After Jerome Powell’s speech, markets are caught in the middle. Participants are hoping for a pivot. Is the bottom in or is more pain on the horizon?

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We want to zoom out and revisit the broader macroeconomic picture and analyze some of the latest data that came out this week, which will heavily influence the market direction over the next few months.

After Jerome Powell’s Brooking Institution speech, it’s clear that markets are chomping at the bit to move higher with any possible Federal Reserve narrative and pivot scenario. There’s over hedging, short squeezes, options market dynamics and forced buying. This is beyond our expertise to say exactly why markets are exploding with volatility on any given data point or new Powell speech. However, these types of events and market movements have nearly always been a sign of unhealthy and heightened volatile swings in bear markets. Despite more talk from Powell with nothing new really said, markets perceived the speech as more “dovish” with his commentary around the concern of overdoing rate hikes. Yet, if this is another bear market rally taking shape for the major indices, we seem to be close to that rally turning over yet again.

What is also concerning and expected to continue, is the trend of economic contraction as told by the data from the ISM manufacturing index (PMI). Today’s latest release shows a print of 49.0 below market expectations of 49.7. New orders are contracting, the backlog of orders are contracting and prices are decreasing. By all measures and survey responses, these are the signs of demand softening, conditions worsening and the economy moving into more cautious territory. The ISM PMI data highly correlates to the less impactful Chicago PMI data which just printed contraction lows similar to 2000, 2008 and 2020. This is the sign of an economic recession starting in the manufacturing sector. 

What does economic contraction mean for financial markets? It’s typically bad news when there’s a sustained contraction trend of ISM PMI below 50 and even below 40s playing out. It seems we’re in the early stages of a larger contraction trend playing out: The despair phase of the market.

The specific question for the bitcoin and macro relationship is now: Was this industry-leverage wipeout and capitulation event enough selling to mute the potential probability and effects of an equity bear market meltdown? Will bitcoin flatline and form a bottom if equities are to follow similar past bear market drawdown paths?

We’ve still yet to see a real blowout in stock market volatility which has always impacted bitcoin. It’s been a core part of our thesis this year that bitcoin will follow traditional equity markets to the downside.

The magnitude of the long-duration debt in real terms was, and still is, the biggest story here.

Furthermore, what does this mean going forward for asset valuations?

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