The Macro Pulse | Shanghai Moon: A Smooth Upgrade for ETH Boosts Crypto Market Confidence

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April 17, 2023


Shanghai Moon

Crypto sprang into life this week as the much-vaunted ETH Shanghai upgrade was finally successfully delivered 🎉. 

Bitcoin had already led an early week charge above 30k, sparked by Hong Kong Financial Secretary Paul Chan saying in a blog post that, despite crypto volatility, it’s the “right time” to push Web3 adoption and that Web3 tech would be one of three focus budget areas. Circa 175mio short liquidations helped BTC claim the psychologically important 30k level and set up nicely for the “Shapella” upgrade. 

ETH, which has underperformed BTC by some 15%+ YTD, played catch up in the “sell the rumor, buy the fact” redux. BTC has been the cleanest play on the “digital gold” narrative, with ETH negatively impacted by uncertainties around the upgrade and potential supply unlock and Gensler labeling everything outside of BTC a security! However, the smooth passing of the event saw a scramble to buy topside and some rotation out of BTC. The ETH/BTC cross rallied some 12% off the lows as ETH pushed to highs around $2,130.

The network maintained stability throughout the upgrade, with high and stable validator participation. The feared withdrawals and supply dump look mostly contained to partial withdrawals of the issuance rewards on the Beacon chain. Most of the full withdrawals came from Kraken, which has been forced by the SEC to close its staking as a service business, but otherwise, it appears stakers are hodlers 💪.

Macro Slowdown

Back to the macro and plenty of important data releases also to occupy us this past week, with US CPI headlining. The number came in soft on headline dropping from 6% to 5%, the smallest gain since May 2021, with monthly inflation at 0.1% below expectations for 0.2%. Taking some shine off, the number was still elevated core at 5.6%, with housing-related costs driving a core month-on-month print of 0.4%. Progress however continues to be made and a very weak PPI print on Thursday, which fell 0.5% MoM (Vs. +0.1% exp), taking headline PPI to 2.7% from 4.9% in Feb, continues to suggest inflation is heading “right way.”

Peak inflation remains on track, although Fed speak continues to talk tough, even if most members are teeing up a one-and-done for May. Hawkish comments from Waller on Friday that “inflation is far above target, so monetary policy needs to be tightened further” helped lift the odds for a Mar 25bp hike to 85%. Interestingly, in the FOMC minutes released on Wednesday, staff economists now forecast a “mild recession” later this year. US retail sales fell 1% in March, a further sign that the world’s largest consumer is starting to feel the bite.

The National Federation of Independent Business (NFIB) survey also painted a gloomy assessment of the US economy, with hiring plans falling to their lowest level since May 2020 and in the context of an expected credit crunch post the recent banking failures, a net 9% of frequent business borrowers said financing was hard to get compared to 3 months earlier, the most since December 2012. The biggest kicker, however, was just 2% of small businesses said it was a good time to expand. This is the lowest level since June 1980.

NFIB: Good time to expand index

Positive risk dynamic…

Putting it all together, the slowdown in the US economy looks to be underway (with even the Fed economists now forecasting a recession.) Inflation continues to ease. The lagging labor market on the face of it continues to look strong, yet we’ve seen signs over the past couple of weeks of cracks starting to appear (JOLTS job openings falling, higher revisions to jobless claims). The Fed is still trying to maintain “credibility” by talking tough on inflation and looks set to deliver one more 25bp hike in May before taking a pause.

I was surprised then that US yields moved higher on the week (2 and 10yr yields up circa 10bps on the week), although after a big move lower post the banking failures, markets perhaps taking a breather. Indeed, solid bank earnings from heavyweights JPM, Citi, and Wells Fargo allaying some of those “banking crisis” fears, although we all know the problems lie in the regional banks, and those problems have not gone away (regional bank stocks continue to trade heavy).

Little overall to dissuade our positive outlook here on The Macro Pulse as we continue to ride this peak inflation, peak rates dynamic. The Vix index is at 17.07, the lowest levels in over a year, suggesting “risk” looks comfortable, and the MOVE index (which measures bond volatility), although elevated, has also moved lower. The risk backdrop for our high beta crypto bags continues to look supportive 💪.


Broad liquidity remains ample, although the Fed balance sheet declined another 17.6bn last week. Nonetheless, it remains 275bn larger than the 1st March and has expanded by $64bn YTD.

Underscoring the positive liquidity environment, the Chinese Credit impulse continues to pump with New Bank Loans for March rising to 3.9 trillion Yuan (up from 1.8trn prior), taking Aggregate financing to 5.4trn Yuan (up from 3.6trn) as the PBOC’s liquidity measures filter through to the real economy. This chart from MacroMicro (h/t Omkar Godbole, Co-head markets at Coindesk) displays the positive effect China’s pumping of credit has had on risk assets and BTC over the past decade 👇.

China Credit Impulse Index - a positive BTC tailwind

The dollar continues to work favorably, briefly making new year lows before a bounce on Friday. A weaker dollar helps to ease financial conditions and provides a favorable tailwind for risk.

Price action also looks constructive. After a big move for BTC and ETH, pullbacks remain minimal, and there’s no sign of exuberant FOMO, with a persistent grind higher, punctuated by some short liquidations. Negative funding rates also suggest little long leverage to concern us here. Large negative gamma for BTC and ETH at 32k and 2,200, respectively, perhaps the next levels to watch for an accelerated move higher 👀. Despite the still negative market sentiment, the powerful dynamic for risk and crypto continues to build 💥.

David Brickell 💜

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