Casey Wagner

The Federal Reserve opted to resume increasing interest rates Wednesday after a one-time pause in June.&nbsp;



Economic activity “has been expanding at a moderate pace,” the central bank wrote in its Federal Open Markets Committee <a href="https://www.federalreserve.gov/monetarypolicy/files/monetary20230726a1.pdf">statement</a>, citing job gains and a sustained low unemployment rate. Plus, US banks have proven to be “sound and resilient,” the statement added.&nbsp;



The move comes after the central bank paused interest rates in June, marking the first hold in 15 months. There had been <a href="https://blockworks.co/news/federal-reserve-raises-fed-funds-rate-over-5-for-first-time-since-2007">ten consecutive rate increase rounds</a> prior to last month, a strategy the Fed hoped will curb the highest inflation the country has seen in more than four decades, but markets have fretted over whether a soft landing is achievable.



“In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” committee members wrote in the statement.&nbsp;



The committee also noted that the Fed will continue to lower its holdings of Treasury securities and mortgage-backed securities.&nbsp;



Bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) and ether (<a href="https://blockworks.co/price/eth">ETH</a>) rallied slightly on the news, with both raking in around a 0.3% gain. Equities were able to slightly pare back losses from earlier in the trading session.&nbsp;



The S&amp;P 500 lost as much as 0.2% Wednesday morning before the Fed’s announcement. In the moments after the rate decision was revealed the index was able to inch back close to its intraday high.&nbsp;



The Nasdaq Composite similarly rebounded slightly, but still remains about 0.2% lower at time of publication.



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Fed resumes raising rates, crypto and equities stay flat

Katherine Ross

A Bureau of Labor Statistics report released on Friday morning showed yet another month of hot employment data, prompting more discussion about what the Fed will do when it meets later this month.&nbsp;



Odds show a 67% chance that the <a href="https://blockworks.co/tag/federal-reserve">Federal Reserve</a> will keep current rates, with a 33% chance that the Fed decides to hike 25 basis points, according to the CME’s <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html">FedWatch</a> tool.



Bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>), meanwhile, managed to retake $27,000 and has held on to the level throughout Friday trading.&nbsp;



On Wednesday, Daily Price Action’s Justin Bennett <a href="https://dailypriceaction.com/crypto/bitcoin-what-todays-selloff-means-for-june/">wrote</a> that the selloff earlier in the week “means the $27,500-$27,650 area flips back to resistance. It also re-exposes the $26,500 support region.”



Right after the jobs report release, odds of no hike for the Fed were at 72% compared to a 27% chance of a 25 basis point hike.&nbsp;



Both Fed Governor Philip Jefferson and Philadelphia Fed President Patrick Harker voiced their support for no rate hike in June prior to the release of the jobs data, with Harker calling it a “skip.”



However, Harker noted that the jobs report “may change my mind.” The <a href="https://t.co/ZwrVfLviqL">report</a> was strong, though the unemployment rate ticked up.



The economy added 339,000 jobs last month, once again topping expectations of 195,000. Unemployment jumped to 3.7%, above the expected 3.5%.&nbsp;



“Markets may obsess over job statistics, but their role in determining the trajectory of inflation and interest rates is debatable,” Noelle Acheson <a href="https://noelleacheson.substack.com/p/friday-june-2-2023?utm_source=post-email-title&amp;publication_id=1104537&amp;post_id=125501145&amp;isFreemail=true&amp;utm_medium=email">wrote</a> in her Substack, Crypto Is Macro Now.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">so, US unemployment came in higher than expected to reach a 7-month high of 3.7% &#8211; but actual employment also came in *much* higher than expected, even though participation rate was more or less unchanged and this is all very confusing <a href="https://t.co/Z0hVmTCTSu">pic.twitter.com/Z0hVmTCTSu</a>&mdash; Noelle Acheson (@NoelleInMadrid) <a href="https://twitter.com/NoelleInMadrid/status/1664612393719156737?ref_src=twsrc%5Etfw">June 2, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



But the report isn’t the only macroeconomic factor playing into the overall market mood going into the weekend.&nbsp;



The Senate passed a debt ceiling deal late Thursday, just barely ahead of the June 5 deadline suggested by Treasury Secretary <a href="https://blockworks.co/tag/janet-yellen">Janet Yellen</a>. Yellen warned legislators on Capitol Hill that the Treasury wouldn’t have enough money to pay off all of its bills if a deal wasn’t pushed through before June 5, meaning that a default was possible.



