PMIs Show Slowing Economic Growth
There was a significant amount of economic data released this week, with particular attention given to the PMI data, which is considered a reliable indicator of economic activity. In May, the manufacturing sector in the US experienced its seventh consecutive month of contraction, as indicated by the Manufacturing ISM Report. The Manufacturing PMI for May was recorded at 46.9, a data point that suggests a recessionary environment.
The report highlights the challenges faced by the manufacturing sector, including a decline in new orders, low backlogs, and uncertainty regarding future demand. However, there were positive signs observed in terms of production and employment. Notably, the report also indicated a decrease in the prices paid for goods by survey participants (deflationary).
Our view is that lower PMIs are downstream of tighter liquidity conditions, hence why we pay much more attention to monetary and fiscal policy as opposed to pure economic activity. However, we thought it would be useful to investigate Bitcoin’s relationship with PMI more closely.
We mapped out the historical PMI figures since 2011, coinciding with the inception of bitcoin trading on centralized exchanges. We have also marked the cyclical peaks and troughs of the PMI metric, which conveniently aligns with the number of cycles (4) observed in Bitcoin since that time.
Without peeking at the Bitcoin chart, you likely notice a clear pattern that matches historical BTC price action. Early 2018 was right after a significant blowoff top, and early 2020 was right before the frothiest bull market for risk assets to ever exist started. Further, despite making another all-time high several months afterwards, one could argue that the frothiest part of the post-COVID bull market ended in early 2021.
With the above in mind, we examined the relationship between monthly PMIs and annual returns. There is clearly a strong relationship between the two. This intuitively makes sense – more economic activity signals greater confidence in the economy and facilitates a higher level of risk-taking.
If we superimpose PMI peaks and troughs on the BTC price chart, this confirms the relationship observed above. Examining this chart we can further observe:
- Bitcoin bottoms before PMI bottoms. Nearly every cyclical bottom happened before PMI reached its low. This is expected given that crypto is an ultra-sensitive leading indicator of shifts in market dynamics.
- Bitcoin (most often) will top before PMI tops out. In a similar spirit to point (1), BTC will normally peak before PMIs peak, save for certain exceptions, which we acknowledge in point (3).
- Excess liquidity can prolong a bull market irrespective of declining economic activity. As observed in late 2021, often market dynamics can prolong bullish price action despite the declining economic activity.
What does this mean from a positioning perspective?
Well, as you can see below, BTC not only bottoms before PMIs, it bottoms substantiallyearlier than PMI. Thus, while we have been discussing potentially short-lived downside volatility from the impending debt ceiling increase, thinking that we return to any new lows due to recessionary indicators is inconsistent with historical data.
The bottom line regarding Bitcoin and PMI data: Examining the relationship between PMI data and Bitcoin prices, we find that BTC tends to bottom out before PMI and often tops out before PMI reaches its peak. This suggests BTC acts as a leading indicator. Excess liquidity can sustain BTC’s bull market despite declining economic activity. Therefore, while short-term volatility is expected, historical data contradicts the idea of BTC reaching new lows based on recessionary indicators.
TGA Refill to Commence Shortly
As we have been covering closely as of late, the federal government appears ready to sign a new debt ceiling agreement. This will assuage fears of a government default but will likely lead to nearly $1 trillion in treasury issuances coming to market. While there are factors such as a potential RRP drain or global monetary easing that could soften the effects of this increase in treasury supply, it is more likely that we will see some (likely short-lived) downside volatility over the next couple of months, as bank reserves are pulled from the private market and into the TGA.
Below is a chart we have referenced before, but it features BTC price action during the last TGA refill, the negative effects of which were, to be fair, exacerbated by a climbing RRP balance and a strengthening USD.
Taking the Treasury Borrowing Advisory Committee’s projections into account, we compiled an illustrative view of the possible direction of domestic liquidity conditions from June through September. The blue line below should be viewed as a “worst-case scenario,” while the orange line speaks to how we think things will (directionally) play out.
The drawdown in banking reserves will likely be negated by an increase in rates that entices money market fund shareholders to move out of their respective MMFs and become the marginal bid on the new treasuries. This will be a liquidity-neutral event for the market (assets flat).
Further, one must consider that the treasury will be anxious to spend its “hard-earned” cash on various expenditures that are coming due, which means that the capital raised through treasury issuance will make its way right back into bank reserves in short order.
