Cryptos Post Jackson Hole Reaction

Daily Updates:

• Last Friday, Chair Jerome Powell sent the US bond market flying after giving a surprisingly more dovish-than-expected hint that he would be open to a rate cut in the FOMC’s September meeting. We covered Powell’s speech in more detail in our Friday daily comment here, but the key line that caught markets offside from Powell’s speech was: “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
• In the immediate aftermath of his speech, market-implied odds of a rate cut jumped materially higher – temporarily exceeding 94%. 

• Since then, markets have slightly readjusted their stance. According to CME’s FedWatch, 30-day Fed Funds futures prices now imply odds of 84%. That suggests traders still have some lingering doubts over the price-stability side of the Fed’s dual mandate. 

• Indeed, expectation for Friday’s PCE inflation report underscores the "challenging situation” the Fed faces, as quoted by Chair Powell. 
• Core PCE inflation in July is expected to have risen 2.9% from a year earlier, which will be the fastest annual pace in five months. The month-over-month core PCE is expected to climb 0.3%, the same pace as it did in June. 
• Traders will also have a second estimate for Q2 GDP in the US to parse – with two major data releases, markets are attentive to the fact that Powell’s potential dovish approach to the September meeting could be derailed. 
• The employment report at the beginning of August (which showed the steepest downward revisions to US job growth since 2020) was an indication of how fast markets change their tune — Treasury Secretary Scott Bessent even claimed following that report “I think we could go into a series of rate cuts here, starting with a 50 basis-point rate cut in September.”

• On Friday, 2-year treasury yields, most sensitive to changes to Fed policy, fell more than 10bps to 3.7%, while the yield differential between the 5-year and 30-year treasury bonds reached its steepest level since 2021.

• Following Chair Powell’s speech, in an interview with CNBC Cleveland Fed President Beth Hammack suggested that she still favours a more hawkish approach to changes in the federal funds rate. Hammack said “We’ve been above our [inflation] target for four years, and we need to get that under control. So to me, we need to maintain a modestly restrictive stance of policy to get inflation back to target.” 
• She also added that in her view, the Fed is “only a very small distance to neutral rate … So I don’t really think we have that far to go, which is why I want to make sure we’re maintaining that restrictive stance of policy to get inflation back to target.”

• In options markets, an interesting divergence temporarily played out between BTC and ETH implied volatility levels since Friday. While BTC volatility dropped sharply following Powell’s speech to below 30% for short-tenor options and stayed at those low levels, ETH IV also fell following the event, though quickly bounced back to similar levels of 68% only a few hours later. While that partly reflected the spot price of the two assets (BTC was stuck below $120K and ETH had rallied more than 15%), the divergence is still notable given that ETH vol remains high, while BTC volatility drifts towards historically low levels. 

• However, an almost flash crash at 20:30PM UTC on Sunday evening which saw BTC fall from $114K to $112K did spark a slight jump in implied volatility levels for short-tenor options. 7-Day IV rose 5 percentage points from 29% to 34% and has since stayed at those levels as BTC has continued to decline to $111K. 
• ETH experienced a similar drop in its spot price at the same time and has fallen from $4,900 to $4,590 while ATM IV levels have hovered around 70% throughout the move.
• The divergence is also apparent in put-call skew: while skew is tilted towards OTM put options across the term structure for BTC, ETH skew remains positive at most tenors.

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