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Poor employment numbers cause a large drop in US interest rates. The stock market falls, as well as Bitcoin. Let's get into a global macro update.
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Welcome back to the Bitcoin Layer. I'm Nick Batia. Today, we're going to go through the action in rates and Bitcoin. Think about the Fed, and will the Fed be cutting rates soon?
All right, let's pull up the chart on 2-year yields. You guys know this is where we focus our analysis when it comes to monetary policy expectations. Where is the Fed going over the next 6 to 12 months? Well, we use twos to give us the best signal. And as you can see, the policy rate at about 4.3% is above where the 2-year yield has been trading for the entire year, essentially.
Now, when the 2-year yield is below the policy rate, it means the market expects the Fed to cut at some point over that horizon. The larger the gap between these two yields, the more cuts are expected in the market. And you can see here that over the last few weeks, yields have been trending right around 4%. And this morning, they traded at 3.99%, just shy of 4%. Yet right now, all the way down at 3.7. A huge 30 basis point intraday fall in 2-year yields is a big, big signal to a rates analyst like myself. What it tells me is that the next meeting is going to come with an interest rate cut from the Fed.
Now, that meeting in September is still a few weeks away, but the data is one thing, the market is another. The data is telling us that the labor market is slowing, but data is all over the place, including last year, a downward revision of about 1 million jobs. Today, a downward revision of a few hundred thousand jobs. It's very unreliable in terms of the non-farm payrolls number that comes out on the first Friday of every month. It's not something that's very high on our signal indicator.
What is though? ISM manufacturing, which this morning missed expectations, declined month over month. A big fall in the employment subindex, a drop in the prices paid subindex. So manufacturing in this country is slowing at the margin, in contraction territory. This is an economy that is chugging along very nicely, but at the margin is seeing slowing in manufacturing. It's seeing slowing in the pace of home sales, and it's even finally seeing some slowing in the home price appreciation rate, which we know home prices continue to tick higher, but that is also starting to level off. So there's a lot of underlying mediocrity in the economy.
But why should the Fed be rushing to cut rates? I will explain this. This is a very, very important concept that we've talked about but haven't discussed it for a while, as the Fed has been on pause, as the economy runs pretty hot, and inflation isn't coming back in. And so it does come back to inflation and what the Fed calls as their neutral rate. Now, inflation is somewhere between 2 and a half and 3%, which it is today. It is above the target range that the Fed wants inflation at, which is 2%. However, it's not at any level that gives them a permanent concern that inflation is going to tick much higher. In that comfort zone, the Fed has admitted for the last 2 years that the policy rate above 4% is overly restrictive. Why would the Fed continue to be at an overly restrictive policy rate if inflation has come back down to a normal and normalized level, even if it is still above 2%? And that is the reason that we have for a long time believed the Fed is going to cut rates into the 3 and a half% range because it simply cannot keep rates above 4% when inflation has shown for now a couple years that it isn't ready to charge back to that level of 4%.
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So, in the Fed's dual mandate, where they have to balance inflation and employment, inflation isn't giving them that warning, and employment is starting to give them that warning. So they have to reduce the one-sided nature of the policy rate today. Remember, we've been talking about rate of change and how the 10-year yield has been flat for 3 years. Well, it has been. The 10-year yield has been flat for 3 years, just as the policy rate has been somewhat steady for the last year. But that doesn't mean that the policy rate where it is today is the appropriate level for the economy over the medium term. The more appropriate policy rate is somewhere in the threes. The Fed knows this and admits this, but is holding off on the cuts because of whatever reason, potential worries about inflation picking up due to domestic and trade policy, or other reasons that might be more politically inclined.
What we really know though from the rates market today is that that debate, which has been ongoing for a while, is starting to resolve itself. The balance toward inflation focus at the Fed is shifting back to the middle. It doesn't mean that they are in some panic to cut and get rates to the accommodative level. It simply has to cut them to get to a non-restrictive territory. Now, coincidentally or not, perhaps this orange line that you see here, this horizontal orange line at 3 and a half percent, is the area we believe policy rates are heading to, perhaps over the next year. And twos making a move very quickly from 4 to 3 and a half here. More than half of that move taking place in one trading session. A big signal day for us here at TBL, and one that we wanted to point out to you right away.