The package — negotiated by House Speaker Kevin McCarthy and President Joe Biden — suspends the debt ceiling into early 2025 and advances the Mountain Valley Pipeline as well as changes work requirements for federal food aid.



On top of the macroeconomic picture, the VIX — an index used to gauge overall market volatility — is at a 52-week low. The lower the VIX gets, the cheaper options prices become while options prices become more expensive when the VIX is higher.&nbsp;



The gauge of a so-called normal VIX — what traders look for in other words — is 21. At the time of publication, it had dropped to 14.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">A <a href="https://twitter.com/search?q=%24VIX&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$VIX</a> under $14.10 takes up to pre Covid <a href="https://t.co/Yj4G7iYEDA">pic.twitter.com/Yj4G7iYEDA</a>&mdash; Tom Hearden (@followtheh) <a href="https://twitter.com/followtheh/status/1664674982352265217?ref_src=twsrc%5Etfw">June 2, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



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Market Focuses on Possible Hike ‘Skip’ in June After May Jobs Report

Crypto faltered and stocks traded sideways after Federal Reserve minutes revealed the central bank has more room to hike interest rates to combat rampant inflation.&nbsp;



“All participants” see interest rate increases continuing in order to ease financial market conditions, the <a href="https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20230201.pdf" target="_blank" rel="noreferrer noopener">minutes</a>, released Wednesday, show. 



Bitcoin (<a href="https://blockworks.co/price/btc" target="_blank" rel="noreferrer noopener">BTC</a>) and ether (<a href="https://blockworks.co/price/eth" target="_blank" rel="noreferrer noopener">ETH</a>) trended lower on the news, dropping 2.3% and 2.5%, respectively. Stocks were more steady, with the S&amp;P 500 and Nasdaq Composite indexes inching 0.2% and 0.5% higher in the moments after the release. 



Bitcoin was still hovering below $24,000 Wednesday afternoon in New York, failing to break a key resistance level analysts are watching.&nbsp;



“If the $25,500 is reached, momentum traders might try to support a rally towards the psychological $30,000 level,” Edward Moya, senior market analyst at Oanda, said in a note. “If bearish momentum returns, Bitcoin has strong support at the $22,500 region.”&nbsp;



At its Federal Open Market Committee meeting on Feb. 1, the Fed opted for <a href="https://blockworks.co/news/federal-reserve-raises-interest-rates-25-bps">yet another interest rate increase</a> — the central bank’s eighth consecutive move.&nbsp;



​​“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” FOMC members wrote in a <a href="https://www.federalreserve.gov/monetarypolicy/files/monetary20230201a1.pdf" target="_blank" rel="noreferrer noopener">statement</a> at the end of their two-day policy meeting. 



In the weeks since the Fed’s meeting, economic data has not shown signs of hitting the key levels Fed Chair Jerome Powell has insisted upon seeing. Inflation remains persistent, with <a href="https://blockworks.co/news/inflation-cooled-in-january">economists fearing a plateau</a> may have been reached. And a hot labor market shows consumer spending is strong.&nbsp;



The Fed is next scheduled to meet in March and will release its latest interest rate decision on March 22. Until then, investors will be watching for jobless claims and inflation readings. 



As of Wednesday, futures markets were still pricing in a 76% chance of a 25 basis point increase in March, according to <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html" target="_blank" rel="noreferrer noopener">data</a> from CME Group.



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Rate Hikes Will Continue but Peak This Year, Fed Minutes Show

The Federal Reserve doubled down on its quantitative tightening strategy Wednesday, bumping interest rates by three-quarters of a percentage point for the fourth straight time.&nbsp;



The US central bank cited slowing consumer spending and production levels. The move marks the Fed’s sixth <a href="https://cms.blockworks.co/fed-raises-rates-75-basis-points-again/" target="_blank" rel="noreferrer noopener">consecutive</a> rate increase, a strategy it hopes will curb the highest inflation the country has seen in more than four decades.&nbsp;



“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” Federal Open Market Committee (FOMC) members wrote in a <a href="https://www.federalreserve.gov/monetarypolicy/files/monetary20221102a1.pdf" target="_blank" rel="noreferrer noopener">statement</a> at the end of their two-day policy meeting Wednesday. “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”



