As I have been posting as a thread on Twitter in recent weeks, I will now extend this to an article on substack as well.
In the Weekly Macro Outlook, I take a top-down view of the current economic situation, the important events that may influence the general market direction, and the direct effects on the Crypto market.
Enjoy your reading!
It doesn't get any bigger than this.
At the macroeconomic level, you don't often have many more impactful weeks like the one ahead of us. Indeed, next week sees a convergence of both CPI and FOMC. In this article, I take you through the expectations of both events and compare analysts opinions with my predictions in order to paint a clear picture of the week ahead.
US CPI
'The Consumer Price Index measures the overall change in consumer prices based on a representative basket of goods and services over time. '
CPI can be seen as one of the most important indicators for policymakers to determine the level of rate hikes. This is partly why the announcement of last month's CPI figures has become so important in determining market direction over the past year.
The beauty of Cryptocurrency projects is that data is almost always instantaneous, which is why I started working on using real-time inflation data through the Chainlink Oracle recently. As you can see, the current US CPI is at 6.04%. A number indicating that, as I have been saying for months, inflation is no longer the biggest problem of the current economic situation.
But US CPI is months behind, and so are policy choices. This is partly why I built a mathematical model which takes this lag into account. A calculation with the rate of change between these 2 models brings CPI calculation in advance to a hit margin of 83% within 0.1%. The forecast for next month is 6.8% - 7.0%, another big surprise down from last month's 7.7%
Whether this will be the case remains to be seen in the real numbers next Tuesday, but the strong downtrend is thus expected to continue.
Comparing this with the analysts, who are sitting at 7.3%, next Tuesday could well be a very positive day for risk-on assets. Always keep in mind that the market trades based on the forecasted number, not the previous month's number.
Quincy’s Model - 6.8% / 7.0%
Analyst Forecast - 7.3%
Previous CPI Number - 7.7%
This is what brings us to the next part of this Macro Outlook, FOMC.
FOMC
‘FOMC is the meeting of US policymakers in which, based on data points regarding the status of the US economy, they set policy regarding the FED Funds Rates, thus influencing the economy.’
This is the policy that controls the markets. Indeed, over the past year, we have seen a rise in the FED Funds Rate, through the implementation of Rate Hikes. These rate hikes cause the economy to slow down, to which inflationary pressures due to the supply-demand imbalance will have to be rectified and thus prices will fall.
Recently, this has looked like this:
The reason this is so impactful on the markets is not the level of the overall Fed Funds Rate. Because you can also see that this has been higher than the 5% we're aiming for more often than not. But it's all about the rate of change and the size of the change.
This time, FED Funds Rate of Change is so unprecedented, in such a short period that its impact is very drastic on the economy.
But the situation is beginning to change, given that the policy was entirely focused on the impact of CPI but given that the predicted models show the impact of CPI falling dramatically, the accommodating policy will do the same. This will cause the policy of rate hikes to possibly be adjusted. Thus 78% of the market expects Powell will announce 50 bps, a drop in hawkish force.
In advance, we can view this week as potentially bullish for Risk On, simply because inflation data will decline and policymakers will react to it for the first time in ages. Give extra attention to the message Powell issues in his FOMC presentation, after announcing the rate hike. This gives us the best outlook for the future
The economic picture is way more complicated than this, which is what I will dive in with you guys in upcoming editions of the Weekly Macro Outlook.
I hope this will prepare you for the week ahead. If you have any questions, my DMs are always open!
Good Stuff Man