Markets Price an 85% Chance the Fed Holds Rates in October After Warsh's Remarks

In Today's Note

• The S&P 500 ended a three-day decline with a 0.33% gain as dip buyers returned, while Fed Chair Warsh said an AI-led investment surge is pushing up prices and market-implied odds of an October pause rose to 85% from 72% after his comments.
• BTC is back at $82.1K (+1.1%) and ETH has gained 3.4% to $2,450 overnight, while TIA (+27.4%), ARB (+14.6%) and NEAR (+13.4%) led the altcoin outperformers.

Market Snapshot: Overnight Moves

Macro & Markets

• Dip buying on Wall Street helped US equities stage a comeback after risk assets from BTC to small-caps sold off over the past week, amidst concerns about the sustainability of the artificial-intelligence trade which has been bolstering markets.
• The S&P 500 broke a three-day decline to end the day 0.33% higher.
• BTC briefly fell below $80K for the first time since mid-September shortly after US equity markets opened yesterday, but prices quickly rebounded and it is now trading back above $82K.

• The selloff across major chipmakers eased on Thursday relative to earlier in the week, however the Philadelphia Semiconductor sector index still ended the day in the red, down 0.88%.
• Most recently fears in the AI-trade have picked up due to credit stress surrounding CoreWeave, a neocloud company, which has taken on more than $51B of debt and obligations to finance its AI infrastructure build-out.
• Yields on CoreWeave debt have climbed over the past few weeks, with the yield to maturity on its 9.75% bond due in 2031 reaching 15.78%, while the spread on its five-year credit default swaps, insurance against its default, soared above 1,140 basis points (up 164% from a year ago).

• After Wednesday’s sharp drop in US Treasury yields, yesterday yields mostly traded sideways across the curve. The ten-year yield ranged below 5.1% while the yield on the two-year note mostly traded between 4.70% and 4.74%.
• During a fireside chat at the IMF and World Bank annual meeting in Bangkok, Fed Chair Kevin Warsh voiced his optimism about the strength of the US economy amid recent geopolitical shocks and tighter monetary policy, though said very little regarding his view for the path of monetary policy.
• According to Warsh, the US and many other economies are benefiting from an “investment surge” driven by artificial intelligence but broadening out to other sectors. That in turn has created a near-term demand shock, putting upward pressure on inflation.

• “I came out of meetings here yesterday and today, and it’s hard to be in a discussion with central bankers and not compare notes and hear the same thing about the surge in prices”, he said.
• As such, "We made very clear that we would deliver price stability, and we removed a dose of accommodation about a month ago”, he told the audience, referring to the Fed’s September rate hike.
• Keeping with his no forward guidance mantra, he later said "I don't prejudge meetings. I don't believe in saying now what I might do at the meetings that we have in the balance of this year."
• Market implied probabilities for a pause in the October meeting increased to 85% following Warsh’s comments, from 72% a day ago.

This Week's Calendar

Charts of the Day

Figure 1. Block Scholes BTC Risk-Appetite Index (white, left-hand axis) and BTC spot price (orange, right-hand axis). Source: Deribit, Block Scholes.

Figure 2. Block Scholes ETH Risk-Appetite Index (white, left-hand axis) and ETH spot price (purple, right-hand axis). Source: Deribit, Block Scholes.

Figure 3. BTC at-the-money implied volatility across selected tenors. Source: Deribit, Block Scholes.

Figure 4. ETH at-the-money implied volatility across selected tenors. Source: Deribit, Block Scholes.

Figure 5. BTC 25-delta put-call skew ratio across selected tenors. Source: Deribit, Block Scholes.

Figure 6. ETH 25-delta put-call skew ratio across selected tenors. Source: Deribit, Block Scholes.

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