Overall economic activity appears to have slowed a bit, central bankers wrote, pointing especially to Russia’s ongoing invasion of Ukraine.&nbsp;



In June, when the central bank opted to raise rates 75 basis points for the first time this cycle, Fed Chair Jerome Powell called the move “<a href="https://cms.blockworks.co/powell-calls-feds-0-75-rate-increase-unusually-large-warns-of-slowing-economy/" target="_blank" rel="noreferrer noopener">unusually large</a>.”&nbsp; But if current conditions persist, higher increases could become the norm.&nbsp;



Crypto markets rose initially on the news, which analysts say was mostly priced in. Bitcoin edged higher 0.7%, while ether posted a 01% gain. The S&amp;P 500 and Nasdaq rallied 0.6% and 0.4%, respectively, immediately following the report, before paring back gains to lose 2.5% and 3.4%, respectively. 



&#8220;This 75bps rate hike was largely expected, and the markets have reacted accordingly,&#8221; said Steven McClurg, co-founder and chief investment officer at digital asset fund manager Valkyrie Investments. &#8220;Language in today’s announcement is also clear that the Fed does not want to limit themselves from raising another 50 or 75bps in December; and a target rate of five percent by the end of Q1 makes absolute sense.&#8221;



Tuesday’s Job Opening and Labor Turnover Survey (JOLTS) pushed stocks lower when data showed job openings rose in September.&nbsp;



“The JOLTS report implies that labor market tightness is not easing materially, and that means consistent wage pressures,” said Tom Essaye, founder of Sevens Report Research. “Consistent wage pressures support inflation, and since the Fed is only focused (for now) on inflation, that’s why JOLTS caused a drop in stocks.”



Markets were happy the Fed moved as anticipated, but related gains have historically been short-lived, Nicholas Colas, co-founder of DataTrek Research, said.&nbsp;



“Over the last three FOMC meetings, the S&amp;P 500 has averaged a +0.8 percent gain on the day of the announcement but lost those gains on the next trading day and been flat over the next week,” Colas said.&nbsp;



The Fed has made clear it’s prepared to continue raising interest rates as needed in an effort to stem record inflation in recent memory.&nbsp;



“Today, we’ve just moved, I think probably into the very, very lowest level of what might be restrictive. And certainly in my view, in the view of the committee, there’s a ways to go,” Powell said in September after the central bank locked in its third 75 basis point increase.



Futures markets were predicting a 51.7% chance of a 50 basis point increase in December, according to CME Group data.



“Markets want clarity,” Colas said. “ [Powell] can’t really provide that yet.”



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Cryptos, Stocks Post Short-lived Rally on Fourth Straight 0.75% Interest Rate Increase

<div id="highlights-block_62ed6fe7dfe35" class="highlights">
 <ul>
 <li>July’s jobs data crushed expectations</li>
 <li>Additional 75 basis point hikes, or more, are likely to come, analysts said</li>
 </ul>
 
</div>



Jobs data released Friday showed strong growth in the workforce and a decline in unemployment, suggesting a Federal Reserve policy pivot may not come in September.&nbsp;



The US economy added 528,000 jobs in July, more than doubling analysts’ expectations, according to <a href="https://www.bls.gov/news.release/pdf/empsit.pdf" target="_blank" rel="noreferrer noopener">data</a> from the Bureau of Labor Statistics. The unemployment rate also marginally dipped from 3.6% to 3.5% last month.&nbsp;



The Fed has kept an eye on labor statistics in recent months with the hope of gauging the odds of a recession. Strong jobs data will likely validate <a href="https://cms.blockworks.co/fed-raises-rates-75-basis-points-again/" target="_blank" rel="noreferrer noopener">Fed Chair Powell&#8217;s recent rate-hiking moves</a>, analysts said.&nbsp;



“Numbers this strong push back strongly against the idea that we’re close to peak inflation or peak hawkishness,” Tom Essaye, founder of Sevens Report Research, wrote in a note Friday. “The looming CPI report could keep any market fallout from being too intense (as hope for a soft CPI should support assets) but we’d still expect moderate declines.”



