Today, enjoy the Forward Guidance newsletter on Blockworks.co. Tomorrow, get the news delivered directly to your inbox. Subscribe to the Forward Guidance newsletter.
The economy is doing fine
Today we received some data points that further solidified the notion that the economy is largely doing okay, or at least much better than what one might think after the Fed cut rates by 50 basis points last month.
Retail sales came in above consensus MoM at 0.4% vs. the expected 0.3%, significantly above the previous month’s move of 0.1%.
With this upside surprise in mind, the Atlanta FED revised its GDPNow forecast for the third quarter higher to 3.4% from 3.2%.
As we can see in the chart below, almost every economic datapoint is suddenly surprising to the upside after a summer growth scare:
This dynamic has led to a significant whipsaw effect in terms of the trajectory of the rate-cutting cycle that began last month. Looking at the SOFR curve that showcases the rate-cutting path over the next few years, we can glean a few insights:
- Through the growth scare that we experienced over the summer, we saw a significant amount of rate cuts get aggressively priced in.
- The climax of this aggressiveness got priced in right around the first rate cut from the Fed.
Interestingly, from there, we’ve actually seen the rate-cutting path the market is pricing in become more shallow than the Fed’s dot plots from only a month ago. Below is a comparison of the rate-cutting path against the Fed’s median dot plot forecast:
Whereas the Fed saw a terminal rate at approximately 2.9%, the market now expects committee members to finish the cutting path at around 3.3%. There’s two explanations here:
- The Fed’s dot plot forecast is already stale compared to the recent positive economic data.
- The market doesn’t believe the Fed is going to be as dovish as it says it will be in its forecast.
I sort of believe both possibilities. I’ve been a strong believer that the economy is not on the verge of recession, and the recent economic data that keeps surprising to the upside is reinforcing that idea.
That said, I also think the market underestimates how committed the Fed is to reaching their desired soft landing. To do that, they need to proactively cut rates to protect the labor market, despite growth looking pretty good.
So where does all of this leave us? In goldilocks territory, really. As long as inflation doesn’t significantly accelerate, the Fed can continue to cut rates into resilient growth.
— Felix Jauvin
2.55%
The amount gained by the Philadelphia Semiconductor Index (SOX) on the session Thursday afternoon. The index is back in the green after losing as much as 5.28% Tuesday.
Semiconductor stocks are, in Tom Essaye’s words, “the canary in the stock market coal mine.” Where SOX goes, stocks will follow, according to the founder of Sevens Report Research.
Why? “Their risky balance sheets and high-beta stock price action tend to see them begin to rollover before most of the rest of the market as traders rotate away to lower-beta, more value-oriented names during times of uncertainty, including economic downturns,” Essaye said.
The key SOX resistance level Essaye is watching is 4,521. As of mid-session today, we are sitting at 5,288.
Hurricane hardships?
Initial jobless claims for the week ended Oct. 12 came in unexpectedly lower at 241,000, down 19,000 from the week prior, data released Thursday shows.
Claims for the week ended Oct. 5 also got an upward revision of 2,000 to 258,000, the Department of Labor added. Two weeks of higher-than-expected first time claims have been largely attributed to Hurricanes Helene and Milton. It’s also estimated that damage from the storms have left people unable to file claims, so data in the near term may continue to show fluctuations.
Some of the largest declines in initial claims for the week ended Oct. 12 were in Florida (-3,428) and North Carolina (-2,404). Each state posted some of the highest numbers of first-time filers the week ended Oct. 5, suggesting that storm impacts are likely driving these figures.
Michigan was also a large outlier for the week ended Oct. 5. The state saw 16,169 initial claims likely due to continued fallout from cutbacks in the auto industry. For the week ended Oct. 12, claims for MI dropped to 8,357.
Continuing claims increased slightly the week ended Oct. 5, coming in 9,000 higher from the week prior at 1,867,000.
Markets dipped at the open following the report’s release, but largely pared losses midway through Thursday’s session. The S&P 500 was trading 0.24% higher on the day at 2 pm ET while the Nasdaq Composite had gained 0.46% at that time.
Stifel chief economist Lindsey Piegza said the jobless claims data shows that the Fed took “too big of a step out of the gate” when they opted for a 50bps decrease last month. She sees central bankers opting to maybe “dial back” next month and potentially forgo a rate cut all together.
Fed funds futures, as of Thursday, disagree. There is currently a 90% likelihood of a 25bps interest rate cut next month, down just slightly from a day ago, data from CME Group shows.
— Casey Wagner
Hacker involved in SEC data breach arrested
On Thursday, the FBI unsealed an indictment against Eric Council Jr., a 25-year-old from Alabama allegedly responsible for the January 2024 SEC X (aka Twitter) account hack. The hack, as you may remember, involved a post from the agency’s account falsely announcing that spot bitcoin ETFs had been approved. The fraudulent post caused a temporary surge in bitcoin’s price before the SEC clarified that its account had been compromised and no such approval had been granted.
Council Jr. allegedly gained access to the account via a SIM swap, allowing his unnamed “co-conspirators” to then make the “unauthorized post.”
He gained access to the account by creating a fake ID of the person who operated it and got a cell phone provider in Alabama to give him a SIM linked to this person’s phone number. He was paid in BTC for his role in the security breach, the FBI said.
Council Jr., according to the FBI, later did some internet searches. Among his history were inquiries like: “How can I know for sure if I am being investigated by the FBI,” and “What are the signs that you are under investigation by law enforcement or the FBI even if you have not been contacted by them.” You can’t make this stuff up.
To be clear, Council Jr. is not being charged with insider trading. Based on the indictment, it sounds like he didn’t even trade on the fake news at all. He was charged with one count of conspiracy to commit identity theft and access device fraud for his role in the scheme.
Whether or not these co-conspirators emerge or face legal consequences — which I’d guess would be related to trades made on the fake news — remains to be seen. If we’re operating under the assumption that BTC is a commodity (which, according to the SEC, it is), the CFTC and DOJ would be the agencies of authority here.
— Casey Wagner
Bulletin Board
- Tomorrow is the SEC’s deadline to submit a Form C in its appeal of the Ripple decision. We know the agency has said it will appeal, but this next filing will detail exactly what its case is.
- Italy’s Deputy Finance Minister said this week that the country plans to increase its capital gains tax on crypto profits from 26% up to 42%.
- TG Macro’s Tony Greer joined Felix Jauvin for the latest episode of the Forward Guidance podcast. Catch up here.
Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.
Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.
Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.
The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.
Source: https://blockworks.co/news/forward-guidance-newsletter-economy-doing-fine