Crypto Rallies Off Inflation

Cooling Inflation. Crypto assets popped this morning off of key inflation signals from April. What did the data say, and why have markets interpreted it as a sign to buy?

Although Tuesday’s producer price index (PPI) release showed inflation running slightly hotter than expected during the month prior, today’s CPI statistics released came in-line with analyst expectations.

Inflation remains sticky and is still running above the Federal Reserve’s long-term 2% target, but this was the first time the CPI decreased in the past three months; meanwhile, retail sales are showing increasing signs of stagnation.

Despite month-to-month fluctuations in inflation data coming with a fair amount of noise, it is clear to see deflation continues to set in as higher prices have come to weigh on the demand component of the economy.

After the data release, markets began pricing in the increased likelihood of interest rate cuts to combat the declining economic situation, sending yields on US Treasuries retracing back to their March highs and indicating that traders are, in fact, gearing up for these inevitable rate cuts.

Disinflation may be present, but it has not yet reached concerning territory, allowing market participants to operate on assumptions that future rate cuts are unequivocally bullish, as their decline decreases the risk-free rate and theoretically bolsters the relative attractiveness of risk assets.

With further confirmation that the future path of interest rates is downwards, market participants slammed the bid on crypto assets, causing the price of BTC to jump 7% on the day; BTC managed to break the downtrend that had encumbered price since April and pierced the $65k level that had served as weekly resistance!

Unlike range-bound crypto assets, traditional equities have climbed steadily for the past two and a half weeks, allowing today’s CPI print to provide the fuel needed for stock indexes to achieve new all-time highs!

Both the broad market S&P 500 and the tech-heavy Nasdaq 100 gapped through their prior ATHs set in March on the open of US cash markets and proceeded to run throughout the morning alongside other risk assets.

America’s Federal Reserve can exert massive amounts of pressure on the short end of the interest rate curve, but fundamentally, these rates are priced from a combination of future growth and inflation expectations.

While the prevailing wisdom adopted by many market participants leads them to believe that lower interest rates are bullish for risk assets, they are only one factor in the broader economic equation, and it remains highly doubtful that cuts will be potent enough to stimulate faltering growth, considering the lowest interest rate levels have coincided with peak recessionary conditions in past cycles.

In the absence of clear growth catalysts, monetary and fiscal policymakers may yet again resort to currency debasement, and even though the real economic impact of such actions are uncertain, they would be nearly guaranteed to increase the dollar-value prices of hard assets insulated from inflationary fiat schemes, like Bitcoin and gold.