This Week’s Top Headlines

i) The Federal Reserve meets market expectations, takes another step down on rate hikes to 25 basis points.

ii) Powell spoke of the “disinflationary” process that is now underway multiple times during the FOMC meeting on Feb 1. Markets took the dovish cue and turned sharply higher in response.

iii) Bitcoin broke $24,000 briefly, guided by the surge in tech stocks. The SNP 500 index gained over 3% from Powell’s comments.

iv) Markets retraced after the US jobs report for January, released on Friday (Feb 3), revealed an unexpected increase in non-farm payrolls while the unemployment rate fell to a 53-year low.

Scroll down to read the details.

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The market rally is stalling.

In my previous issue, I discussed the overheated state of the market, as indicated by the Relative Strength Index (RSI) reaching levels not seen since 2021. I also touched on the sustainability of the rally with economist Sani Hamid, and we agreed that it was driven by mania and euphoria, amongst other factors.

The retracement is now underway, with Bitcoin dropping to $22,935 after failing to hold the psychological support at $23,000. This will likely lead to further selling pressure and I believe that a dip to $22,500 is possible.

The RSI has made a dramatic U-turn this week, suggesting that sellers are beginning to shift the tides of the market.

Macroeconomic factors will continue to drive Bitcoin’s price action in the coming weeks, and $20,000 remains a crucial mark for bulls to defend. Should it be broken, we may see Bitcoin spiral towards its November 2022 low of $15,500.

More bad news for the bulls as Bitcoins are flowing back into exchanges.

The "Bitcoin Exchange Net Position Change" chart from Glassnode tracks the outflows/inflows of Bitcoins from exchanges. By analyzing the movements and tying them back to macroeconomic events, we can formulate trends and predict the future price action for Bitcoin to a certain extent, at least.

The FTX crisis in November has seen investors flee from centralized crypto exchanges as they prioritize self-custody (ie. storing crypto in cold wallets). It was the largest exchange outflow in Bitcoin’s history, with over 200,000 BTC withdrawn per month.

Exchange net-flows have returned to neutral in recent weeks, as the recent rally has reintroduced FOMO and GREED into the market. This may signify a slowdown in buying pressure relative to spending.

The Federal Reserve meets expectations and slows rate hikes to 25 basis points.

On Wednesday (Feb 1), the Federal Reserve raised the interest rate by 25 basis points, bringing the benchmark to a range of 4.5-4.75%, the highest since 2007.

During the Federal Open Market Committee (FOMC) press conference, Chairman Jerome Powell maintained a consistent tone, stating that the Fed expects to continue making "ongoing increases" within the target range as deemed appropriate.

Despite modest signs of cooling, inflation remains elevated. Powell believes that the central bank may need to implement "a couple more rate hikes" to reach its target of 2%, noting the strength in the labor market and wage growth.

Investors who were looking at the Fed to hint at pausing rate hikes soon were left empty handed. The markets experienced a brief dip when Chairman Powell emphasized that the Fed is unlikely to consider reducing interest rates in the near future.

But markets turned sharply higher when Powell repeatedly spoke of the “disinflationary” process that is now underway.

The SNP 500 index jumped by 3.3%, with technology stocks leading the way with a 5.3% gain. Meanwhile, Bitcoin saw a momentary break past $24,000 and peaked at $24,200.

Market rally stalls as latest US jobs report crushes expectations.

The January jobs report, released on Friday (Feb 3), showed non-farm payrolls increasing by 517,000, significantly higher than the 187,000 market estimate.

The unemployment rate fell to 3.4% versus expectations at 3.6%. It is the lowest jobless rate since 1969.

Major markets indices were mixed following the report, but Bitcoin quickly fell from its 5-month high of $24,200 to $22,900.

Hey wait a second, if more people are getting employed, isn’t it a good thing for the economy? Why then, did the market retrace, you ask?

Well, that’s because inflation and unemployment are inversely correlated. Low unemployment means more people are getting employed, which results in increased consumer purchasing power, leading to higher inflation. On the other hand, high unemployment reduces consumer spending and puts downward pressure on prices, lowering inflation.

The Federal Reserve’s goal is to bring inflation back down to its target goal of 2% through raising interest rates. This would normally result in an increase in unemployment and a decline in the stock market.

However, the recent jobs report presents conflicting information, with the unemployment rate falling while inflation cools, which is not in line with expectations.

During the press conference on Wednesday, Chairman Jerome Powell spoke of the labor market, stating that it remains "out of balance". The latest report supports this statement, which could force the Fed to take a more aggressive approach and keep interest rates higher for longer.

This is one of the main reasons for the market retracement, even though Bitcoin is still up 40% since January.

That’s all for this week’s newsletter!

Disclaimer: I am not a financial advisor. This newsletter is based on my own analysis and research. Do not take any of it as financial advice.

*This newsletter was written at 11.30 AM on 6 February 2023 and completed at 3.30 PM the same day. To get early access to our newsletter, be our patron for as little as $1/month!