Bitcoin/Gold ‘Glitch’ and World Interest Rates Ahead of RBA Today

Another Glitch has happened, this time in the safe haven assets of gold and bitcoin.  Once again, in the quiet hours of the US Sunday night/ Asian morning markets, both gold and Bitcoin skyrocketed.  Possible reasons for the ‘glitch’ have been the activation of stop buys and stop losses that due to the lite trading conditions moved the market more than they normally would.  The movement in the market was caused by the ‘not-so-dovish’ but interpreted dovish comments of Fed Chairman Powel in the US market evening, ‘“Having come so far so quickly, the [Fed] is moving forward carefully, as the risks of under- and over-tightening are becoming more balanced,”. Also, over the weekend the increased global risks heightened once again with the resumption of the Hamas-Israel war, with Israel now growing their targeted area into the South of Palestine, where a population of nearly 2 million are sardined in. And then Monday morning, before open, we had the Houthi attacks on multiple commercial vessels in the Red Sea and a US navy ship engaging.  Whatever it was, this sort of price action shows the market is bullish on these asset prices, but Mondays ‘Glitch’ may have been too far too soon for the gold market to swallow, but Bitcoin appears to have had a more sustained move.

Today here in Australia – the chance of interest rate cuts are not being priced in as aggressively as worldwide peers. As previously discussed, high migration, high energy prices and a one the lowest OECD productivity gains have meant inflation is now entrenched meaning any monetary movement is likely to have less impact on influencing inflation. Aussie inflation is currently sitting at 5.2% compared to the US at 3.2% and Europe at 2.4%.  Today’s RBA decision once again becomes a damned if you do damned if you don’t decision, but no matter how you look at it, without Government policy changes Australia will not be enjoying the rate cuts being forecast for the rest of the world.

Powell Speech and Rate cuts

The market is once again interpreting news as they want to.  In arguably a very balanced speech from Powell on Friday – the markets enthusiasm for a resumption of Quantitative Easing and reduced rates, being priced in from May 2024, with Powell by no means saying anything to encourage this.  While Powell and other Fed officials continue to state cutting of interest rates is not yet being discussed ‘It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,’ the market has now priced 4 rate reductions next year starting May 2024.  This can be most notably seen in 3 year treasury bond rate, dropping from 5.1% in October to a low of 4.3% in December 23.

US 3 year bond yields

Barclay’s said in yesterday’s Monday note ‘The Fed is forecast to begin a significant easing cycle in Q224 (markets are more aggressive relative to econ consensus), delivering 100bp cuts in 2024, another 100bp in 2025 and more in 2026 to a steady state rate of 2.75-3%’ 

European Inflation Plummeting – Rates to follow

Last Thursday Eurostat reported on the November inflation – dropping 0.5% from October to 2.4%, impressive for a region that in October 2022 was recording a 10.2% inflation high.  With growth now negative in the September quarter, this good news has come at a cost to the European economy, especially Germany, with expected growth of 0.6% and -0.3% respectively.  For 2024 forecasts of economic growth of 1.3% in 2024 are now being forecast, with even more positive wage increases news, sustaining above inflation of 2.9% (forecast) with 4-5% increased wages forecast. 

The interest rate relief can be clearly seen in the 3 year European bond price dropping from around 3.15% to 2.55% between September and now, which is offering some relief to consumers.

Europe 3 year bond yields

Europe actually looks set for the soft landing all other economies have been striving for, cutting the balance between quantitative tightening, interest rates and positive real wage growth.  In order to do this, they have had to shift energy policy in order shrug off huge energy increases, due to the reliance on Russian gas and oil and as Europe enters winter, their energy prices dropped a whopping 11.5% in the November month.  

Inflationary risks are still there, but as Carsten Brzeski, global head of macro at ING bank has pointed out in a recent research note; ‘With a weakening economic outlook and disinflation, rate hikes should be off the table at the December meeting,’ ; ‘Given that the full impact of the tightening so far will still unfold in the coming months, the risk is even high that the ECB has already tightened too much,’. In fact the positive news for the European economic outlook and reduced inflation means futures markets are now pricing in a full 2% drop in interest rates next year.

Australia RBA Day – not so lucky

Sadly in Australia entrenched inflation due to poor economic policy surrounding migration and energy are making rate cuts a distant memory.  Despite energy prices continuing to drop in Europe and The US, Australia’s energy policies have meant that we are struggling to maintain and develop our current electricity supply through the closure of coal fired plants and insufficient grid development for meaningful renewable replacement as well as the $12 gas price cap, with the rest of the world paying around $5/Gj, the cap appears to be more of a magnet with prices staying suspiciously close to the generous cap.

With these continued inflationary pressures, the 2% anticipated drops for the rest of the world, is equating to just 1 cut of 0.25% next year priced in in Australia, once again this can be seen in Australian 3Y bonds dropping from 4.5% to 4.1% between November and December,

Australian 3 year bond yields

As the world approaches a turning point in inflation – the outcome is still not clear, and we once again hit a crossroad, where varying inflationary pressures – such as Australia’s migration policy and the US out of control deficit continue to push oversized inflationary pressures onto economies, with central banks having little monetary control over these fiscal influences.  2024 is shaping up to be a year where the stories of economies may diverge and some – like Australia – may be left behind. 

But what will become clear – is the glitches like yesterday’s Bitcoin/gold glitch are not glitches but warnings that markets are remaining imbalanced and over reactive – volatility will return.