Hive Intelligence Report: The Fed to Hike 75bps? And the Implications of the Sinn Fein Election Victory

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 9 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.

US

Is the supply-side driving inflation?

• Demand is extremely strong. If this was all a supply-side story we wouldn’t be seeing employment figures and wage figures which we are witnessing. A factory which cannot fulfill orders because it cannot get parts is not hiring extra people! Demand is a big part of this.
• Demand is a part of this in the US, you cannot deny it, but the same kind of direct stimulus to the consumer didn’t happen outside of the US yet, inflation is a global phenomenon. At the core of it are supply-side issues. In the US, one of the main reasons for low unemployment is the collapse of participation – still below the pre-pandemic level.
• On an anecdotal level, consider things you consumer, services for example, in the UK that are not impacted by the supply-side issues, the owners of these companies are telling you that they have never been this busy. People are so busy; they are looking to expand yet there are no workers.

The USD Backdrop

• US is stumbling into a stagflationary environment, aka the UK. The NFP was not strong by any means. Europe probably as well. UK has been leading the pack since last fall. The Fed acknowledges that in the July FOMC. Stagflationary environments are not good for currencies as GBP has already attested to . Not sure what that means for USD given there is no alternative.
• You can suspect that we get the move first in stocks, which would provide good entry points for USD shorts.

Will the Fed hike by 75bps? [Saturday]

• We are only one disappointing CPI print away from a 75bp hike. This can turn on a dime.
• One of our members was not so sure. The Fed have set the bar high for 75bps for June or July: an acceleration of inflation. And they haven’t told us precisely what this means. So, their reaction to the CPI this week is key. The thing the Fed hates more than inflation is being proven wrong. So, they will cling to their plan until they really are forced to let go of it. And three months is probably not long enough for the evidence that they are wrong to be so overwhelming  that they change their plans. The Waller and Bullard pushback is pathetic. With inflation accelerating of course the market is bound to expect a higher Fed Funds Rate. The US is not that close to a banana republic. Yet, the real test of market credibility is long-term break-evens. And they show the Fed is falling further behind the curve. That Waller and Bullard can only produce such a weak pushback adds to the conviction that the Fed has ‘lost the plot’.
• But July FOMC is 78% [as of Saturday] for 75bps again. Powell is losing the respect of the markets. One big CPI hit will bring 75bps back.
• Another of our network things, conditional on 50bps in June, they see another 50bps at the following meeting. One thing that has kept Powell awake at night, for years, is the relationship between asset prices and the economy. Bernanke, being an economist, had resolved that question (to himself) in his 2010 Jackson Hole speech. Yes, there is a relationship, probably small… something like the ‘Pigou effect’ that we learnt in Econ 101. But Powell may think the relationship is larger, because empirically there has been a lot of correlation. Especially between high yield spreads and the economy. But correlation is not causation, something that Powell, a lawyer, may recognise. He will be more sensitive to wealth destruction effect of rate hikes than most people think.

UK and Ireland

What are the implications of the Sinn Fein election victory in Northern Ireland?

• The Northern Ireland major party has always been loyalist (pro-union with the UK) and Protestant. Now Sinn Fein are the largest party. They have their origins as the de facto political wing of the IRA, which fought to throw the British out of Ireland. So effectively it raises the risk that Northern Ireland will eventually aim to leave the UK. There are of course lots of issues – does Ireland want Northern Ireland? And what does the rest of the UK want?

Would it be orderly and peaceful?

• It could get very nasty again. Protestants have had the power there for centuries and there are centuries of built-up hatred.

Commodities

Gold vs Bitcoin

• At some stage gold should really fly. It’s by far the easiest way to get out of the whole system. You can go to a shop in London and get yourself ten million USD worth of gold. It’s incredibly liquid on a personal level. Not liquid on a central bank level, however.
• The problem with gold is it’s tough to pay for stuff with it.
• Central banks have a lot of gold, that’s their power. So that leaves crypto, which they can also outlaw. But countries will just self-custody. In the end, should the system fail, governments have a way of getting their money back from you.
• It’s easy for them if it’s all held in a London vault, and they just do ledger entries.
• The commodity funding space is a lead horse in this horror show; they are key users of the euro dollar system without any liquidity backstop.

Is gold old fashioned?

• Gold seems just too old fashioned. The solutions crypto offers are spectacular.
• But you can take a lot of money out of the payment system very easily with gold. If you thought by the end of the next week, it could all collapse, and you had to buy gold or bitcoin, you’d buy gold.

If a commodity trading house hits the Eurodollar funding vortex, does it start to pull down the whole commodity safe haven equity?

• It could mean the opposite. If the hedges leave it short, they may have to cover. Usually, the pain is with the trend.

