Connecting the Dots
Episode 56 - Is Fed QE Around the Corner?
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Onto the newsletter. Here’s what you’re getting this week:
Macro Update: Institutional adoption has arrived as the spot ETF is approved. Liquidity injection from the falling RRP keeps driving Nasdaq/SPX higher and the market is yet to factor in the end of QT and the return to balance sheet expansion as the liquidity hose is necessarily switched back on.
Crypto Native News: Circle files for IPO, bitcoin ETF’s to come in Asia,
Institutional News: The CFTC releases a DeFi report, BOE Governor Bailey speak on crypto at TSC, Standard Chartered releases their latest crypto report and Larry Fink calls for an Ethereum ETF.
Charts of the Week: RRP is falling sharply and Kaiko releases its token liquidity rankings.
Top Jobs in Crypto: Featuring Wirex, Options Group Recruiters, FTC, Revolut, Numeus and Circle.
Macro Update
This is where we connect the dots between macro and crypto.
Is Fed QE round the corner?
Macro took a back seat this week as we finally got the much vaunted spot BTC ETF approval. This for us was a done deal the moment Blackrock filed for a spot ETF. What Larry Fink wants, he tends to get and we expect the same outcome with the ETH spot ETF approval. Afterall, the SEC’s opposition was little more than political, especially once they approved the BTC futures ETF, it made little sense to deny a spot BTC ETF.
This undoubtedly is a landmark moment for Bitcoin and the wider crypto industry. Major asset managers giving legitimacy to Bitcoin as an asset class and providing access via traditional platforms will unlock and drive potentially trillions of dollars of capital into the ecosystem. The moment of institutional adoption has arrived 🚀
The initial reaction has looked like a classic “buy the rumour, sell the fact” redux as speculative money which front ran the announcement took profit and short term leveraged longs got wiped out. Yet we view this announcement as unquestionably positive for BTC and over the coming weeks and months, induces a positive demand shock which will meet with the negative supply shock of the halvening. This is a super powerful demand/supply dynamic which, ceteris paribus, will take us to new record highs.
On to the macro and a lighter data calendar last week was headlined by US CPI and PPI. US CPI came in a touch stronger than expected at 3.4 YoY, up from 3.1% prior due to base effects. The all important core however continued to tick lower at 3.9%, down from 4% and the slowest pace since mid 2021. Meanwhile, offsetting any disappointment with the “hotter” CPI print, PPI fell for the third consecutive month at -0.1% bringing a weaker headline YoY print of 1% with core PPI at 1.8%, down from 2%.
Net net, little to change the outlook for the Fed and the market continues to favour a March rate cut which stands at around 70% probability. Significantly, 2yr US yields broke lower, to the lowest levels since May 2023, closing at 4.14%. 10yr yields closing 10bps lower on the week and we continue to think have a long way to fall as the market adjusts to a lower Fed funds rate profile and continued disinflation. This is a positive tailwind for crypto.
Elsewhere, the ECB laid the groundwork for their coming “dovish pivot” releasing a working paper laying blame to inflation on supply chain disruptions and the energy price shock, with demand barely positive. In our view, the ECB is further behind the curve than the Fed and will be forced to cut rates sharply this year. Meanwhile, our non-consensus view on the Bank of Japan, who we don’t expect to “normalise” policy in any meaningful way, gained traction as wage growth slowed sharply in November, whilst core CPI came in at 2.1%, the lowest level since June 2022 and down from 2.3%.
Global disinflationary winds are blowing hard. Rather than a return to the 70’s style inflation that the macro bears seem to growl so loudly about, it feels to us we’re normalizing back to the disinflationary world we’ve experienced since the 2008 Financial Crisis. That will require substantially lower rates from here.
Perhaps quite significantly, talk around the potential taper and end of Quantitative Tightening (QT) which we’ve been speaking about for several weeks now has started to filter into the market narrative. In particular, following comments from the Fed, markets are catching up with the importance of the falling Reverse Repo Facility (RRP) as the determining factor as to when the Fed ends the balance sheet runoff (see episode 54, “The Powell Pivot” for explanation of why RRP falling will lead to end of QT.)
The RRP facility on Friday saw 603bn of usage, down $94bn on the week. That’s another $94bn cash injection into markets. At this rate, the RRP will be at zero by the end of Feb. The Fed are going to have to start tapering QT soon. Moreover, whilst the end of QT will relieve some debt supply pressure as the US debt continues to spiral out of control, with the RRP depleted, the Fed will ultimately need to support the T-bill market.
We think then, that risk continues to perform very well as the liquidity injection from the falling RRP keeps driving Nasdaq/SPX higher. Once that RRP falls to zero however, expect some choppy risk waters that ultimately will require some form of Fed intervention akin to the “not QE QE” which they were forced to enact in 2019 when the repo funding market came under strain. The Fed are aware of this looming event on the horizon and in our opinion will try to get ahead of it, by tapering QT and lowering rates.
