The Fed is boxed in
The past week’s US data have left the Federal Reserve in an uncomfortable position, with inflation proving too sticky to justify materially easier policy even as the consumer outlook visibly weakens. Core PCE for July rose 0.2% month on month and 3.3% year on year, both in line with consensus, with headline PCE firmer still at 3.7%, a tenth above expectations. As the Fed’s preferred measure, this is the release they pay most attention to, and it suggests underlying inflation remains stubborn, limiting the scope for any cuts.
The rest of the data pulled in the opposite direction. Consumer confidence fell to 89.4 in August, its weakest in seven months, with the expectations component falling 5.8 points to 68.2 even as the present situation component rose. New home sales dropped 10.5% in July to 607,000, with inventory rising to 9.6 months of supply, a clear sign that elevated borrowing costs are biting into housing demand³. Yet the broader economy is not deteriorating quickly enough to force the Fed’s hand. This is not quite stagflation, but it is a difficult combination to reconcile, and we do not think it is at all clear the Fed will turn as dovish as markets have recently been pricing. For Treasuries it argues for continued volatility, with the short end particularly sensitive to incoming inflation and labour data.
Treasury’s expanded buybacks add to our unease. The initial market reaction when purchases began was for yields to rise, which is hardly encouraging. More fundamentally, the programme shifts issuance toward shorter maturities, increasing the government’s sensitivity to Fed policy, and risks loosening financial conditions enough to keep rates higher for longer. It has already contributed to a weaker dollar, which raises imported inflation and makes eventual Fed easing harder still. The result is a circular problem: buying depresses the long end, weakening the dollar, the shorter maturity profile increases vulnerability to Fed rates, and those rates are in turn driven by the very inflation the weaker dollar aggravates. This looks to us like a temporary market fix rather than a solution, leaving the underlying fiscal credibility problem unresolved.
Against this backdrop, Fed Chair Kevin Warsh delivers his first Jackson Hole keynote on Friday 28th August, and expectations are unusually finely balanced. The market is looking less for an explicit September call than for clarity on how he interprets the combination of sticky inflation, weakening labour and confidence data, and the recent disorder at the long end of the Treasury curve. We are listening for three things: whether he characterises recent inflation as persistent or shock driven, whether he explicitly acknowledges the tightening of financial conditions from higher long yields, and, most importantly, whether he distances monetary policy from Treasury’s buyback intervention.
Flows turn supportive
Bitcoin closed 26th August near $78,500, having briefly topped $81,000 the day before, and has reclaimed its 200 day moving average for the first time in 270 sessions.
Fund flows across all issuers suggest that this quagmire at the Fed is proving supportive for digital assets, with inflows of US$1.65B over the first three trading days of the week to 27th August across all issuers globally, following the US$2.94B recorded in the full week to 20th August, which was the largest weekly inflow of the year globally. Bitcoin has led at US$976M and Ethereum at US$478M, with broad altcoin participation (XRP +US$80.5M, Solana +US$62.9M, Hyperliquid +US$39.0M). The US drove the bulk at US$1.5B, with Germany and Switzerland also strong. Total industry ETP assets under management have risen to about US$155B and industry-wide year to date flows are back positive at US$3.4B. These are industry-wide figures covering every issuer globally and are not CoinShares product flows.
