"Market participants are learning to play the ball, not the referee”

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In Today's Note

• The Fed held rates in a 9-3 vote, but the market focus was Chair Warsh's press conference, where he rejected the 'pause' framing and played down forward guidance, telling markets to 'play the ball, not the referee'. Long-dated yields surged, with the 30-year jumping 14bps to 5.23%, its highest since 2007, while the S&P 500 fell 1.52% and the Nasdaq-100 entered a technical correction.
• Robinhood reported $156M of Q2 prediction-market revenue, exceeding its equities revenue, as Binance.US said it will apply for a CFTC derivatives clearing licence in August. Aave proposed winding down six low-adoption deployments including Sonic, Scroll and zkSync, and Pump.fun's token graduation rate jumped after its BOOST launch mechanism redirected migration liquidity into early market buys.

Market Snapshot: Overnight Moves

Macro & Markets

• For the fifth consecutive meeting in a row, the Federal Reserve voted 9-3 to leave its benchmark federal funds rate unchanged in the range of 3.5% to 3.75%.
• Minneapolis Fed President Neel Kashkari, Dallas Fed President Lorie Logan, and Cleveland Fed President Beth Hammack all dissented in favour of a 25bps rate hike.
• The market reaction was however more focused on Kevin Warsh’s second press conference as Chairman of the Fed, where he delivered an overall confusing message resulting even in a number of journalists claiming they were “struggling” or needed “help” to interpret some of his comments.
• Warsh made a number of hawkish comments through the press conference, but fell short of directly answering what his reaction function is and what it would take for him to raise rates:

“I wouldn’t characterize what we did as anything like a pause … If you were to try to force a description that this was a pause, I would say financial market prices would take the other side of that … nominal and real rates went up.”

“Five years of high inflation have left a mistaken impression that’s hard to shake that the Fed’s implicit inflation target was somehow above 2%. Let me reiterate, there is no soft inflation target, there is no soft implicit target. Not on this committee's watch. There’s only a target and it’s 2%.”

“As I mentioned in the prepared remarks, we’ve seen a material tightening not just in nominal rates but in real rates too, and we’re observing it. We’re trying to stay out of that because, you know, many of you might be interested in our reaction function. We’re interested in the reaction of financial markets.”

• Warsh essentially conceded that one reason for not hiking was that higher yields in the intermeeting period helped do some of the Fed’s work in tightening the economy.
• When asked whether June’s soft CPI print was a reason for a pause, he responded “in two words, not much”. He later suggested he won’t rely solely on the PCE metric that most Fed officials follow:

“I’m looking at a broader set of inflation data than PCE”.

• He also spent much of the conference emphasising why he believes a lack of forward guidance helps the Fed understand more clearly how financial markets are reacting to incoming news and data:

“Market participants are learning to play the ball, not the referee and market prices will continue to respond in the direction and magnitude they see fit.”

“I understand the desire for rolling forecasts and commentary from this committee, but for our part we need to observe market reaction to developments direct and unfiltered.”

“By not spoon-feeding markets, by not previewing our decisions, by not sort of giving nudges and leans, my colleagues and I have found in the inter-meeting period what we’re getting is the views from a very accomplished economist, that’s the internals of financial markets. Instead of just repeating or echoing what we are saying back to us, they’re giving us somewhat, not perfect, their own judgment.”

• Movements in financial markets following the conference showed the market scaling back immediate expectations for hikes but expecting higher inflation risks in the future.
• 30-year US treasury yields jumped as much as 14bps to 5.23%, their highest since 2007, while the 10-year yield jumped towards 4.7%.
• Meanwhile, two-year yields at the front end declined 10bps to 4.22% while market expectations for a pause in the September meeting briefly spiked to 41.7% from only 17.8% a week earlier.
• 5y5y forward inflation expectations jumped slightly from 2.24% to 2.28% while the US dollar also marginally sold off.
• Risk-on assets mostly sold off, though BTC jumped up and down in a tight range of $63K and $64K.
• The S&P 500 sold off 1.52%, the Nasdaq-100 entered a technical correction, down 11% from its all-time high, and chipmakers declined more than 5%.

• In geopolitics, the US has once again launched a new wave of strikes against Iranian targets, in “response to yesterday's attempted Iranian attacks on U.S. forces based in the Middle East".
• Since the end of last week, both sides had briefly halted their exchange of strikes with one another in an effort to further diplomatic talks. That came to a sudden end on Tuesday night when Iran's Islamic Revolutionary Guard Corps carried out a surprise assault on a US military base in Jordan.
• At the White House Trump said, "We're going to be hitting them very hard because it's our turn to hit them … They know what's coming. They're asking us not to do it."
• He gave similar messaging in a phone interview with Fox News also, "We'll be hitting them hard … they're going to get a beating."
• Brent crude oil jumped from $87 a barrel to as much as $93 following the new US attacks.

DeFi / Web3 / Altcoins / Crypto3

• Binance.US, the U.S. affiliate of the crypto exchange, said it plans to apply in August for a Commodity Futures Trading Commission (CFTC) Designated Contract Market (DCM) licence to launch a federally regulated prediction markets platform offering event contracts, futures and options.
• The announcement comes as legal uncertainty persists over prediction markets, with multiple U.S. states challenging sports-related event contracts even as the CFTC maintains it has primary jurisdiction over the products.

• Retail trading platform Robinhood, reported that its prediction markets generated $156M in Q2 revenue, exceeding revenue from equities at $129M and crypto trading at $100M.
• Total transaction-based revenue rose 44% year over year to $776M, while overall net revenue increased 32% to $1.31B and net income climbed 48% to $573M.
• Crypto trading revenue fell 38% from a year earlier despite $40B in notional volume, while Robinhood said event contracts helped drive record activity across several trading categories.

• Aave, a decentralized lending protocol, proposed removing dozens of low-adoption reserves and fully winding down deployments on Sonic, Scroll, zkSync, Metis, Soneium and Aptos, affecting about $98.1M in supplied assets and $15.6M in debt.
• The plan covers 50 low-adoption reserves, 21 matured Pendle Principal Tokens and another 25 reserves across the six deployments, targeting assets and markets that no longer justify their maintenance and risk-monitoring costs.
• Affected markets would be frozen for new activity, have supply and borrow caps cut sharply, and face higher reserve factors and interest rates to encourage users to unwind positions.

• Pump.fun, a Solana memecoin launchpad, has seen its token graduation rate rise sharply following the rollout of its BOOST launch mechanism, reaching 6.7% at its peak compared with an average of 0.8% throughout June.
• BOOST redirects liquidity that was previously locked after token migration into automatic market buys during the first five minutes of trading, with purchased tokens then burned to create immediate buy pressure.
• Although BOOST only activates after a token has already graduated, it incentivizes traders to push tokens to the migration threshold, lifting the average graduation rate to 4.7% over the past four days from 2.5% the previous week.

• Anchorage Digital, a federally chartered crypto bank, said the Federal Reserve's proposed payment account, a limited account that would give eligible crypto firms direct access to the Fed's payment infrastructure but without FedACH access (the Federal Reserve's network for processing electronic payments between banks), intraday credit or interest on balances, is not a workable substitute for a traditional master account, which provides banks with full access to Federal Reserve payment services.
• The bank argued that without FedACH access, institutions would still need intermediary banks to process routine electronic payments and settlements, undermining the proposal's purpose of providing direct payment system access.
• Anchorage Digital was joined by the Blockchain Association, which said the proposed accounts are too restrictive to replace traditional master accounts, while Sen. Cynthia Lummis urged the Federal Reserve to finalise the framework.

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