SignalPlus Macroeconomic Analysis Special Edition: Breach of Trust

Despite the ongoing government shutdown, the main event last week centered around the Federal Open Market Committee meeting. The outcome disappointed the market's dovish expectations, as Powell rebutted the fully priced in December rate cut, stating it was “far from” a “done deal.” Although a 25 basis point cut was made, Powell pointed out that there were “strongly divergent views” within the committee, with about half the members supporting a cumulative cut of 75 basis points in the fourth quarter, while the other half opposed it. Furthermore, the government shutdown has made economic forecasting more difficult than usual, and the Fed even hinted that they might “remain cautious” and wait until after the December meeting to assess whether further rate cuts are necessary. Regarding the economic situation, Powell believes that the labor market has been relatively stable in recent weeks. Despite the tariff pressures, inflation is expected to remain near the target. The highly anticipated end of quantitative easing is expected to occur around December 1, which is close to market expectations, and will then pause, with an expansion of the balance sheet again in the first half of 2026. Continuing this gentle tone, Chicago Fed President Goolsbee stated on Monday that he has “not yet decided” on the interest rate decision for December, citing concerns about “the inflation picture”; meanwhile, San Francisco Fed President Daly also mentioned that she would only “keep an open mind” regarding a rate cut in December. Given the previously high market pricing level, risk assets are disappointed by the lack of immediate easing. Since the meeting, the U.S. stock market has fallen 1-2% from its historical highs. Before the meeting, the market's expectation for a rate cut in December was nearly certain at around 95%, but has dropped to about 70% after the meeting.

Despite encountering slight setbacks, overall market sentiment remains optimistic as earnings season approaches. EM stocks in South Korea and Japan are leading the way, driven by the performance of Nvidia and the semiconductor sector. The “Gorgeous Seven” continues to lead the market, with two-year performance surpassing the benchmark by 70%. The basket of stocks favored by retail investors has almost outperformed all strategies year-to-date. Naturally, Nvidia's earnings report is seen as the biggest stock market volatility event in the next month, with an expected daily breakeven volatility of +/- 1% against the S&P 500 index, even higher than December's non-farm payroll data.

At the same time, the economy continues to operate steadily, with the Atlanta Fed's GDPNow model suggesting a third-quarter growth rate of 4%, far surpassing any estimates from Wall Street, and consistent with the recent rebound in data momentum. In this context of growth, does the Fed really need to cut interest rates?

Now, let's look at the bad news. Unlike stocks that have actually entered a “only rise no fall” mode, cryptocurrency prices have taken a hit, and market sentiment has fallen to new lows. The recent price drop has severely impacted the community's purchasing power and optimism, with the full effects still unclear. Additionally, Balancer was hacked overnight, resulting in losses of over $130 million, an act that once again undermines market confidence and catches us off guard. As a result, Ethereum plummeted nearly 10%. Considering Balancer's status as one of the “veterans” and the safest protocols in the system, confidence in DeFi is more shaken than ever. Even more concerning, at this time, rumors are circulating in the market about regulatory agencies potentially taking action against the behaviors of some of the largest participants in the “October 10th” crash, exacerbating the overall predicament and bringing Bitcoin dangerously close to the $105,000 region.

After the sell-off, TOTAL3 (excluding BTC/ETH) has now given back all its gains for the year-to-date and is flat, while other major macro asset classes have achieved double-digit growth. The total market capitalization, including Bitcoin, has also underperformed all major stock indices (including the Chinese stock market) year-to-date, which has indeed comprehensively dampened the spirits of traders hoping for a recovery in altcoins.

Finally, on-chain data shows that since early summer, net long-term holders have consistently turned into net sellers, which often suppresses price movements in the coming months, as we are currently witnessing. Additionally, according to Glassnode's analysis, the high volume of long-term wallets transferring to centralized exchanges also indicates actions being taken to prepare for sales, with recent averages showing a significant spike, coinciding with more profit-taking activities among long-term holders.

As traders prepare for further price declines in the short term, the skew of Bitcoin and Ethereum put options has risen again. We maintain the same cautious stance and would not be surprised to see Bitcoin test the $100,000 level downwards again (many token prices have already fallen below their October 10 low), which could be driven by weakness in U.S. stocks or negative headline risks. Good luck and stay safe. This could be a tricky period before we look forward to the Christmas market.