Hotter Than Expected Inflation Slashes Rate Cut Expectations 📈

🐺 Hi pack-mates,

This is Howling Markets, the gasoline that keeps powering your thirst of financial market knowledge on a daily basis!

Today we will be covering:

• Education: What Are Gas Fees? 🔥

• Ethereum Gas Prices Spike After ERC-404 Launch 💥

• Hotter Than Expected Inflation Slashes Rate Cut Expectations 📈

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

What Are Gas Fees?

When thinking about gas, the first thing that pops into everyone’s mind is the fuel needed by cars to run. So, what can gas be in relation to Ethereum’s Network?

Gas is the computational power needed to perform a transaction on the Ethereum Blockchain. To ensure a sustainable service, the computational power required to perform each action is charged to the user in order to avoid spam and loop transactions that would consume Ethereum’s capabilities.

Hence, Gas fees are the amount that must be paid by the user to perform an action on the blockchain. These fees are calculated by multiplying the amount of gas needed times the cost per gas unit.

On a very basic level, if a transaction needs 10 units of gas and gas costs 2 dollars per unit, then the total gas fee would be $20. However, being a blockchain, the fees are not expressed in fiat currencies, but rather in the native token of the blockchain, which in this case is ether.

More specifically, gas costs are expressed in “gwei” a unit of measurement equivalent to 0.000000001 ETH (10^-9 ETH). Interestingly, gwei is an abbreviation of the term “giga-wei” which is equivalent to an even smaller amount of ETH called “wei”. Each giga-wei is equal to a billion wei (1 ETH = 10^-18 wei).

A “wei” is the smallest unit of measurement of Ether, comparable to a satoshi for Bitcoin, and it takes its name from Wei Dai, the creator of b-money, a cryptocurrency prototype developed in 1998 (10 years before bitcoin!) which was never officially launched.

So, going back to the gas fee, this amount is calculated in gwei, and it is made up of two components: the base fee and the priority fee, the second of which is optional and comparable to a tip. When a user wants to perform an action, they will have the possibility to offer a given gas fee, from which the base fee will be deducted by the system and the remainder will make up the “tip”.

The tip is defined as a priority fee because naturally the validators will prioritize more remunerative transactions. Because of this, gas fees are a crucial determinator to Ethereum’s network speed as transactions offering only the base gas fee will most likely either be performed late or not completed at all in cases of large trade volumes.

Ethereum Gas Prices Spike After ERC-404 Launch

Well, the launch of the newest ERC-404 tokens seemed too good, didn’t it?

These new experimental tokens brought so much attention to the Ethereum blockchain that they caused an influx of billions of dollars and a surge in transactions.

This influx fueled a spike in gas prices, which reached 360 gwei on the 9th of February, the highest level since May 2023. The chart below only represents the average gas price, so it didn’t capture the most violent and rapid spikes, but it still shows how, on average, it reached 70 gwei.

Knowing that the gas fee is given by the unit of gas required times the gas price, the spikes that reached 10 times the long run average gas price had a disrupting effect on transaction costs.

Because of this, a group of Ethereum developers decided to create and launch a new experimental token type, the DN-404, standing for “Divisible-NFTs 404”.

The direct reference to the ERC-404 is striking. The new DN-404 promises to achieve the same results of fractional NFTs promised by the ERC-404 tokens, without the concerns and inefficiencies of the other prototype.

However, also in this case the term DN-404 is an unofficial acronym and it has not yet been submitted through an Ethereum Improvement Proposal (EIP). Do you believe that this token will be able to solve the issue of the previous one and become a popular alternative on the blockchain?

Today’s Howling Question

And now, it is time for our howling question!

All the rumors surrounding the ERC-404 tokens have caused a lot of volatility on the Ethereum’s network. How do you think Ether’s price reacted to this newcomer between the 5^th and the 12^th of February?

a)  -15%

b)  -5%

c)  0%

d) +5%

e)  +15%

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

Hotter Than Expected Inflation Slashes Rate Cut Expectations

At the end of yesterday’s newsletter I had commented that the stock market’s performance looked pretty weak on Monday but it could have really gone either way on Tuesday, depending on the inflation reading.

The inflation figures were released just an hour before the market opened and they painted a worse picture than what the markets expected. The YoY inflation rate slowed down less than what the market expected, falling from 3.4% to 3.1% as opposed to the 2.9% forecast.

Additionally, the Month-on-Month (MoM) inflation rate increased from 0.2% to 0.3%, showing that the prices are starting to slowly creep higher.

These inflation readings hit the markets very hard, especially considering that Powell had recently stated that they would consider a rate cut only after inflation makes significant progress towards the 2% level.

As a result, March rate cut expectations fell to almost zero and May’s dropped from 50% to less than 30%.

On the other hand, it is important to mention that the Fed prefers to use the Personal Consumption Expenditure Index (PCE) as opposed to the Consumer Price Index (CPI) and that the PCE dropped more sharply to 2.9%, the first reading below 3% since 2021.

Everything considered, how likely do you think a May rate cut is?

Equity and Debt Markets Update

And now, our daily markets update!

Tuesday has been a really tough day for the stock market as it restlessly fell throughout the day. The market opened with a significant gap down of almost -1% and then it extended its lead to around -1.9% before slightly pulling back and closing the day -1.37%.

On the other hand, government bond yields had a great day because when prices fall, yields increase. The 10 year government bond yield surged by +3.28% throughout the day without any hesitation, closing around 4.3%.

Answer

The correct answer is e) +15%

More precisely, ETH price surged by +16.22%, showing interest in this new project. However, it is also possible (and likely) that the increase in price was also due to the general optimism surrounding the network and the future Ethereum Spot ETFs.

Howl-Worthy Memes 😂

🐺 See you next time!

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