The Debt Ceiling Circus Rages On
Macro & On-chain Commentary
- Fedspeak leans hawkish, Powell says June decision remains unclear
- Debt ceiling talks continue this week, as Treasury funds dwindle
- A bullish US Dollar has helped flip Gold and Bitcoin bearish in the near term
With less than a month remaining until the upcoming FOMC meeting, a series of speeches by Federal Reserve officials strongly indicated a persistent hawkish stance. However, during his speech on Friday, Fed Chair Powell struck a more restrained tone, hinting that the interest rate “may not need to rise as much as it would have otherwise to achieve our goals.” On the other hand, the Fed’s Bullard is calling for two additional hikes this year, and has shifted rate probabilities towards elevated expectations of higher rates in the near future.
The bigger focus this week is the cataclysmic possibility of a US debt default. Although many consider this outcome to be highly improbable, markets still need to price the risk accordingly, which has disrupted short-term treasury yields around the X-date. Despite this uncertainty, the S&P 500 has broken out to a new yearly high, which may help create additional buyers remorse for those heavily focused on fixed income.
Despite a bullish S&P, the current lackluster price range of digital assets raises some confusion, especially considering Bitcoin’s previous strong correlation with both the S&P and Nasdaq post-Covid. Following the collapse of SVB, Bitcoin shifted towards an increasing price correlation with Gold, which had been poised for a new all-time high. Bitcoin’s digital gold thesis has gained steam, which has meant an increasing inverse correlation with Dollar strength. Rather than being perceived as a broad risk asset, Bitcoin’s price action has become closely tied to Fed policy, and a hawkish stance from the Fed has weakened both Gold and Bitcoin, at least in the short term. Bitcoin might experience a more favorable environment if the Fed’s tone regarding further interest rate hikes cools down after the release of additional economic data. However, for now, a stronger Dollar poses bearish headwinds.
