August 21, 2022|Commentary

Commentary from the Desk: August 31, 2022


This week, we are closely following:

**1. Reactions and outcomes from Jackson Hole
2. The Merge continues to take center stage


2. Fed: Sorry, no pivot

Investors entered the weekend looking for guidance from the Fed on the state of interest rate hikes. They got the guidance, but unfortunately, the outcome wasn’t what they hoped for: there was no pivot.

On Friday, Fed Chair Jerome Powell’s speech at Jackson Hole continued to underscore the current adage that risk assets are being steered by the macro economy. He struck an exceptionally hawkish tone and warned that “pain to households and businesses” would be the “unfortunate costs of reducing inflation.”

From Powell’s remarks:

“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. At our most recent meeting in July, the FOMC raised the target range for the federal funds rate to 2.25 to 2.5 percent, which is in the Summary of Economic Projection's (SEP) range of estimates of where the federal funds rate is projected to settle in the longer run. In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.”

This was definitely not what the market wanted to hear:

  • The Nasdaq slid 5% following the speech (the worst daily performance since June) and equities are now in negative territory for the month of August.
  • The yield-curve remains inverted, as it has been since early July, with the 2-year sitting at 3.44 and the 10-year sitting at 3.117
  • Risk assets continued to retrace following Powell’s remarks with ETH falling as low as $1,430 on Sunday, which is more than 25% off its 30-day high.

Another timely indicator: the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred gauge of inflation, came in at 0.1% in July signaling that consumer spending is starting to slow – however, it’s still too high for the Fed to consider a pivot.

On the back of these recent events, the probability of a 75-basis point rate hike in September is 68.5% according to CME FedWatch, up from 28% one month ago.

Looking ahead this week, we have more macro data and commentary we’ll be tracking around:

  • Atlanta Fed President Raphael Bostic speech: Thursday at 3:30 PM ET
  • Non-farm Payrolls, Unemployment rate: Friday at 8:30 AM ET

2. Marching to The Merge

  • Aside from Powell’s remarks, we continue to closely follow the progress of the Merge, which is estimated to occur within the next two weeks, with September 14th or 15th as the target date. We published our take last week, which you can read here.
  • Our long-term view: this upgrade has high impact
    • The Ethereum network will have better economic incentives and more validators, setting the foundation for future scaling upgrades.
    • ETH issuance can potentially become deflationary in times of high demand.
    • Sell-pressure from miners, who typically sell 80-90% of their rewards to cover high energy costs, is expected to drop considerably due to the elimination of overhead and energy costs.
    • Overall, even absent a material pickup in new speculative demand, we see the market transitioning from flat/oversupplied to materially undersupplied.

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