Is this the Bottom?

Why Pump on Bad Macro News?

This was probably the biggest question going into the weekend. The crushing 9.1% US inflation data print should have meant more pain for equities and crypto markets, but we saw a relief pump instead. We explore a few angles of why this occurred.

Messaging from Fed and US Government

In the run-up to the release of the inflation data, there was already an emerging narrative coming from US Government officials that the June CPI data was likely already “out of date” and did not reflect the effects of monetary tightening policies and falling energy commodity prices. This narrative was reiterated by President Biden post-release.

Following the outsized inflation data print, there were immediate fears that the Fed would turn even more hawkish during the next FOMC meeting. At one point, markets predicted a ~70% chance of a 100bps rate hike. 

Source: CME

However, Fed officials quickly came out over the next few days to allay these fears and manage expectations for the impending rate hike. This was helped by a stronger than expected advance monthly sales data for retail and food services, which was released on Friday. For now, the market is predicting a ~70% chance of a 75bps rate hike and a <30% chance of a 100bps rate hike for next week’s meeting.

Have Commodities Really Peaked?

Source: TradingView

The S&P GSCI is a key commodity index that covers a wide range of goods, some of which form the base components for the CPI. However, since the CPI is a lagging indicator, the 9.1% rise for June 2022 should be read against the current macro-environment in July. Commodities peaked in early June and have since plummeted from their monthly high ($825) on June 8 to $677 at the time of writing.

Commodities have been steadily rising since the onset of the pandemic. As governments turned on the printer, the short-term increase in demand created an artificial layer of support while production was curbed. However, as the pandemic subsides, production has become overdrive as economies restart and pick up where they left off, leading to more demand for raw materials. Russia's war in Ukraine only further exacerbated supply disruptions.

However, now that everything has slowed, fears of a stagnating economy are leading to price drops across the board. Concerns about the inability of the Fed to manage the highest inflation in four decades without entering a recession are growing rapidly. It does not help either that the strength of the US dollar is making it expensive to buy raw materials priced in USD.

Markets have clearly overreacted in more ways than one. War drove commodity prices to ATHs but has now since dropped to pre-war levels, despite the continued disruption of the supply chain. Oil, in particular, has remained a huge concern, especially for the EU, which has to deal with the consequences of retaliatory action from Russia over sanctions. 

Soft Estimate of Merge Date and Other “Local” Token Events

ETH, which had dumped more than BTC in percentage terms over the first two quarters of the year, saw an outsized pump this weekend amidst news of a successful Sepolia Merge and the core devs beginning to discuss a soft estimate of a date for mainnet Merge, currently estimated at September 19 if all goes well. 

This merge timeline isn't final, but it's extremely exciting to see it coming together. Please regard this as a planning timeline and look out for official announcements!https://t.co/ttutBceZ21 pic.twitter.com/MY8VFOv0SI

— superphiz.eth 🦇🔊🐼 (@superphiz) July 14, 2022

This positive news boosted all other tokens related to the Merge, most notably LDO. Major DeFi tokens on Ethereum, such as Aave, CRV, CVX, and UNI, also saw gains. At the same time, ETC also pumped on this news amidst expectations that existing ETH miners will accelerate their migration to ETC with the impending Merge. 

As for MATIC, the price has benefited from a recent string of positive announcements for Polygon, such as:

• Previous Terra projects migrating over to Polygon

• Reddit launching an NFT Marketplace on Polygon for online avatars

• Polygon is the only blockchain to be selected for the 2022 Disney Accelerator

• Rumor of impending significant announcement

As of the time of writing, bullish sentiment surrounding BTC and ETH has also started to ripple out to alt-L1s, with AVAX, SOL, and ALGO recording sizable gains.

Why a Bear Market Would Probably Continue 

Firstly, the fact remains that the Fed hasn’t managed to tame inflation yet. Even if we go along with their narrative that the latest inflation data has likely peaked and we start to see a tapering next month, the Fed would probably want to see a trend of inflation moderating, i.e. data over a few months, before even beginning to consider easing off the monetary handbrake. Also, 9.1% is a long long way away from the Fed’s long-run inflation target of 2%.

While the Fed and US Government officials will point to the fact that commodity prices have moderated over the last few weeks as signs of positive progress from monetary tightening, do take note as we mentioned above, that this has mainly been a result of lessening demand as companies start to project slower growth, and the strengthening of the US dollar, which are making commodities more expensive. The root cause of the spike in the first place, i.e. significantly reduced supply of key commodities and supply-chain challenges stemming from the Russian-Ukraine war, has not been resolved, and looks unlikely to be resolved anytime soon. While global leaders scramble to source alternative sources of commodities, this is merely a stopgap measure given the long lead times it takes to spin up new commodity supplies, e.g. planting more crops, turning back on oil wells, power plants, etc. Without stable commodity supplies, it’d be difficult for companies to return to more growth.

A lot of the macro narrative tends to focus on the US, but other major economies are also facing significant challenges. Europe has just started trying to combat inflation, and the ECB has a tall task ahead given that their economy doesn't seem as robust as the US, and also has a strong dependence on Russian / Ukrainian commodities. Elsewhere in Asia, Japan is struggling with a weak yen and inflation as the Bank of Japan (BoJ) continues its Yield Curve Control (YCC) experiment. China is still struggling to deal with the effects of COVID-19, which has significantly dented its economy. While the Chinese Government is still targeting 5.5% GDP growth this year, all the latest indicators seem to point words a slowing economy, despite the stimulus already being poured in by the government. All this makes a simultaneous global economic recovery highly unlikely.

Finally, bull markets need bullish narratives, and a new bullish narrative is required for the crypto market to turn. We had that with DeFi Summer in 2020 and NFT Summer in 2021, which captured the imagination of users and investors on what was possible on blockchains. This is why there has been continued conversations about finding more practical use cases for blockchains beyond just yield farming and PFPs. While investors may be impatient and just want the market to flip from bear to bull ASAP, it's important to note that building great projects take time, and when the next breakthrough hit for crypto comes, that’s when we’ll see a resurgence.  

Things to Watch Out for This Week

Macro data coming out this week include

Tuesday, June 19: Europe June CPI

Wednesday, June 20: UK June CPI, US June Existing Home Sales, Japan BoJ Outlook Report

Thursday, June 21: ECB Monetary Policy Statement & Interest Rate Decision

On the stock market front, it’s Q2 Earnings Season, and with major PLCs publishing earnings this upcoming week, it’ll give investors an idea of the state of the US economy. Here are some selected Earnings Reports to watch out for:

This article was produced in collaboration with Zhong Yang Chan. You can follow him on Twitter here.