle. Moreover, beyond these factors, Bitcoin’s surge can also be attributed to its perceived role as “digital gold”, which is narrative that has gained traction in recent years, with many investors viewing Bitcoin as a non-sovereign monetary system and a digital alternative to physical gold. The research team at Grayscale Investments LLC has played a significant role in promoting this viewpoint, suggesting that Bitcoin’s core use case lies in being a store of value akin to gold. Additionally, it is worth mentioning the remarkable rise of the Solana network’s SOL token, which has seen significant growth as it competes with Ethereum for dominance in the cryptocurrency market. With a surge of 142% since mid-September to reach $42, Solana’s success can be attributed to various factors, such as efforts to distance itself from the tarnished reputation of former crypto mogul Sam Bankman-Fried, along with the network’s strong operational performance, characterized by minimal network outages.

FIRM DESPITE FLUCTUATIONS

One of the key takeaways from Federal Reserve Chair Jerome Powell’s recent press conference was the firm commitment to consistent decision-making, unfazed by recent market fluctuations. Amid concerns surrounding rising bond yields and investors’ eagerness for insight into the Fed’s perspective, Powell emphasized that market sentiment alone does not dictate the Fed’s actions. Rather, the impact of higher rates on future decisions would depend on persistent and influential factors. Furthermore, Powell acknowledged the inherent volatility in financial conditions, considering it a complex interplay of asset prices and interest rates influenced by various factors. However, he firmly stated that the Fed aims for stability and avoids being swayed by market noise, viewing volatility as mostly inconsequential. Moreover, while recent market movements, such as the surge in 10-year Treasury yields and their effects on the stock market and mortgage rates, have garnered attention, Powell made it clear that these dynamics do not necessitate immediate action by the Fed. Looking ahead, with a focus on inflation, it is increasingly likely that the Fed will maintain unchanged rates in their upcoming meeting. Rick Rieder, BlackRock’s Chief Investment Officer of global fixed income, echoes this sentiment, suggesting that the probability of the Fed keeping rates steady is high.

INTEREST RATES OUTLOOK

Federal Reserve policy makers currently have no intention of raising interest rates again, nor do they foresee cutting rates significantly in the near future. This stance has caused unease among investors and has contributed to the notable increase in long-term interest rates over the past few months. The Fed believes that this rise in rates will serve as a measure to restrain the economy, and they are encouraged by the cooling of inflation over the past year, albeit it still being relatively high. However, in the event of inflation resurging, they are ready to implement tighter measures. Following their recent meeting, futures markets estimated a one-in-five chance of the Fed’s policy committee raising rates by a quarter point at its final meeting of 2023, occurring next month. That being said, the possibility of easing is not on the Fed’s radar, especially given the ongoing strength observed in the job market and the recent report by the Commerce Department, which indicated a 4.9% annualized growth rate in the third quarter. Fed Chair Jerome Powell explicitly stated that the committee is not considering rate cuts at this time, and although Fed policy makers projected a target range on rates for next year just slightly lower than the current range, it appears unlikely that they will revise this forecast. Nonetheless, Powell mentioned that the current policy stance is restrictive, suggesting the potential need for rate cuts in the future, as rates at their present level are expected to cool the economy over time. What is impressive is the belief that the economy can withstand rates near the current level, implying that the economy possesses previously underestimated reserves of strength. Powell cited the expanding labor force due to increased job seekers and recovering immigration, as well as the remaining pandemic savings held by households, as factors driving the economy. Furthermore, the Fed staff, which removed its recession forecast in September, continues to anticipate an absence of economic downturn. The longer the Fed can delay cutting rates, the more it suggests that the “just-right” or neutral rate for when inflation reaches the 2% target may have increased. In its September projections, the Fed estimated an average longer-term target rate of 2.5%, essentially its forecast of the neutral rate. However, confidence in this estimate appears to be declining as a higher neutral rate would offer a variety of benefits, including providing the Fed with more flexibility to cut rates during a recession and often indicating stronger productivity and potential for faster economic growth. Nonetheless, there are potential risks, such as a resurgence in inflation leading to unavoidable rate hikes or the negative effects of past rate increases and elevated long-term interest rates taking a toll on the economy. Ultimately, investors are hopeful that the Fed’s rate projections turn out to be accurate.

MODERATE INCREASE

The number of Americans filing new claims for unemployment benefits increased moderately last week, indicating a gradual cooling of the labor market. Initial claims for state unemployment benefits rose by 5,000 to reach a total of 217,000 for the week ended October 28. This figure was slightly higher than the forecasted 210,000 claims by economists. Nevertheless, despite this slight increase, it is important to highlight that the labor market remains tight, underlining the overall strength of the economy. The number of people receiving benefits after their initial week of aid, which serves as an indicator of hiring, also rose by 35,000 to a total of 1.818 million during the week ending October 21, however, experts believe that this increase mainly reflects difficulties in adjusting the data for seasonal fluctuations rather than a significant change in the underlying trend. Furthermore, layoffs continue to remain low, with U.S.-based employers announcing 36,836 job cuts in October, a 22% decrease from September, and although planned layoffs were up 9% compared to the same period last year, this does not affect the upcoming October employment report, which excludes this data. Looking ahead, economists predict that nonfarm payrolls likely increased by 180,000 in October, compared to a rise of 336,000 in September. This anticipated decrease in job growth can be attributed in part to the recently concluded strikes by the United Auto Workers union against Detroit’s car manufacturers.

INTERNATIONAL NEWS

The European Central Bank (ECB) is currently deliberating a review of the interest rates it pays on government cash deposits, with the aim to tackle mounting losses that have resulted from the bank’s efforts in combating inflation. Recent interest rate hikes on deposits, implemented to curb lending and price growth in the euro zone, have led to substantial losses for the ECB and the 20 central banks of the countries that share the euro. To reduce these financial burdens, central bankers in the euro zone have reignited a debate regarding the remuneration of government deposits, and although a decision was not made during last week’s policy meeting, sources close to the matter mentioned that the issue will likely be revisited next year, when the ECB will also address the broader concern of excess cash within the banking system. The hesitation in reaching a decision stems from concerns that reducing interest rates may prompt governments to transfer their funds to commercial banks, only for these banks to subsequently deposit the money back with the ECB for higher remuneration. This potential outcome poses challenges in effectively managing the funds. It’s important to note that slashing interest rates on public cash could also have political ramifications alongside the financial implications. Moreover, the currently high interest rates set by the ECB have led to significant profits for commercial banks, leading to public criticism and even taxes imposed by governments. The issue of high interest rates also extends to central banks in other wealthy nations, such as the Swiss National Bank, the Federal Reserve, and the Bank of England, which have also reported losses.

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