PSE Trading Macro Review: A bullish correction is underway, setting the stage for BTC to potentially rise to the $100,000 mark in Q2

Written by: @MacroFang, PSE Trading Trader

2024 Macro Outlook: Market correction ahead of Q2 2024 rebound

This week has been an important one for the market and various economic data, drawing attention to the complexities of interpreting the jobs report data and other economic indicators.

BTC: A bullish correction is underway

Bitcoin’s recent spike in volatility, driven by increased cryptocurrency leverage, is in stark contrast to the expected reduced volatility of the ETF launch, which was launched to expand investor access and improve price discovery. However, the current environment shows an increase in leverage, as evidenced by rising perpetual futures funding rates and a surge in open interest (partly from basis trading from leveraged funds). Despite the potential for ETFs to stabilize the market, the road to reducing volatility could be bumpy due to the current high level of leverage, especially as events such as the Bitcoin halving drive demand for leveraged exposure.

Against the backdrop of rising volatility and leverage in the crypto ecosystem, Bitcoin experienced a pullback, falling from $73,000 to $63,000. This pullback is seen as a normal price correction in the market dynamics, setting the stage for a possible price rise to the $100,000 mark in the second quarter of 2024. This correction is common in the trajectory of digital assets and is usually the consolidation phase that precedes a major event.

ETH: Should bounce back 1 month after the upgrade

Ethereum has grown significantly and has undergone significant upgrades. For example, the Beacon Chain in 2020, the “Merge” in 2022, and the Shanghai Upgrade in 2023 aim to enhance sustainability and security. The recently implemented Dencun upgrade aims to improve scalability and reduce L2 gas fees, which is a key challenge for ETH to grow itself and solidify itself in the competitive landscape. Amid the competition, these advancements highlight Ethereum’s commitment to infrastructure improvements.

Ethereum’s price typically goes through a pre-upgrade rally, a downturn in the first 30 days after the upgrade, and then a significant increase. However, factors such as Bitcoin ETFs, potential Ethereum ETF approvals, and market leverage are likely to bring more volatility to Ethereum’s price action after the Dencun upgrade, suggesting that the market dynamics will be more complex in the future.

ETH ETF Expectations

Positive expectations for the Ethereum Dencun upgrade, as well as expected regulatory developments such as potential Ethereum ETF spot, will drive investor optimism. These factors, combined with Ethereum’s continued improvements in scalability and efficiency, set the stage for a favorable price increase for ETH after the upgrade. The prospect of such technological advancements and increased mainstream adoption could significantly increase Ethereum’s attractiveness to retail and institutional investors, contributing to a stronger and more sustained rise in its market value.

U.S. Analytical Employment Report

A month ago, January’s jobs report was special, showing a large increase in new jobs coexisting with a decrease in the number of hours worked — a scenario often associated with a recession. This raises confusion about its meaning. However, the anomalies observed in the January report were significantly revised in Friday’s release.

This month’s latest employment data turned out to be positive, although the unemployment rate rose slightly, from 3.7% to 3.9%. This slight rise has led to headlines declaring unemployment at a two-year high, although it must be noted that such rates have been seen and revised in the past. Despite this, the economy continues to demonstrate low unemployment and overall robustness.

A key observation point is that if the unemployment rate crosses the 4.0% threshold in the coming months, it could influence monetary policy decisions. In addition, the broader U-6 unemployment rate has reached a two-year high, indicating that people re-entering the workforce face challenges in finding work immediately.

Wage Growth: Strong Productivity, But Steady Inflation

Wage growth was in line with expectations, reinforcing the view that a 4% wage increase would not automatically lead to inflation if accompanied by strong productivity, as is currently the case. This situation alleviates concerns about inflationary pressures in the economy.

Powell: Despite the hawkish tone, he still maintains a rate cut attitude

Powell’s recent comments appear to be dovish, suggesting that the Federal Reserve may be close to deciding to lower interest rates, depending on upcoming CPI and PPI data. However, the strength of the economy may lead the Fed to adopt a hawkish tone when releasing the dot plot, which may temporarily disrupt the market.

FOMC Meeting Preview: June Rate Cut Still Expected

We expect a dovish outcome from the upcoming FOMC meeting at 2pm next Wednesday, with Fed officials expected to confirm that they are prepared to lower interest rates during the year. While potential hawkish signals showing future interest rate forecasts through “points” may cause concern, the consensus is that these will remain steady, demonstrating an expected 75bp cut in 2024. Under Powell’s guidance, the Federal Reserve is said to be gaining “greater confidence” in the economic outlook.

However, Powell is poised to keep the possibility of a rate cut at the May meeting as early as possible, highlighting that a decline in core PCE inflation below 3.0% is a key factor. An “in-depth” discussion on balance sheet policy could lead to halving the cap on Treasuries to $30 billion per month starting in June, setting the stage for rate cuts in the same month.

CPI: Better than expected

Tuesday’s Consumer Price Index (CPI) report is highly anticipated as there may be some anomalies in the January data that could affect the inflation data. The incident of the selective release of data by the U.S. Bureau of Labor Statistics (BLS) has also raised eyebrows, highlighting the importance of the upcoming Consumer Price Index (CPI) report.

Initial jobless claims: in line with expectations

Initial jobless claims fell within expectations last week, indicating healthy job growth. At the same time, assets such as gold and Bitcoin hit new highs, reflecting a broader trend in momentum investing. The valuation and growth potential of the technology sector, represented by companies such as Nvidia, are being closely watched, reminiscent of past market cycles.

Market: We are not in a bubble

The current market situation is very different from the speculative bubble observed around 1999-2000. Today’s market valuations are more reasonable, with a more balanced outlook for earnings and industry growth.

Bank of Japan: End YCC

On 19 March 2024, the Bank of Japan (BoJ) announced a shift in monetary policy, ending the negative interest rate policy (NIRP) and introducing a new policy rate target range of 0bp-10bp from 21 March. This was largely expected by the market to be seen as a subtle tightening approach, while maintaining substantial support by continuing heavy purchases of Japanese government bonds (JGB) between April and June.

The BoJ’s decision to keep the pace of purchases steady, particularly positive for the short- to medium-term sector amid a reduction in JGB issuance, is indicative of the BoJ’s dovish stance on rate hikes. In addition, the removal of the yield curve control (YCC) target for the 10-year JGB yield, as well as adjustments to other asset purchase and lending rates, highlights the gradual shift in the policy framework. However, the Bank of Japan did not provide clear guidance on future policy actions, and investors awaited further insights from Governor Ueda’s press conference. The outlook suggests a slight bullish move in JGB yields, depending on the direction of the JPY and USD, with the 10-year JGB yield expected to be just around 1% and considering a more tangible rate hike.