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SEPTEMBER 6, 2023

PUSHING FOR APPROVAL

Grayscale Investments is urging the U.S. Securities and Exchange Commission (SEC) to approve its request to convert its bitcoin trust into an ETF, as following the recent court ruling against the SEC’s refusal to review Grayscale’s application, the company has swiftly delivered a letter to the regulatory agency, emphasizing the need for prompt action. Grayscale’s lawyers argued that their application has been pending for an extended period, exceeding the permitted duration for SEC decision-making. Additionally, they addressed the SEC’s security concerns, stating that any significant differences in safety between spot bitcoin and existing futures bitcoin ETFs would have already come to light. Furthermore, Grayscale’s lawyer highlighted the lack of a valid rationale distinguishing a bitcoin futures ETP from a spot bitcoin ETP. The company’s court victory has further strengthened their position, and they are now seeking a meeting with the SEC to discuss the next steps. Moreover, successful approval of Grayscale’s conversion request would have far-reaching implications for other investment firms pursuing their own bitcoin ETFs.

FADING MORTGAGE DEMAND

Following the recent period of steady increases, mortgage interest rates slightly declined last week, but unfortunately, this was not enough to reinvigorate mortgage demand. According to the Mortgage Bankers Association, total mortgage application volume dropped by 2.9% compared to the previous week. In additional, the average interest rate for 30-year fixed-rate mortgages with conforming loan balances experienced a small decrease, falling to 7.21% from 7.31%, with points also showing a slight drop. Nonetheless, despite these adjustments, mortgage applications reached their lowest level since December 1996. Consequently, applications for refinancing home loans fell by 5% compared to the previous week, while applications for purchasing homes decreased by 2%. These trends can be attributed to both the persistently high mortgage rates, which remain over a full percentage point higher than a year ago, and the limited housing inventory available for prospective buyers.

IMPACT OF HIGH OIL PRICES

The recent surge in oil prices reaching a 10-month high has sparked concerns regarding the Federal Reserve’s approach to interest rates. Bill Merz, the head of capital market research at U.S. Bank Wealth Management, explains that the rising oil prices contribute to the overall narrative of inflation. This, in turn, impacts bond yields and raises questions about the actions the Federal Reserve will take. The correlation between the increasing yields and oil prices adds complexity to the current market scenario, as investors speculate about how the Federal Reserve will respond and what measures they will implement to address these economic factors effectively.

BOND HOLDINGS REDUCED

The Federal Reserve has successfully reduced its bond holdings by approximately $1 trillion as part of its efforts to tighten monetary policies. This reduction has not caused significant strain in the financial markets, in contrast to previous instances. As a result, the central bank’s portfolio, which amounted to about $8.4 trillion in April last year, has now declined to approximately $7.4 trillion. To manage the reduction, the Fed is allowing certain treasuries and mortgage-backed debt to mature without replacement, shifting the responsibility of federal debt to the private sector. Nevertheless, it is important to note that although this approach has been relatively smooth, with money-market funds and other buyers readily purchasing the increased supply of Treasury bills, it may pose challenges to the markets, especially considering the Treasury’s decisions on securities sales and the growing fiscal deficit.

ADVICED CAUTIOUS APPROACH

Federal Reserve Governor Christopher Waller has recently expressed optimism about the lastest strong economic data and its potential impact on the central bank’s decision regarding interest rate hikes and inflation control. Waller highlighted positive indicators, including job growth exceeding expectations and lower-than-forecasted wage increases, and he emphasized the need to analyze whether the current low inflation is a sustained trend or a temporary anomaly. Waller’s stance leans towards tightening monetary policy and raising interest rates, however, he urged caution and emphasized the importance of monitoring data before making any definitive decisions. Moreover, Waller also reassured that an additional rate hike would not significantly harm the job market or drive the economy into a recession. Waller’s comments reflect recent statements made by Fed Chair Jerome Powell, and align with market expectations of a rate increase delay in September but some uncertainty for the October session.

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