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Powell’s speech and contract ISM PMI
We would like to zoom out and revisit the broader macroeconomic picture and analyze some of the latest data released this week that will heavily influence market direction over the next few months.
After Jerome Powell’s speech at the Brookings Institution, it’s clear that markets are looking to move higher with every possible Federal Reserve narrative and pivot scenario. There is over hedging, short squeezes, options market dynamics and forced buying. This is beyond our expertise to say exactly why the markets are exploding with volatility on any given data point or new Powell speech. However, these types of events and market moves have almost always been a sign of unhealthy and elevated volatile swings in bear markets. Despite further talks from Powell, where nothing really new was said, markets found the speech “more dovish” in his comment on concerns about exaggerating rate hikes. However, if this is another bear market rally looming for the major indices, we appear on the verge of this rally being reversed once more.
What is also worrying and expected to continue is the trend of economic contraction, as indicated by data from the ISM manufacturing index (PMI). Today’s latest read shows 49.0 print below market expectation of 49.7. New orders are falling, the order backlog is shrinking and prices are falling. By any measure and by any poll, these are the signs of weakening demand, worsening conditions and the economy moving into more cautious territory. The ISM PMI data correlates strongly with the less impactful Chicago PMI data, which just posted contraction lows similar to 2000, 2008 and 2020. This is the sign of an economic recession beginning in the manufacturing sector.
Source: GMI, Julien Bittel
What Does Economic Contraction Mean for Financial Markets? It is usually bad news when a sustained contraction trend in the ISM PMI plays out below 50 and even below 40. It appears that we are in the early stages of a larger contraction trend: the desperation phase of the market.
The specific question for the bitcoin and macro relationship now is: was this industry leverage wipeout and capitulation event enough selling to dampen the potential likelihood and impact of a stock bear market collapse? Will Bitcoin stagnate and bottom if stocks are expected to follow similar drawdown paths of past bear markets?
We still haven’t seen a true burst of stock market volatility, which has always impacted bitcoin. It has been a central part of our thesis this year that Bitcoin will follow traditional stock markets lower.
The real scale of long-term debt has been and still is the biggest story here.
And what does this mean for future asset valuations?
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