Dot Plots, Pound Drops | On Chain Report
Join the Qluster team in this week's On Chain Report. Read on to find out the MaxAlpha perspective, Dot Plots and the new Supply on Exchange updates for BTC, ETH 👇
Pound in the Ground. Where is the Alpha?
Inflation: Make no mistake. The US Federal Reserve is serious about taking on inflation—at all costs.
Recent official statements express the central bank’s concerns of nagging inflation becoming entrenched in prices.
Again, consumer price inflation is a persistent annoyance for policymakers. One that insists on lingering, despite what seems to be heavy-handed use of the “interest rate” fly swatter.
The challenge remains for Fed Chairman Jerome Powell and his team. Tame inflation while preserving economic growth. In other words, central bank officials now face a balancing act between the objectives of their crusade against inflation and preventing a significant economic slowdown.
Or, worse yet, triggering a full-blown recession.
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The wisdom of experience is our best friend in times of great uncertainty.
For some practitioners, leaner market conditions might feel completely new and foreign after such an extended period of excess. Whether they struggle to comprehend market developments or build conviction in their views of events unfolding in real-time, it pays to listen to the wisdom of experience.
“Sharp sell-off to the change in the Dot-Plot… that implies a Fed rate in 2023 greater than 4.5%”
MaxAlpha Asset Management’s CEO Weng Cheah attributes a change in the Fed Dot-Plot as the reason investors had been selling equities on an expectation of a 75bp rise—since the September CPI number.
Weng notes, “we should not doubt the resolve of the US Fed to fight inflation.” The reality is that investors might be unwittingly setting themselves up for a “future of sticky inflation, higher rates, low growth and elevated volatility” by hoping otherwise.
With decades of experience managing investments at the forefront of financial markets, Weng is an early pioneer of computerised algorithmic trading and previously led top-performing teams at major investment banks.
Here’s a link to connect with Weng and the MaxAlpha Team 👉
During Wednesday’s press conference, JPow emphasised the unknowns of whether this process will lead to a recession and the extent of its severity should one eventuate. In response to this hawkish outlook, the DOW 0.00 and S&P500 have prolonged a steady decline spanning six consecutive days, with many experiencing a broad sell-off typical of an investor capitulation, known colloquially as a “washout”.
Currency: In other headlines, drastic intervention from the Bank of England appears to have supported the pound sterling’s sudden fall. While most central banks move in lockstep to reduce piles of debt accumulated through the pandemic, it seems political will is firmly in control of monetary policy at the British central bank.
Detractors argue the flawed reasoning of direct intervention from the BoE at this stage of the business cycle. However, we have yet to see whether the government bond-buying spree will be a saving grace for the GBP—or its proverbial sword of Damocles.
Fun fact. UK Government Bonds also go by the name of “Gilts”.
Stay tuned for technical analysis. We’ll email you the upcoming Technical Outlook report 👇
On Chain: There are interesting developments for supply on Exchange (SoE) of Bitcoin and Ethereum, which practitioners should be aware of.
Bitcoin’s SoE made an interesting breakout above its short-term resistance [BTC: SoE 9.295], confirming our previous projection of a bearish condition. We can also see that the EMA(30) appears ready to cross the EMA(50)—displaying a flip in the short-term trend of Bitcoin’s Supply on Exchange.
From here, the previous EMA area would become technical support.
Converting this zone of resistance appears to present an increasing trend of Supply on Exchange.
A stark contrast to the second largest cryptocurrency by market cap…
Ethereum SoE [ETH: SoE 14.59] continues its correction.
A break below its short-term EMA(30,50) support area appears to be taking place at the moment. However, it is noted that plotting the EMA(30,50) within the short-term window could be subject to “noise”, as fakeout pivots have been experienced several times this year (July and August).
Therefore, it can be especially necessary for:
Maintaining appropriate position sizing
Seeking confluence across other signals
In light of the current price structure of Ethereum, we are of the view that the local structure of this crypto is still ranging and waiting for another impulsive move. Supply on Exchange of Ethereum will continue its trending move if SoE breaks up its EMA(30) again, which is now sitting at 14.88%.
From the long-term perspective, we noted that Bitcoin SoE continues to move closer to its long-term EMA(30,50) resistance.
∆ presented in the previous reports now sits at 0.815 points.
This ~25% decrease was an unusual movement from the delta since the first time we tracked this metric. It is necessary to recall that when the delta decreases, this implies the metric moves in opposition to its trend; in this case, Supply on Exchanges increases.