Stocks traded sideways Friday, while cryptocurrencies extended recent gains. The S&amp;P 500 was trading down 0.5% and the tech-heavy Nasdaq lost about 1% Friday late in the trading session. Bitcoin and ether gained 0.8% and 4.2%, respectively.&nbsp;



Friday’s jobs data comes a day after <a href="https://cms.blockworks.co/blackrock-to-offer-institutional-clients-crypto-via-coinbase/" target="_blank" rel="noreferrer noopener">asset manager BlackRock</a> said it would begin facilitating institutional cryptocurrency trading through Coinbase’s prime brokerage service. The exchange’s stock rallied <a href="https://cms.blockworks.co/coinbase-stock-has-ballooned-nearly-60-in-5-days/" target="_blank" rel="noreferrer noopener">more than 30%</a> Thursday before paring gains.&nbsp;



“There was, what has become, a rare good news headline for bitcoin on Thursday after Coinbase was chosen to provide crypto services to Blackrock&#8217;s clients,” Craig Erlam, a senior market analyst at OANDA, wrote Friday. “This is a big show of support for an asset class that&#8217;s had a frankly terrible year so far. But clearly, there remains strong demand for cryptos which bodes well for the future.”



It is hard to say how long the turnaround for COIN and the broader crypto market will last, analysts agreed, but on the whole, it shows the industry moving in a positive direction.&nbsp;



“While small and retail investors have been virtually shaken out of the space over the past few months, institutions are now making a comeback,” said Mikkel Mørch, executive director at digital asset investment fund ARK36. “Evidently, big players like BlackRock see neither the recent slump in prices nor the waves of bankruptcies among crypto companies as evidence that it’s over for cryptocurrencies or that there is something fundamentally wrong with this asset class.”



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As Crypto Rallies on Strong Jobs Data, Analysts Speculate on Powell’s Next Move

David Canellis

<div id="highlights-block_62a8e9e6b31d4" class="highlights">
 <ul>
 <li>“Macro is driving problems with Celsius rather than Celsius driving problems for the market,” Arca’s Dorman said</li>
 <li>Scaramucci is still long-term bullish but warned crypto investors must stomach current volatility</li>
 </ul>
 
</div>



Crypto markets are squarely in the toilet. Bitcoin is trading around $22,000 — almost 70% below its November all-time high. Ether, somehow, has fared even worse.



Collapsing lending platform Celsius makes for an easy scapegoat for the widespread carnage. Rumors of its insolvency preceded Celsius&#8217; native token, CEL, dumping 50% this month. The platform has since <a href="https://cms.blockworks.co/celsius-lending-platform-suspends-withdrawals-and-transfers/" target="_blank" rel="noreferrer noopener">locked</a> users out of their accounts while it wrangles various leveraged decentralized finance (DeFi) positions.



Just weeks ago, markets reeled from the Terra ecosystem’s <a href="https://cms.blockworks.co/?s=terra" target="_blank" rel="noreferrer noopener">implosion</a>, which all but wiped out the ninth and 10th largest tokens by market capitalization and some $40 billion in representative value along with it.&nbsp;



But macroeconomic factors such as inflation, rate hikes and the war in Ukraine have pushed the tech-heavy Nasdaq and the broader S&amp;P 500 down 30% and 20%, respectively, this year as the US flirts with a recession. Commodities, meanwhile, are surging, with benchmark index S&amp;P GSCI up more than 40% year to date.&nbsp;



It’s clear investors are moving from “risky” assets such as crypto and tech stocks into more recession-resistant plays.&nbsp;



It all presents a classic chicken-and-egg problem: Did Celsius trigger cryptocurrency to shed more than 25% from its collective value over the past week, or are investors simply de-risking across the board?



<h3 class="wp-block-heading">The Great De-risking</h3>



Anthony Scaramucci, managing partner at hedge fund of funds SkyBridge Capital, told Blockworks he wasn’t surprised by sinking crypto prices. SkyBridge offers an institutional bitcoin fund, as well as other vehicles designed to offer limited partners crypto exposure.&nbsp;



“You have a risk-off market, an oil crisis born from the current war environment, and you have the vestiges of the pandemic,” Scaramucci said. “As well, we may not be feeling it as much in Europe and the United States, but they&#8217;re going through ‘zero Covid’ lockdown strategies in China, and that&#8217;s having a huge effect on the supply chain.”



