SignalPlus Macro Analysis Special Edition: J-Pow

After a week of anticipation, Chairman Powell delivered a striking speech, unexpectedly making dovish remarks, emphasizing the downside risks to employment, and expressing a willingness to temporarily overlook tariff-related inflation pressures.

"If these risks materialize, they could quickly manifest in the form of a sharp increase in layoffs and a rise in the unemployment rate," "The important question for monetary policy is whether these price increases could significantly raise the risk of a persistent inflation problem," he stated. "A reasonable baseline assumption is that their impact will be relatively short-lived --- --- just a one-time shift in the price level. Of course, 'one-time' does not mean 'all at once'." --- --- Powell

Other key dovish statements included:

"Given that policy is in a restrictive zone, changes in the baseline outlook and risk balance may warrant an adjustment in our policy stance."

Faced with this increasing dovish shift, Powell attempted to maintain the Federal Reserve's independence/credibility to some extent through the results of the monetary policy framework assessment, which abandoned the average inflation targeting regime in favor of a more traditional 2% inflation target. The committee emphasized the need to "anchor" inflation expectations at a higher neutral Federal Reserve interest rate level. This was originally a more hawkish trade-off but was clearly drowned out by the overwhelming dovish voices dominating various macro asset classes.

Risk assets surged broadly, with stock indices ending a five-day losing streak. The U.S. Treasury market steepened, the dollar plummeted, and the S&P 500 index recorded its best single-day performance since May, just a step away from its all-time high. Notably, small-cap stocks led the gains on Friday, indicating increased market confidence in a soft landing scenario for the U.S. economy. Classic interest rate-sensitive sectors such as consumer discretionary, industrials, and real estate performed well, while large tech stocks lagged due to concerns over an impending AI bubble and weakened chip demand in China due to export-related restrictions. Outside of the Jackson Hole meeting, preliminary purchasing manager indices from the past week were unexpectedly strong, with overall output indicators hovering near multi-year highs, suggesting that third-quarter GDP data may be promising. Despite persistent inflation pressures from tariffs, the Federal Reserve now indicates they are willing to temporarily overlook this.

This week's economic calendar will also be busier, with durable goods orders, the PCE price index, new home sales, trade inventories, and consumer confidence index all on the agenda. Cryptocurrency prices had mixed performances this week, with Bitcoin slightly down while Ethereum continued to soar due to ongoing interest in DATs. Over the past month, the public market capitalization of ETH DATs has significantly increased relative to BTC, and the BTC/ETH ratio has rebounded to a technically noteworthy level in the recent rally. However, the net asset value (NAV) premium has narrowed (approximately $120 billion market cap corresponding to about $95 billion in holdings), which could lead to potential share dilution for companies like MSTR in the future, a risk factor to monitor in the medium term. This week, ETF inflows were mostly low, with BTC ETFs experiencing outflows for six consecutive days, while ETH ETFs saw a significant single-day rebound on Friday after a similarly lackluster week. Interestingly, during this rebound, ETH futures on the Chicago Mercantile Exchange showed record short positions, possibly due to DAT-driven hedging or capital basis arbitrage activities aimed at extracting any existing yield premium. Additionally, following Powell's speech, BTC implied volatility plummeted to new lows, somewhat unexpectedly, leading to a significant divergence from (still rising) ETH IV.

According to market estimates, market pricing suggests that the likelihood of BTC reaching its all-time high again within this month is only about 15%, equivalent to a payout ratio of 7 times, which is a somewhat surprising development following the dovish Jackson Hole meeting. Looking ahead, the main focus next week will be Nvidia's earnings report on Wednesday and U.S. PCE data on Friday. Tech stocks lagged for most of the past week, with Sam Altman ominously suggesting that we may be in an "AI bubble," while Nvidia's sales of H20 chips to China have recently been suspended. Due to new restrictions, the company's second-quarter sales to China were hit by $8 billion, and analysts will closely monitor the follow-up impacts revealed during the earnings call. Finally, unfortunately for the bears, the rebound in the S&P 500 index on Friday generated many positive momentum signals, with broad market participation pushing it closer to historical highs. Previous signals clearly pointed to the index continuing to rise in the medium to long term, although this may be difficult to comprehend in the current geopolitical context.

As always, this is not investment advice, please do your own research (DYOR), and we wish our readers good luck in the last week of summer!