SignalPlus Macro Analysis Special Edition: A “Hawkish Rate Cut”?

Despite risk sentiment stabilizing last week, G7 fixed income markets experienced a tough week as several non-US top-tier economic data surprised to the upside. Australia’s CPI rose 3.8% YoY, above the expected 3.6%, causing its 5-year government bond yield to jump 15bps and the AUD to climb 2.5% against the USD for the month. This was followed by Canada’s extremely strong jobs report, far exceeding expectations (unemployment rate at 6.5% vs. expected 7.0%), triggering the largest single-day move (+20bps) in Canadian 5-year bonds since 2022, and pushing the CAD up 2%. In Japan, despite weak capital expenditures, the market is pricing in a 90% chance of a Bank of Japan rate hike this month, making the dovish Federal Reserve stand out among the G7.

Markets broadly expect the Federal Open Market Committee (FOMC) to cut rates by 25bps this week, with two more cuts throughout 2026. Despite stubborn inflation, the Fed has hinted at using weak unemployment (~4.5%) as a rationale for a final cut this year. Additionally, with two jobs reports due between the December and January FOMC meetings, we expect Chair Powell to keep options open for a further cut in January or March, while the 2026 “dot plot” forecast will likely remain similar to the last.

Unsurprisingly, the Fed’s dovish stance is beginning to face market resistance, with participants now pricing in the possibility of a “hawkish cut” based on Powell’s Q&A guidance or potential changes to the Summary of Economic Projections (SEP). For this to materialize, the Fed would need to be very explicit in its forward guidance, for example, adjusting 2026’s rate cut expectations to just one or fewer, but we think this is unlikely.

On the other hand, since President Trump has strongly hinted that Kevin Hassett could be the next Fed Chair, this is likely the market’s consensus outcome, suggesting that from June next year, a more “accommodative” Fed Chair will take the helm. Thus, in the medium term, the views of 1) a weaker dollar, 2) higher inflation, 3) a steeper US yield curve, and 4) higher asset prices are likely to remain unchanged absent significant macro surprises.

All of this has little impact on the crypto market, with BTC rebounding to the $86–92k range after a lackluster week of trading. Unfortunately, underlying market sentiment appears to have turned negative, with BlackRock’s IBIT ETF experiencing its longest streak of consecutive weekly outflows since inception—nearly $2.9 billion over the past six weeks.

This structural shift in sentiment is evident from BTC’s recent (lack of) correlation. Over the past eight weeks, BTC has significantly underperformed other high-beta, risk-on asset classes. This asset decoupling has occurred as investor focus has shifted entirely to AI and related stocks, global retail traders have returned en masse to day trading (and prediction) markets, and gold and silver prices remain near record highs.

From a production standpoint, BTC prices continue to hover below most production cost metrics. Due to China’s recent regulatory crackdown on crypto activity and miners shifting resources to AI and cutting back on pure mining, hash rate has dropped sharply. If prices remain below production costs for an extended period, it will put extra pressure on miners, potentially leading to further declines in hash rate and mining difficulty, creating a negative feedback loop for BTC prices in the medium term.

More concerning is the global DATs crash, which has sparked widespread worries about oversupply and potential forced selling if the shares of these listed companies trade well below the value of their BTC holdings. MicroStrategy (MSTR) faces the most pressure; the total value of its debt plus equity now trades at almost no premium to its BTC holdings. When asked what would happen if this ratio fell below 1, Saylor gave a worrying answer: “When our stock trades above the net asset value of our bitcoin, we sell stock, which creates value for shareholders; when the stock trades below (bitcoin net asset) value, we will either sell bitcoin derivatives or sell bitcoin directly.” — Michael Saylor, Binance Blockchain Week, December 3 Hopefully, MicroStrategy’s $1.4 billion reserve fund will prevent it from being forced to liquidate its BTC holdings for the foreseeable future.

Looking ahead, the situation is largely unchanged—equities are likely to remain strong through year-end, while fixed income faces short-term adjustment pressures as global central banks (ex-Fed) turn neutral/hawkish, pushing yields higher. We worry that crypto will remain in a short-term bear market until proven otherwise, as reflected in the volatility market where traders continue to pay premiums to hedge downside risk. It may take a very dovish rate cut (or a surprise S&P 500 inclusion of BTC) to reverse the short-term trend, so we expect market interest and sentiment to remain subdued and trend lower as the new year approaches. Good luck and happy trading.