I want to bring up the dollar really quickly. It, the dollar and DXY specifically, is something that we've been watching. We now reading between the lines and looking at the administration, the way that they've behaved for over half a year now, we get the sense that this administration wants a weaker dollar. You can see here on the chart from essentially from the inauguration time when the dollar was around 109, it's been a straight march lower in the dollar. This is a weakening move that is driven in large part by this new trade policy being taken up in a search to convince other countries around the world to stop manipulating their currency weaker in order to engage in a legitimate trade relationship with the United States. And so what you are seeing is the companies will, uh, the countries willing to play ball are slowly appreciating their currencies versus the dollar and getting in a position that brings the administration to the table and says, yes, we can see that you have read what we have written. You have listened to what we have said, and you are stopping the practice of unnecessary currency cheapening. This is a policy that's been in place from around the world for decades, and the United States is really ready to play ball.
We, it's very tough, guys, for us to listen to political speak and have that drive investment decisions, such as how to trade DXY. So it's very difficult, and it's very unreliable to do something like that. However, we look at the candlesticks for evidence and for movement, for flow. Liquidity is flow. Capital movement is flow. Flow drives markets. And so what is the flow? The flow is a cheaper dollar and a more expensive basket of trading partner currencies versus that dollar.
Now, it, the dollar got very weak there at the beginning of July. We flagged a little bit of a, a bounce potential. We've seen that bounce. Now, it hit, uh, just levels above 100. And then today, you can see this large red candle rejecting that 100 area. Again, a very material price action day in DXY. It tells us that the trend is still down in the dollar. If we see the dollar continue to move lower, this is going to be a boost to global liquidity, a very, very supportive tailwind to risk asset prices. So something that we will be watching closely.
Before we get into the Bitcoin price, I want to talk about TBL liquidity here for a couple minutes. I'm going to try to give you a one-minute summary of TBL liquidity, what we are using it for, what is it, and how you need to think about it. TBL, short for the Bitcoin Layer, has introduced a proprietary index last year called TBL liquidity. It is an index that we have constructed, inspired by the global liquidity index introduced by Michael Howell and Crossberg Capital. Subscribers to the Bitcoin Layer, our TBL Pros, will have access to a Zoom Q&A with Michael Howell here in August, which we are very excited about. Go to thebitcoinlayer.com/subscribe to sign up.
Our TBL liquidity index consists of four components, and it is meant to tell us whether the conditions for Bitcoin prices are good or bad. Now, what do we think are the four macro factors that drive Bitcoin prices up and down? It's actually quite simple. Number one is the size of the banking system. Larger banking system, more money out there to potentially buy Bitcoin. The second one are treasury prices. This is the collateral that these banks hold as their assets. So as treasury prices go up, this is good for liquidity, money creation, and Bitcoin prices. The third component, and arguably the most important, is treasury volatility. As treasury volatility goes down, this is supportive for liquidity because it means less volatility, more confidence in the system, more money creation, good for Bitcoin. The fourth and final component is the US dollar versus other fiat currencies. This can be measured by DXY. A higher DXY is a bad liquidity condition on money creation and Bitcoin prices. Why is this the case? Because the world has debt in dollar terms. Approximately $300 trillion of debt exists in the world. And as the dollar goes up versus the rest of the world's currencies, all of that debt that's held abroad becomes harder to pay back. So a stronger dollar is bad for liquidity and bad for Bitcoin prices.
So today, what is driving the Bitcoin price lower? Well, it's not Treasury prices. Those are going up. It's not the dollar that's going down. Treasury prices going up and the dollar going down. Those are both supportive liquidity conditions. So, we are to conclude that it must be here the introduction of some volatility. And we see the large move down. Even though it's a move down in yields and higher in prices, it will likely introduce volatility into the system. We see the VIX, which is the stock market's measure of implied volatility, spiking today as stocks fall. This is higher volatility and therefore lower Bitcoin prices.
It's so important for us to think about TBL liquidity at all times, but even then, think about the individual components. What is in the driver's seat today? Today, it's volatility. And you can see here on the chart, Bitcoin giving up this $115,000 level. Our sights are set around $18,000. This would be a nice consolidation zone, anywhere really between 105 and 115K. Bitcoin can grind there for another few months and prepare itself for the next leg up. This would allow realized price to catch up as coins change hands at these higher prices. It would also allow some leverage to come off. In a previous episode, we pointed out a little bit of elevated funding rates. This is some speculative energy coming into the market. We might want to see some of that come off, see the momentum come off, but I would say you don't want to see Bitcoin give up a $100,000. It, it captured $100,000 and it has been chopping around there for a few months and has been in the $100,000 zone for almost a year here. So, we want to see Bitcoin hold that 100K level. I would like to see it hold around 108 and consolidate somewhere above 108,000.
Thanks for watching this short global macro update. Make sure to subscribe to our channel. Rate and review on your favorite audio platform. And for those looking for daily TBL liquidity numbers and that really high signal indicator on global macro and what is driving risk asset prices, including Bitcoin, go to thebitcoinlayer.com/subscribe. We'll catch you guys next time.
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