This is why they “surprised” the market with December’s “pivot.” Don’t mistake thinking the Fed policy is solely about the economy and inflation. Their main role is to be the liquidity provider of last resort. With inflation “under control,” the Fed is now focused on dealing with a looming liquidity crisis and the need to fund the spiralling US deficit.
The market has begun to price the lower rate profile of the Fed and major central banks. However, the market is yet to factor in the end of QT and the return to balance sheet expansion as the liquidity hose is necessarily switched back on. This dynamic is rocket fuel for crypto and combined with the halvening and now spot BTC ETF demand shock, underpins our expectation for explosive gains in 2024 and for Bitcoin to hit new record highs. Stars are aligning perfectly.
Native News
Key news from the crypto native space this week.
Circle Internet Financial, the company behind stablecoin USDC, said on Thursday that it had confidentially filed for a U.S. initial public offering as part of plans to become a publicly-traded company. Circle did not disclose the number of shares it plans to sell or the proposed price range for its new IPO filing. Circle controls the issuance and governance of USDC, a cryptocurrency pegged to the U.S. dollar. Circle said the IPO is expected to take place after the Securities and Exchange Commission completes its review process, subject to market and other conditions.
Livio Weng, chief operating officer of Hong Kong licensed crypto exchange HashKey, said that about ten fund companies in Hong Kong have begun exploring the launch of potential spot crypto exchange-traded funds. About seven or eight of them have already been in contact with Hong Kong’s Securities and Futures Commission and have formed a team to start designing the investment products. HashKey, which received a license from the SFC to offer retail crypto trading services in August, said that it may participate in potential spot crypto ETFs in Hong Kong through two main aspects — engaging in crypto transactions associated with ETFs and providing crypto custody service.
Institutional Corner
Top stories from the big institutions
The Commodity Futures Trading Commission’s (CFTC) Digital Assets and Blockchain Technology Subcommittee of the Technology Advisory Committee (TAC) released a report titled Decentralised Finance. CFTC Commissioner Christy Goldsmith Romero, sponsor of the TAC, said “From the time that I arrived at the CFTC, I have played a steady drumbeat that we need to study emerging issues related to digital assets or we could risk harmful unintended consequences. This report is the result of the hard work of the TAC Digital Assets and Blockchain subcommittee to study DeFi. It is intended to help inform ongoing policy debates in the U.S. Congress, state legislatures, and regulators including the CFTC. It provides a foundational understanding of DeFi. It finds that the benefits and risks of DeFi depend significantly on the design and features of specific DeFi systems. However, most DeFi systems are not completely centralised or decentralised, but instead operate on a spectrum. I hope that this report can serve as a first step to facilitate a dialogue between policymakers and industry particularly because DeFi remains at the centre of illicit finance risks, cyber hacks and theft.” A link to the full CFTC report HERE.
Bank of England Governor Andrew Bailey spoke at the UK Parliament Treasury Select Committee on Wednesday. Some of the conversation turned to crypto where Bailey said the integration of cryptocurrencies into the global financial system has stalled as the coins struggle to win over regulators and the public. He added “My own sense is that it’s not taking off as what I might call a core financial service,” “For instance, using Bitcoin as a payments method is pretty inefficient.” Though he also said that regulators need to “keep a very close eye” on the market but added that the cryptocurrency market’s integration into mainstream finance has not “kept the momentum.”
Standard Chartered Bank released their latest crypto research report. The report said “If ETF-related inflows materialise as we expect, we think an end-2025 level closer to [$200,000] is possible.” The report author Geoff Kendrick said the 2025 prediction is consistent with their previous estimates of $100,000 by the end of 2024. They see the price gains materialising quicker for Bitcoin than for Gold as the market matures quicker. They look for $50-100bn inflows to the Bitcoin ETF’s in 2024. A link to the summary page of the report can be found HERE.
Speaking in an interview with CNBC on Friday, BlackRock CEO Larry Fink said “I see value in having an Ethereum ETF”. He added that “these are just stepping stones towards tokenisation and I really do believe this is where were going to be going.” Fink also added that he did not see cryptocurrency as a currency but as an asset class, referring specifically to bitcoin as “an asset class that protects you” against fears of political risk.
Charts of the Week
Because charts are just as important as macro.
RRP falling sharply, will this trigger a return to QE ? Hat tip to Imran Lahka for the chart.
Kaiko Data Token liquidity Rankings for Q4 2023. Naturally BTC and ETH top of the pile, but big rise for AVAX.
Top Jobs in Crypto
Well, we all want to work in Crypto don’t we. Here’s a bit of help on your job search!
Head of Private Wealth and VIP Services - Crypto at Wirex
Crypto Market Making PM via Options Group Recruiters
Senior Crypto Policy Advisors at the FCA
Head of Product Crypto Exchange at Revolut
Business Compliance Manager for Crypto at Revolut
Senior Trading Infrastructure Engineer at Numeus
Business Development Director at Circle
DISCLAIMER: The content in this newsletter is not financial advice. This newsletter is strictly educational and is not investment advice or a recommendation to buy or sell any assets or to make any financial decisions. Crypto markets are volatile, please be careful and do your own research.