Author: PSE Trading Trader @Christine

I’m bullish on BTC hitting 30K by October.

The reason is simple: US equities have shown impressive resilience despite ongoing economic worries. Earnings are solid with S&P 500 companies topping expectations. We aren’t seeing the severe recession or slowdown many forecasted. The market has priced in months of inflation fears already. With the Fed clearly signaling a pause on hikes after November, stocks can rally into year-end.

Major indices are breaking out of trading ranges even with the macro turmoil. That suggests risk appetite is returning. Now that Three Arrows and FTX are behind us, crypto sentiment can improve too.

BTC has already bounced 40% off its lows as the macro outlook firms up. The inflation narrative is fading as well, with the market shifting focus to growth names and AI. As the economic picture stabilizes, I’m confident BTC can catch a bid.

US Equities: Higher for Longer

Not a ton of new economic data last week, but what we got continues to show some strength under the hood even with higher rates. The economy’s not going gangbusters, but it’s also not flashing any big warning signs of a recession or major pullback. Q3 GDP estimates are over 3% — Atlanta Fed’s over 5% seems too sunny to me though.

One bright spot is productivity bouncing back after a terrible 2022. That’s what I figured would offset any hiring slowdown, and while job growth has cooled off, we haven’t had any negative jobs reports yet.

I think these higher rates are going to stick around for a while, but I don’t see why the Fed needs to hike them anymore right now. A September increase is very unlikely at this point, and even though markets are betting on a November hike, I just don’t see the rationale. Inflation reports this week came in a bit hot, but that was mostly oil and energy. Core inflation should keep gradually getting better, with year-over-year drops continuing.

Seems like the Fed is starting to acknowledge the economic risks if they keep jacking rates — lower bank lending, more auto loan delinquencies, commercial real estate struggles, more pain for consumers with student loans restarting. But so far, those risks haven’t caused real damage, and the data is still showing a pretty healthy economy. Just look at the latest subdued jobless claims last week as an example.

For stocks, I still see an upward tilt for the rest of the year. Some of the biggest names like Apple were soft last week on headlines about China restricting iPhone use, but I think that was overblown — most state workers weren’t using them anyway. If iPhones stay attractive to consumers, demand should still be solid. We’ll probably keep getting worrying geopolitical headlines, but the fundamentals look resilient for now.

SPX: Growing Preference for Growth Stocks

The S&P 500 seems to be favoring growth stocks more and more lately. That could lead to growth stocks (like the “Magnificent 7") having even higher valuations compared to defensives and cyclicals if rates stay high. T*he biggest names in tech — Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia, and Tesla — are known as the Magnificent Seven. *Since 1990, the percentage of total debt that the S&P 500 pays in interest has basically mirrored yields on investment-grade bonds. So higher investment-grade yields could mean higher interest expenses.

Interestingly, growth companies did a good job pushing out their debt maturities before rates started rising. So they locked in historically low rates. Also, the S&P 500’s cash-to-total-debt ratio is still elevated, with growth companies holding 53% cash versus 28% for cyclicals and 14% for defensives. That suggests growth firms could earn more interest income if rates stay higher for a while.

Looking at how rates impact valuations, the rate spike in 2022 caused multiples to contract, especially for growth. But this year we’ve seen multiples expand despite persistently high rates. Really looking at the fundamentals shows growth multiples could expand compared to cyclicals and defensives.

Going forward, average rates are expected to be higher than after the financial crisis. That will likely increase interest expenses and hurt earnings for S&P 500 companies. But growth firms pushing out maturities in 2020 should help limit the damage if rates stabilize at a new normal. Given the big differences in leverage, defensives and cyclicals are likely to feel more pain from higher relative debt than growth stocks. So the relationship between growth valuations and rates may be more complex than many assume.

Macro: A Look at the August CPI and Beyond

After a couple slower months, core CPI accelerated again in August — partly thanks to a big jump in airfares. Core services minus rent were up, as were prices excluding shelter. Even though some expected a small rise in core PCE inflation, the PPI details point to goods prices picking up steam again. Still, the Fed will likely stick to its plan — I see them doing a 25 basis point hike in November. That matches the steady growth and inflation a bit above target we’ve had. Sticky inflation could mean high rates for a while. The Atlanta Fed wage tracker dipped but still supports 2% price inflation. Risks are union negotiations leading to higher labor costs, and a government shutdown if Congress doesn’t get its act together.

The economy seems to be growing in diverse ways — shifting from services spending towards more consumer goods, business investment and residential investment. Manufacturing output slipped a bit, but things like low jobless claims and a small industrial production gain point to solid performance.

The upcoming FOMC meeting and housing data will be key to watch. Given the recent signs of smoother inflation and softer labor market, the Fed will likely hold policy rates steady. Their forecasts may show higher 2023 GDP and slight dips in unemployment rate projections. Core PCE forecasts will probably show declines too. Housing starts should increase with tight supply, but high rates and prices could limit that.

There are hints of loosening in the job market — things like the ratio of openings to unemployed inching down and the unemployment rate ticking up. But labor demand is still strong, so it seems more like normalization at a level that will keep fueling over 4% wage growth. The Atlanta Fed wage tracker confirms slower pay growth. Sticky inflation and sticky labor costs seem linked. Upcoming auto union negotiations will be crucial for future price inflation. Also, the jump in ISM services could reflect rising energy costs. But strong Q3 GDP is expected on robust consumer spending and broad growth.