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Rates On The Rise
Yesterday’s initial jobless claims data release came in below expectations, signaling a stronger labor market which is another “good news is bad news” signpost.
We can see some of these developments play out via the Eurodollar Futures curve where the market’s expected federal funds rate is steepening (more rate hikes), now expected to be over 4% in the second half of 2023. That’s in line with the Federal Reserve’s own projections that they’ve told the market:
Neal Kashkari’s recent Oddlots appearance are clear examples of this.
Inflationary Bear Market
Comparisons to 2008 are misguided, due to the different inflationary outlook and macroeconomic backdrop.
2008 was a credit-financed boom turned deflationary bust. 2022 is an inflationary bear market, where both equities and bonds have sold off in tandem. Much of the legacy financial and portfolio allocation is built upon the assumption that bonds and stocks won’t carry a positive correlation to the downside, and portfolio managers “diversify” accordingly.
Equities and bonds have been positively correlated over the last year during a period where equities went down. This is a first for the post quantitative easing fiat currency era.
The positive correlation to the downside occurred again yesterday, as bonds got smoked on a massive move to the downside. At the time of writing U.S. Treasury bond futures are -1.99% for an asset that traded with a volatility of 15.54% over the last month.