Cypher Weekly Updates: Jan 15th 2023

Market Condition Updates

A playbook: how to trade the recession expectations in 1H23:

On the discount rate side: As the US inflation data appear to have peaked, rate hiking cycle comes near its end, which provides support for long-duration assets. People are now expecting a 25bp hike in the Jan. FOMC meeting. The probability priced in by swap traders for a 50 bp hike on Feb 1 dropped from ~25% to ~5% following the CPI release. (Source: CME Group, ).

On the growth side:

In the US: the concurrent data on the US economy does not show weakness and the job market remains very tight (Source: Atlanta Fed GDPNow).

In the world: China is reopening and its factories coming back to capacity after the initial COVID-19 shock, judging by the country’s mobility data (Source: Bloomberg).The warmer-than-expected winter in Europe also mitigated the energy crisis the continent facing (Source: Morgan Stanley). 

The key contention is on the outlook: some leading indicators are pointing to slow down in economic activities in the US sometimes this year, but not the coincident data. So what drives the market now is recession expectation and how the Fed reacts to it. The market will, accordingly, shift its focus from “higher” to the second half of Powell’s new mantra, “longer.”

• Trading on recession expectations might provide support for risk assets, especially long duration assets as

Expectation on rate hiking comes down, as CPI peaked and the Fed pauses rate hikes sometimes in 1H23: this helps discount rate

Company earnings and economic data from 4Q22 turned out better than feared, we might hear the

Market might again rally on recession expectation: This peak-inflation rally happened last June, when core inflation (MoM) appeared to have rolled over and the market was betting on an early pause in the hiking cycle. $QQQ rallied ~25% before the resilience in core service inflation and a hawkish Powell at Jackson Hole meeting smashed such hopium.

If you decide to play it, however, remember that the rally could be violent but fragile:

• Historically, the market never bottomed until after the Fed pivoted (not paused). When the market rallied during pauses, the downturn afterwards were usually drastic. Investors are advised to be nimble whether you want to be aggressive or patient.

Crypto Market Updates

The crypto market has demonstrated great momentum leading up to, and post, the first MoM negative CPI print. We are glad to see majors (as what can best represent the market sentiment at this time, $BTC, $ETH, $BNB, $SOL) broke major resistance with volume.

• Bitcoin neatly broke out the key ~$18.5k level with ascending volume, in a clear liquidation-driven melt-up.

$ETH’s price action was also neat, but lacked volume relative to BTC. 

$SOL, one of the most beaten-down L1s, successfully broke-up the ~$21.5 resistance level w/ decent volume and a successful retest.

Price action in crypto seems to be leading this cycle, while it was lagging last time. How do we make of it? Last cycle in 2018 when the Fed expressed concerns and highlighted “risk management,” $QQQ (NASDAQ 100 ETF) both fell and recovered before BTC prices reacted to the changes in the macro condition (please refer to last week’s update for details).