With this delta movement, our view about its current bearish structure will remain the same unless SoE crosses above the EMA (50), which is now at 10.52% and less than the previous week.
The bullish structure of Ethereum SoE has undergone minimal change since the previous week.
Forward momentum continues while remaining above the EMA(30,50) area.
It is necessary to note that the EMA(30) is heading towards crossing the EMA(50), confirming the change in trend structure, similar to what took place in November 2018. In light of this current environment, we consider Ethereum sentiments to remain bullish.
The current situation will only be deemed invalid when Ethereum SoE falls below the EMA(30), which now stands at 13.68%.
ALTPERP | Ranging within Expected Volatility Zone
The FTX Altcoin Index basket ALTPERP made a ranging move since the previous report. It is noted that the metric respected the 8% volatility that we mentioned previously, allowing us to gain additional short exposure in a more favourable position.
Our view on the bearish market will be reconsidered as soon as ALTPERP reaches above $1954, which is ~5.62% since this report.
Special Review: Fed fund rates and the officials’ thoughts
Contributed by Vu Nguyen
Despite the US central bank’s efforts to tackle runaway inflation, Chicago Federal Reserve President Charles Evans is concerned about a rapid rise in interest rates.
“Well, I am a little nervous about exactly that,” Evans answered when asked about investor concerns that the Fed had not waited long enough to assess the impact of its interest rate increases.
“There are lags in monetary policy, and we have moved expeditiously. We have done three 75 basis point increases in a row, and there is a talk of more to get to that 4.25% to 4.5% by the end of the year; you’re not leaving much time to sort of look at each monthly release.”.
The discrepancies between the FED officials and market reaction after almost every FOMC meeting and announcement establish that the market and the economy greatly depend on the financial and monetary policies of the policymakers. In this sense, the FED dot plot – usually the Figure No.2 of the FOMC’s Summary of Economic Projections, sheds light on how the policymakers of the US think about the future economic outlook.
Using the Fed’s dot plot, one can see how each Fed official projects the central bank’s key short-term interest rate. The dots correspond to what central bankers anticipate as the appropriate midpoint of the fed funds rate at the end of each calendar year three years in the future, should the economy develop as expected. For the longer term, officials also provide a dot representing neutral interest rates, or the point where rates neither stimulate nor restrict economic growth.
Every dot represents a Federal Reserve official, from Jerome Powell to Lael Brainard, from John Williams to Charles Evans at the Chicago FED. It is all anonymous, and no one knows which official represents which dot.
The dot plot has 19 individual projections when the Fed is fully staffed; however, there is one fewer dot when the Fed has one vacancy on its board of governors. St. Louis Fed President Jim Bullard, who has made it clear he wants his projections omitted, is another dot missing from the Fed’s longer-run projections.
Case Study | Changes in the opinion of the FED officials from June 2022 to September 2022
The effect of the FED’s projection on the economy is significant because it will direct how the FED will adjust the interest rate in the future to meet its macroeconomic goals. In an LA Times column, Hiltzik puts it, “regardless of the decline of inflation, the Fed continues to sound extremely hawkish in its rate projections. In other words, it is necessary to destroy the economic village to save it. Nevertheless, millions of workers whose jobs and lives depend on a more robust economy are not convinced that this is the right path.”
Additionally, some might argue that since the establishment of government, there has not been an occasion where a totally free market and economy have existed.
Mission Log | Summary of Key Highlights
Both short-term and long-term SoE of Bitcoin presents an increase ∆ between the long-term SoE and its EMA(30,50) at 0.815 points (SoE below EMAs, lower than last week).
In our view, both price and SoE metrics imply a bearish outlook for Bitcoin at the moment, which is in line with the current market environment.
Ethereum SoE broke down the EMA(30,50) short-term support area, while the long-term window still presents the bearish market outlook, with long-term EMA(30) about to cross EMA(50), presenting the market condition similar to November 2018.
Currently, we believe ETH is ranging for another impulsive move. Opportunity is equal for both sides.
The cryptocurrency market keeps ranging but respects the bearish market condition, with ALTPERP has not violated the 8% volatility condition we set last week. We had some chances to open up more short orders or resize the positions.
In this sense, we still hold a pessimistic view of the crypto market unless it breaks the $1954 mark, which is 5% from when this report was made.
The FED dot plot presents what the officials think about the market outlook in the future, similar to the economy’s central governance of other countries.
Those opinions will be catalysed into the decision of interest rate, which in turn will significantly affect the economy and the market as a whole.
See you again for the next update.
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