This week has been a choppy and directionless week as expected, as markets nervously await next week’s blockbuster CPI + FOMC to cap off the year.
CPI + FOMC CPI 13 Dec 9:30pm SGT FOMC 15 Dec 3:00am SGT
Tuesday’s CPI will yet again be ‘the most important CPI release ever’, this time because the market has set it up to be with its epic 2-month short squeeze rally.
At the FOMC, Fed members will release their updated projections of inflation and interest rates (Dots). Markets will focus on where they forecast inflation next year, as well as where they see rates in 2023 and 2024.
Both these events are the last remaining hurdles for the rally into year-end.
A higher-than-expected CPI print and more hawkish Fed have the potential to invalidate this rally, like we saw in the April and August reversals.
On the other hand, another disinflationary print could see many chase a continuation of the rally into year-end.
We will write a more in-depth preview of these events next week. However, markets are certainly taking the ‘positive/dovish until proven otherwise’ stance into it.
Apart from this, we haven’t mentioned the China reopening story in any of our previous posts, as we always felt it was a bit of a red herring for markets looking for an excuse to rally.
Even if more supply chains in China fully come back online, globally, services not goods are the beta in the inflation problem - and this is mostly demand related.
Furthermore, any positive demand side boost from a hypothetical full reopening will only further worsen the global services inflation.
In any case, this is still some time away, as China will now first have to deal with a massive exit wave, as the rest of the world did last year and this year.
In any case, it is clear that global inflation has indeed peaked.
The question that remains for markets now is where will inflation bottom.
Even if 2% inflation is out of reach next year, will it fall low enough such that the Fed will have room to cut rates while keeping real rates positive?
Therefore, one key market theme for next year will be the shift from ‘peak inflation’ to ‘trough inflation’.
Our upcoming year-end Just Crypto piece at the end of the month will touch on this and other guiding themes for 2023.
Crypto Options and Deribit
Finally in crypto, while the pie is getting smaller, the slices are being split in more ways.
Deribit is one of only a handful of large centralized exchanges to come out of this with its reputation intact.
Users are also showing that trust is the most important commodity in crypto now - with Deribit registering record trading volumes last month amidst the worsening crypto bear market.
As we’ve been writing, crypto options are the one remaining sector of growth for the industry, and Deribit’s November numbers continue to show this.
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