Is there an issue with neon gas?

• A member of our network spoke to a director at the SIA (Semiconductor Industry Association). They said that neon gas is produced from nat gas wells as a byproduct. The concentration of neon gas in Ukraine is higher than other regions and hence more economical. It can be produced in Canada, Australia etc but it takes five years to build the processing facilities. After Crimea in 2014, most semiconductor manufacturers have added neon gas recapture capabilities, so the problem isn’t immediate but further down the road if the semiconductor demand keeps increasing.

Trading JPY

The yen: a cheap haven for uncertain times | FT

• One member of our network agrees with this cheap haven JPY story. They’re not going long JPY but are keeping an eye on commodities topping out. Maybe softer CPI YoY.
• They think it’s more of a EUR/JPY trade than a USD/JPY trade. Where the ECB is looking to tighten into a recession and the BoJ is holding onto the YCC as inflation is normalising. Both are vulnerable central banks.
• GBP/JPY is very sensitive to the financial system taking a hit.

South Korea

‘If South Korea takes a path of turning hostile against its neighbors, the end of this path could be a Ukraine.’ – a tweet from Hu Xijin

• Korea voted out the appeasing party and chose a pro-US and pro-Japan right of center president. Soon, they will explore joining the Quad and mending relations with Japan, while being realistic on North Korea and China. China will huff and puff, find some excuses to block trade with Korea, but ultimately these countries are ready for economic sacrifices. Look at Australia. They gave China the metaphorical finger after their exports were blocked.

Crypto

MicroStrategy Incorporated {MSTR} and buying opportunities in Bitcoin

• MSTR have a margin call on Bitcoin at $24,000, their price action is correlated (Chart 1). It could also be $21,000.
• You need to be ready to buy a serious puke through $32,000.
• $28,000/$30,000 area looks to be decent support. Luna foundation has been holding it in, they are looking to buy $10bn of bitcoin. They seem to have done about $3-4bn so far. It will be a cascading ring of stops should it break lower.
• A systemic accident would be a nice buying opportunity.

Movement in Crypto

• It’s the first time in a while that Crypto is moving at the weekend. If it breaches $30,000 this week it could be utter carnage. Especially given the exposure to places like MSTR (above).

What will affect crypto?

• MSTR owns ~0.6% of the Bitcoin market cap. It should not matter that much. The July implied FFR is far more important. But then, what Bitcoin market cap means relative to its (outside cold storage) free float and relative to daily average trade volumes.

Are stablecoins stable?

The $UST Depeg (thread)

• If someone wants USD from these coins, is this actually easy?
• Yes, but at the moment you will only get $0.90 from the Luna stablecoin (minus transaction costs). Some stablecoins claim that they are backed one-to-one, and they are audited somehow, even though they don’t specify all the details of their USD holdings. Others aren’t backed one-to-one but have ingenious schemes behind it supposedly guaranteeing a one-to-one rate to the dollar. Either way, it seems the regulators are going to force more oversight and transparency in the stable coin sector. There seems to be a bipartisan consensus forming that it needs to be tackled. This Luna episode shows it’s urgent.
• These complexities are built in to hide the truth and make their creators rich. This is the FTx founder admitting as much.

Trade Ideas

• Increased long USD/CNH [Thursday]. This is not just a bet on Powell being wrong at the last meeting and more US Fed hikes need to be priced in, but you also have the PBoC wanting a weaker renminbi.
• Short AUD/USD [Thursday]. Poor data while USD is trading quite well.
• Trading before CPI [Thursday]. One member won’t do anything before CPI next week. A favourable base effect for the next months is in place – CPI YoY should decline, ceteris paribus. If it surprises on the upside then a 75bps hike goes back in favour. A ‘good’ inflation print next week opens up a month or two of a bull steepening curve and a weaker USD.
• Buying 5-10 delta short dates in USD and risk [Thursday]. Total capitulation risk is getting elevated.
• Not wanting to be short EUR [Friday]. ECB don’t like currency weakness. They are going to hike soon. EUR has a massive structural short through the carry trade. And in risk aversion with stocks lower, EUR generally trades well.
• Reducing long oil options [Monday]. This member has had a total flip and is now buying downside.

Read, Listen, and Watch

Read

• What a neon shortage in Ukraine would mean for the chip industry | Siliconrepublic
• About those kill-switched Ukrainian tractors | Cory Doctorow

Listen

• The Great U.S.-China Tech Divorce | The World Unpacked (35 minutes)
• Labor: Gen Z and the Multi-Earner Economy | Morgan Stanley (9 minutes)
• Geopolitics, Innovation, and Deglobalization With Peter Zeihan | FYI (1 hour)

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.)