Hive Intelligence Report: Has Market Pricing Pulled Back

Every week, we bring together our community of macro experts to discuss the latest market developments. In this piece, we distil the insights from our conversations up to 23 May. These are views from our network rather than the views of the Macro Hive research team. ‘[Day]’ indicates the day the comment was made.

A Conversation on Fed Pricing and Market Focus

This conversation was sparked by a piece by John Authers (‘Has the Inflationary Wave Broken? Expect More’ | Bloomberg)

• Member One: I’m not sure the breakeven decline reflects a dramatic change in the inflation fundamentals, or simply flight to quality trades. Five-year breakeven rates declined by about 80bps from its peak at the end of March, while five-year real rates sold off by about the same amount. The real rate sell-off reflects the expected Federal Reserve (Fed) hikes and balance sheet unwind. Meanwhile, breakevens are acting like a slack variable representing risk off/on trades.
• Member Two: I think the dynamic between breakevens declining at the same time as real rates rising reflects market expectations that the Fed will overtighten. Thus, a risk off environment since mid-March. This process started early after the March FOMC. So, now, naturally, you see some of those hikes get taken out which should give some support to risk and weaken the dollar. Unless we get another inflation surprise. Bill Ackamn had a Twitter thread claiming the opposite, in fairness, that we have had a risk-off environment because of fears of rising inflation.
• Member One: I am not seeing a significant decline in the number of hikes expected during the remainder of this year or next. At best half a hike less. That’s noise.

• Member Two: Fed Funds (FF) and Eurodollar (ED) futures have priced out one full hike less by the end of the year compared to the peak at the beginning of May. In Europe, one more hike was added into yearend during the same period.
• Member One: I am not sure that its so clear in the WIRP function in Bloomberg. There is a lot of noise in that number since the last ex-hike date. It seems like net of noise; it has subtracted 0.5 hikes.
• Member Two: The point is, the focus has shifted slightly to growth/recession from inflation. I mean, the ED curve peaks in H2 next year, followed by 50bps of cuts into 2025. EDM3 has rallied 35bps in the past month. The ED curve now versus one-month has a really strange shape: lower terminal rate next year but higher longer term terminal rate versus one month ago.

Trading the USD

This conversation was sparked by a piece on Reuters (As U.S. economy’s exceptionalism fades, so does the dollar | Reuters)

• Member One: Is this the sign of a tactical USD low? I continue to think we are heading towards the biggest external USD demand shock we have ever seen. And these are the narratives to create good entry.
• Member Two: There is a lot of enthusiasm for lower USD. I really don’t think people have made much being long (discretionary). Model funds have done well though.
• Member One: Financial conditions continue the trend, but we will get rotational moves between the factors, depending on the short-term market narrative. I suspect we are close to finishing the inflation top hopes.
• Member Three: I think you [Member One] are right, there are too many underlying structural issues that are not getting fixed or changed.

US-Taiwan

Blinken: The US does not support Taiwan’s independence

• This is the same stance held since the 1970s. The US supports the status quo on Taiwan. The reason he has to repeat this message is that China always claims the US is pushing for independence, which it never has. The same thing happened with Hong Kong.

Didn’t Biden say they would act militarily on Taiwan?

• He did. But that doesn’t mean the US supports independence. The US would act militarily if China breaks the status quo, i.e., if it invaded Taiwan.

China

Improving consumption

• This is important from Shenzhen. Finally, some practical steps to improve consumption by introducing various subsidies. But it falls short of permanently improving households’ purchasing power through the income channel.
• This is a direct response, it seems, to Premier Li Keqiang’s warning at the emergency meeting that the economy is faring worse than in 2020.

Cryptocurrency

A potential negative of Ethereum

• On one basis it’s easy to be bullish Ethereum. That is, if you don’t actually use it, but see charts of all the developers on it etc, programmable money, then it makes sense and sounds good.
• But, if you use it, it sucks. At least for lower value transactions. If you’re buying a $200k NFT, then fine, you wont care about 100-200 gas. Or if you’re playing $25m in USDC, 100-200 gas doesn’t matter. But for smaller transactions it doesn’t work.

Migration to Proof-of-Stake is not going to be as easy as they say

• It’s a big undertaking if you really think about it. Its migrating a completely live system to a completely new adventure. So certainly some risk around that.

Trade Ideas and Themes

Oil

• One of our network has met with a few macro hedge funds who are in favour of $130-150/bbl oil. Their thesis is that oil is a supply side story and will keep on rising even with slower growth. They also note that there is speculation that there’s a fiscal + QE program coming in China.

Comments on Carbon Credit Restrictions from a Broker

• ‘My views on trading restrictions is that it is unlikely to be implemented and even if it is, blocking registry accounts will be of no consequence to “speculators” since they all transact via derivative markets.’

Read, Listen, and Watch

Read

• Why the British state is a magic money tree | The New Statesman
• How Goodhart’s Law Can Help Us Understand How We Got Here | The Felder Report
• Hedge fund manager Alan Howard explains why he’s investing across the entire crypto ecosystem | The Block
• The Hitchhiker’s Guide to Ethereum
• Astronomers Discover ‘Deep Structure’ Under Moon’s Largest Crater | The Byte
• What you need to know: Scope 1, 2 and 3 emissions | Deloitte

Listen

• Bill Nelson on How the Fed Fell Behind the Curve | Macro Musings
• Why a recession isn’t coming
• WW3 is just the beginning ft. Peter Zeihan | Top Traders Unplugged
• Central Banking in a De-Globalized World ft. Joseph Wang | Top Traders Unplugged

Watch

• Final Stock Market Low In Or Painful 2008-Like Plunge To Come? | CiovaccoCapital
• E69: Elon Musk on Twitter’s bot problem, SpaceX’s grand plan, Tesla stories, Giga Texas & more | All-In Podcast (YouTube)

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)