Mixed Signals
Week of April 4th, 2022
The Federal Reserve’s strategy on combatting inflation has become increasingly complicated with mixed messaging from monthly released economic indicators and almost daily financial consequences related to the Ukrainian-Russian war. The core personal consumption expenditures price index, which excludes food and energy, rose to 5.4% year over year, a level not seen since 1983. The core PCE index, which measures prices Americans pay for goods and services. is the Fed’s preferred measure of inflation. On Friday, the unemployment rate improved to 3.6% from 3.8% in February, with strategists calling for further improvement in the near term which could lead to stronger support for a more aggressive stance on raising short term rates starting at the Fed’s next meetings in May, for a total of six this year.
But it may be the inverted yield curve that may worry investors on potential signals for a recession ahead. The spread between the 2 and 10 year treasury yield has tightened almost 80 basis points year to date, with current indications below 0 signaling an inverted curve. This is the fourth time this century that the 2/10 year spread inverted, going back to 2019, 2006, then 2000. However, due to the extreme circumstances following the pandemic and now a war, this inversion may be different with the amount of quantitative easing involved over the last two years.
Market volatility with notable intraday swings is the norm these days with the S&P 500 index finishing about unchanged for the week after rising 100 points to 4640 late Tuesday, before settling down to 4545 Friday, about 4% down year to date. Ten year treasury yield experienced daily broad trading ranges all last week, reaching a high level of 2.55%, declining to about 2.30%, before finishing closer to 2.40% end of week. Crude oil futures declined about 18%, closing at $104 a barrel Friday with more movement expected this week. The European Union could impose additional oil related sanctions as reclaimed areas near Kyiv uncovered brutal scenes of war casualties. Lithuania announced last week that it stopped importing Russian sourced natural gas and called for the EU to follow.
On-Chain Update
Bitcoin closed Q1 nearly flat for the quarter, in line with muted to negative returns for the same period from 2014 to present. Historically, Q2 has held a post-2013 average return of nearly +50%. Technical analysis continues to show a bullish continuation possibility to $50,000, based on the completion of an ascending triangle chart pattern.
Last week, the 19 millionth Bitcoin was mined, meaning 90% of all Bitcoin to be mined is now in circulation. The remaining 10% of Bitcoin to be mined, bringing the total in circulation to 21 million, will occur through a disinflationary process after several more block reward halving events. The next block reward halving is estimated for March 2024. Block rewards are set to end around 2140, when miners will then rely on Bitcoin transaction fees in each block as incentive to secure the network.
The Bitcoin reserve for the UST algorithmic stablecoin on the Terra blockchain continues to grow, and now holds 30,727 BTC valued at $1.40 billion. These types of stablecoins will increase or decrease the circulating supply of stablecoin vs network token to maintain stablecoin value. The Bitcoin reserve will act to defend the UST $1 peg in the event of a de-pegging death spiral between the Terra and UST equilibrium. The Luna Foundation Guard has previously unveiled plans to increase reserves to at least $3 billion or more. This week, an algorithmic stablecoin on the WAVES network called USDN has continuously slipped away from the $1 peg, now well below $0.85 per token. Historically, algorithmic or seigniorage-style stablecoins have had trouble maintaining a $1 peg in times of stress.
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The Portfolio Management Team
Steven McClurg, CIO
Bill Cannon, Portfolio Manager
Wes Cowan, Portfolio Manager, Head of Defi
Josh Olszewicz, Head of Research
Sean Rooney, VP Research and Trading
Will McDonough, Vice Chairman, Investment Committee
Leah Wald, CEO, Investment Committee
Shannon Smith, Head of Investor Relations
