Rates, Reserves, Repayment, and Regulation
On-Chain Commentary
- The Fed is expected to hike rates another 25bp at next week’s FOMC
- Bank deposits are likely to continue to decline following tax season
- Digital asset businesses continue to seek regulatory clarity in the US
Earnings season is in full swing, with most S&P 500 companies set to report earnings over the next two weeks. Despite the S&P 500’s unexciting multi-month range, these figures may shed light on the signals the Fed is tracking regarding economic contraction. Unless the Fed provides additional forward guidance at the FOMC meeting next week, the expected 25 basis point hike is unlikely to have an immediate impact on markets.
Bank deposits, which continue to decline in both large and small banks, remain a significant concern. Following the tax deadline, bank deposits could drop an additional $170B based on treasury account inflows. Deposit outflows, combined with another rate hike, may be enough to push several regional banks to the brink. Banks that do not hold significant amounts of US treasuries and cannot take advantage of the newly created BTFP program are the most vulnerable. Interestingly, the 1-month and 3-month treasury yield spread has widened to the highest level ever, likely due to debt ceiling and default concerns as well as a potential Fed pause.
For digital assets, regulatory clarity or the lack thereof remains a top concern among crypto businesses in the US. Both Coinbase and Gemini have announced plans for offshore crypto derivatives exchanges, and Coinbase CEO Brian Armstrong has even floated the possibility of the company exiting the US entirely. Another indicator of bank deposit fears and regulatory unease is the differential between the offshore Tether and onshore USD Coin, with the two stablecoins now holding a $50B differential in circulating supply. Since the FTX collapse in November, USDT inflows and USDC outflows have been directly inverse, a trend that has been further exacerbated after the SVB debacle.