The final reason for relative optimism around the TGA refill is that we think it’s plausible that we see a decrease in the capital tied up in the RRP, absent any increase in short-term rates.
Below, we see that the RRP balance peaked in late March.
Interestingly, this was also the same point at which emergency bank borrowing from the Fed peaked. The troubled banks have all been seized, so the deposit run to MMFs has been put on pause. To us, this means that demand for the overnight rate might be exhausted.
Additionally, it seems apparent that the Federal Reserve will entertain a pause (or a “skip,” as they like to call it) at the June FOMC meeting.
This should be constructive for reducing rate expectations, which could translate to an increase in collateral values and perhaps further entice capital to move from MMFs (out of RRP) into risk assets.
The bottom line on the debt ceiling deal:The forthcoming debt ceiling agreement will assuage default concerns but is expected to introduce approximately $1 trillion in treasury supply to the market. Analysis of past TGA refills indicates a potential negative impact on BTC prices. However, the combination of a declining RRP balance, global monetary easing, and a pause in rate hikes suggests that any downside volatility is likely to be short-lived.
Potential overlooked catalyst in H2: Ripple Case
In an otherwise quiet week for crypto, there have been a few standouts, one of which is XRP. XRP, the native currency of the Ripple payments ledger, has recently seen significant price gains. This has fueled speculation that a resolution to its ongoing legal battle with the U.S. Securities and Exchange Commission (SEC) might be imminent.
In 2020, the SEC sued Ripple, alleging that it had sold unregistered securities in the form of XRP. Ripple’s CEO, Brad Garlinghouse, has expressed confidence that the case will conclude soon, suggesting it might be resolved in weeks rather than months. Recent developments in court pertaining to the ‘Hinman emails’ have garnered significant attention. These emails are related to a speech by William Hinman, the former Director of the SEC’s Division of Corporation Finance, in which he discussed the SEC’s classification of ETH as a non-security. Garlinghouse emphasized that a court ruling has allowed for these emails to be publicly released in mid-June.
Ripple’s recently completed investments in companies such as Metaco, which offers custody services, and Bitstamp, a crypto exchange, have added to the speculation that the company anticipates a favorable outcome. While a victory for Ripple may not establish a broad precedent, it could be interpreted as a regulatory triumph with potentially positive implications for other altcoins.
Bottom line as it relates to Ripple price action: While we remain unconvinced about the value proposition of XRP, a victory over the SEC would undoubtedly be perceived as a triumph for the entire industry, countering what is widely seen as an overreaching regulatory body. Despite the potential limitations of such a ruling, it is probable that XRP would experience a rally, and other altcoins would also reap the benefits from a successful outcome for Ripple.
Update on Litecoin Trade
Another asset that performed well this week was LTC. We recently revisited a trade idea centered around Litecoin’s upcoming halving event, which occurs roughly every four years. Historical data indicates significant price appreciation leading up to these events, making it an opportune time to capitalize on this potential catalyst. We also advised de-risking around mid-June, considering the common “sell the news” phenomenon that typically takes place one to two months before the halving.
Although the recent SVB calamity initially caused a sharp decline in LTC, it has since made a full recovery. Until a couple of weeks ago, LTC had not seen substantial gains against BTC in anticipation of the halving, which is expected to occur in approximately 60-70 days (pending block times).
Based on the recent LTC/BTC chart, there are indications that traders are now increasingly entering this trade.
This notion is further supported by consistently high levels of open interest, reaching twice the amount of $475 million and doubling since early March. This suggests that significant leveraged bets are being placed on LTC.
Given these factors, holding this trade for the next couple of weeks is a viable strategy. We will continue to provide technical updates to our clients in the coming days.
Bottom Line as it relates to LTC halving trade: LTC has shown strong performance recently, attracting trader interest ahead of its upcoming halving event. Despite a temporary setback caused by the SVB calamity, LTC has fully recovered. The trade continues to hold promise, and clients can expect additional technical updates in the coming weeks.
Core Strategy
Despite our recommendation in late April to raise cash in anticipation of a near-term resolution to the debt ceiling (TGA refill = lower market liquidity) and recent negative price movements, our overall outlook for the year remains positive. If the Federal Reserve follows through with a pause, it would be a positive development for assets sensitive to liquidity conditions.
Tickers in this report: BTC, ETH, RPL, MATIC, SOL, XRP, LTC 0.09%
