Another Day, Another Crypto Cyberattack! 👨🏻‍💻

🐺 Hi pack-mates,

This is Howling Markets, the experienced mews anchor briefing you about all the latest news in the financial markets!

Today we will be covering:

• What Is Inflation Inertia and Why Is it Important? 📈

• Ledger’s Connect Kit Gets Hit by a Cyberattack 👨🏻‍💻

• What Happens When Central Banks Lose Their Credibility? 🔑

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

What is Inflation Inertia and Why Is It Important?

Inflation Inertia is a concept that was introduced by classical economists that studied the presence of inflation in a macroeconomic setting using dynamic models.

A dynamic model is a tool which is built by equations and assumptions that is used to estimate key economic parameters and forecast future ones. Using these models, classical economists theorized the concept of inflation inertia, based on the tendency of inflation to remain constant if there aren’t any external factors affecting it.

In simpler terms, inflation inertia is the idea that today we expect that tomorrow’s inflation will be the same as the current level.

From a monetary policy standpoint, inflation inertia is a big issue that slows down any changes and makes the economy less responsive. However, everything becomes even harder when people lose confidence in the central banks. As a result, monetary policy changes often lose the little effectiveness that they have.

Ledger’s Connect Kit Gets Hit by a Cyberattack?

Once again, another cyberattack occurred in the crypto world and in a few hours it costed a total of more than $150,000 dollars among many unassuming crypto enthusiasts.

This time around the hackers targeted Ledger, a hardware crypto wallet provider that became extremely popular in recent years. Together with the hardware, Ledger also provides a Connect Kit, a software that connects the wallet to several decentralized apps in Web3.

The attack started when some hackers managed to introduce a malware in the frontend code of this software. This malware showed to the Connect Kit users a pop-up asking them to connect their crypto wallet to speed up the access to the decentralized apps.

However, instead of speeding up the process, this pop-up with the new found wallet credentials initiated a token draining process, transferring all digital assets in another wallet.

Fortunately, after just a couple of hours, Tether managed to identify and freeze the crypto wallet where the drained tokens were being transferred, and some time later, Ledger came out with a new software version to replace the malicious code and resolve the safety concern.

Even if now the issue has been resolved, do you really feel safe when interacting with these new tech products? What do you do to limit the exposure to these risks?

Today’s Howling Question

Knowing that the Feds have been more dovish than the ECB, how do you think the Euro/United States Dollar (ticker: EURUSD) exchange rate varied?

a)   It did not react.

b)  United States’ interest rates dropped more than the European ones, so the EURUSD fell.

c)  United States’ interest rates dropped more than the European ones, so the EURUSD rose.

d)  United States’ interest rates dropped less than the European ones, so the EURUSD fell.

e)  United States’ interest rates dropped less than the European ones, so the EURUSD rose.

Hint: we talked about the effects of rising/falling interest rates on the exchange rates a couple of newsletters ago.

Try to answer the question and then check out the correct option after the last interesting news.

When Central Banks Lose their Credibility?

Currently we are living in a particular economic environment where everything in the financial markets is decided by the central banks. They can restrict economic activity, they can generate booms, they can lower inflation expectations, and much more. But what happens when central banks start to lose their credibility?

Mike Riddell, a bond fund portfolio manager for Allianz Global investors, stated that “Central banks everywhere are still really struggling with credibility,” and that “The ECB [is] telling us that rates will stay high and could even go higher, but markets simply don’t believe them anymore.”

The importance of a central bank’s credibility comes from the fact that expectations are one of the main ways in which the central bank policies are transmitted. If the people do not believe in the central banks, they will not adjust to the new policies and the economic situation will not improve.

For example, if there is high inflation in the Eurozone, but the investors do not believe that the ECB will be able to keep it under control, inflation will not decrease.

Regardless of any eventual rate hikes, people will keep expecting higher inflation in the future, so they will increase their current consumption, throwing fuel on the already existing inflation.

This is the environment that has presented itself in Europe. The ECB stated that they are not discussing rate cuts yet, but the swap markets have priced in a total of 1.5% worth of cuts, divided in 6 stages.

Do you believe that inflation could pick up once again in the Eurozone? Or do you believe that the ECB’s statements are just precautionary, and Europe is already out of the danger zone?

Equity and Debt Markets Update ⚖️

And now, our daily markets update!

Following quite a few weeks of optimism, we noticed an evening star candlestick pattern forming on the SPX, and Friday’s session only further confirmed our suspicions.

On Friday the stock market lost 0.08%, a very marginal amount, but still extremely relevant due to the intraday trading range in which the price fluctuated. The price never even tried to increase, and on the other hand, it fought not to go down even more while trading sideways compared to the previous day’s price.

This is a bad sign that might indicate that the optimism has worn off and the price is ready to come down.

Likewise, the debt market also slid slightly lower on Friday. However, it also showed a sign of upward momentum with a long wig pointing to the upside.

This is a clear sign that the future rate cuts have been fully priced in by the debt markets, and now the yields are ready to move higher in the short term.

Answer

The correct answer is b) United States’ interest rates dropped more than the European ones, so the EURUSD fell.

This is because the more dovish Feds allowed the US interest rates to fall more than the Eurozone’s ones, where the ECB tried to keep rates high to maintain inflation expectations low.

Because interest rates fell more in the US, investors are drawn to other markets (such as Europe), so the demand for the Euro increases, reducing the exchange rate EURUSD.

To learn more about this topic, you can read the newsletter titled “Dollar’s Value Drops, Great News for the US!”.

Howl-Worthy Memes 😂

🐺 See you next time!

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