End of Tightening: It’s fashionable now to declare that the Fed will hike to 4% “come hell or high water.” (Some of us remember when 4% was a low rate.) The swagger is a sign that central bank tightening cycles are closer to the end. The bond market is also looking through the rhetoric. Even before the start of aggressive tightening, the bond market flirted with the idea of a 2023 recession. That hasn’t changed through the ups and downs of the data or narratives. Three-month interest-rate futures now predict the peak of policy rates to be 4%, with rate cuts starting in the second quarter of next year. It is a powerful leading indicator – the bond market is convinced that recession is the only cure for inflation. It may take policy rates of 3%, 4%, or 5%. But the bond market says a recession will happen and then policy will ease, as it has in every recession. There is an uncanny connection between digital assets and the peak of rate expectations. The yo-yo summer months for rate expectations were mirrored in digital assets. June 2023 Eurodollar futures saw rate expectations drop sharply to 3.25% in July as bond traders bet on the early end of rate hikes; the One River Core Index rose nearly 30% in response. This is in keeping with the powerful 76% correlation between peak rate expectations and digital asset prices since the middle of last year. August saw rate expectations reverse and digital assets with them. Now what? It’s all about inflation. The market says the economic downturn will contain inflation – the near-term job of policy is done. One-year inflation swaps are now 2.2%, down from a high of more than 5%. Long-term inflation expectations remained anchored through all this, and 5y5y inflation swaps are below long-term norms at 2.4%. Politics will become a more powerful part of the narrative as the unemployment rate rises. And with the Fed targeting higher unemployment, it is sure to rise. Digital assets don’t like a recession. But they love low and declining real interest rates. That’s coming. A cold crypto summer and a warm winter? The cold always bothered me, anyway.