The precarious macro landscape — combined with too much money in traders’ pockets as a result of US stimulus measures — has led to big inflation numbers, according to Scaramucci, causing correlation across multiple asset classes, as with tech stocks and bitcoin.&nbsp;



“Bitcoin, in a buoyant market, goes up more than the market,” he said. “In a downtrodden, depressed market, it&#8217;s going to go down more.”



The financier posited rising inflation is not likely systemic or secular, but born directly from the aforementioned ongoing crises.&nbsp;



“A year from now, we could very well be out of the pandemic, and the inflation numbers could actually trend down,” added Scaramucci, who this week <a href="https://twitter.com/SquawkCNBC/status/1536314248539815936" target="_blank" rel="noreferrer noopener">told</a> CNBC that SkyBridge had just bought more bitcoin and ether. “The future of the web is going to include these decentralized technologies — I&#8217;m incredibly long-term bullish. You just have to have the stomach for this level of volatility right now.”



<h3 class="wp-block-heading">Macro factors exposed unsustainable digital assets</h3>



Jeff Dorman, chief investment officer at crypto investment firm Arca, said the dampened macro environment has driven some participants to take on additional risk.&nbsp;



“I think macro is driving problems with Celsius, rather than Celsius driving problems for the market,” Dorman said. “If Bob gives me one bitcoin, (BTC) and I pay him 2% interest for that, and then I lend it to Alice, who pays me 3% — that’s easy. I have a one-for-one asset liability match. And I’m making 1% net interest margin on the spread,” Dorman said.



Problems arise when Bob gives five BTC, but Alice only wants to borrow one. The lender still has to pay Bob 2% on his five BTC while Alice is only paying the lender 3% on one.



“Now, I have to figure out how to make up that yield,” Dorman said. “So, what am I going to do? I&#8217;m gonna go do risky hedge fund shit to make up that yield and hope that nobody knows what I&#8217;m doing — because nobody&#8217;s paying attention, because it&#8217;s unregulated. That’s where these companies get in trouble: They&#8217;re basically operating like unregistered hedge funds.&#8221;



But Dorman rejected the current zeitgeist that demands investors lump all digital assets together to consider them one giant risk trade, with bitcoin the least risky, outside of stablecoins.



Believing that bitcoin is king and everything else is an altcoin is an “archaic way of thinking about this market,” he said, the equivalent of labeling the S&amp;P 500 the only ETF and everything else a lesser, alternative ETF.



Crypto investors might wonder: Absent an exit from digital asset markets entirely, what does de-risking look like?



<h3 class="wp-block-heading">Defensive digital assets</h3>



Of course, there are stablecoins, some riskier than others. (SkyBridge’s Scaramucci said Circle’s USD Coin and Tether held up remarkably well throughout the recent chaos, with both firms processing billions of dollars worth of redemptions without downtime.)



Scaramucci suggested investors stay away from leverage, saying: “Stay unlevered. Be long term in your orientation. What&#8217;s caused the upside surprises and the downside surprises is the leverage in the system.”



To Arca’s Dorman, persistent price correlation in crypto is the result of an immature investor class, rather than anything inherent to digital assets.



“In theory, bitcoin has nothing to do with Axie Infinity, which has nothing to do with BNB,” Dorman said. “But if one guy owns all three, and they&#8217;re using those three as collateral to do something, they&#8217;re going to be a forced seller of all three at the same time.”



Crypto exchange tokens should be resistant to market downturns in a mature market (there’s been some <a href="https://cms.blockworks.co/native-crypto-exchange-tokens-hint-at-first-sign-of-broader-market-recovery/" target="_blank" rel="noreferrer noopener">indication</a> already), while native assets for blockchain-powered games should even <a href="https://cms.blockworks.co/crypto-markets-have-tanked-but-not-blockchain-based-gaming/" target="_blank" rel="noreferrer noopener">prove resilient</a> during a recession, Dorman said — as long as the tokens are structured with sustainability in mind.



“In the digital asset world, what are the areas where investors won&#8217;t stop what they&#8217;re doing just because of a bad market or because of a recession? Gamers don&#8217;t stop gaming because of recession,” he said. “If anything, they actually start gaming more, because they have more time on their hands and they&#8217;re not working. Gaming, in theory, should be a defensive sector.”



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