Higher CPI Inflation Forces Markets To Reprice

August CPI inflation data was worse than expectated and the markets repriced in response. Bitcoin falls more than 10% and the S&P 500 closes down 4.3%.

The below is an excerpt from a recent edition of Bitcoin Magazine Pro, Bitcoin Magazine’s premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.

Inflation Is Not Over

Despite the overall consensus and sentiment for good inflation news this past month, the higher-than-expected U.S. August Consumer Price Index (CPI) print has derailed any short-term bullish momentum for risk assets that’s been building over the last week. As a result, equities, bitcoin and credit yields exploded with some volatility today. The S&P 500 Index closed down 4.3% with bitcoin following on a 10% plus down move. The last time this occurred for equities was June 2020.

It’s a similar event to what we saw last month for July data, but in reverse and with more magnitude. Markets cheered on a loosely confirming trend of peak inflation last month, only to have today’s data say otherwise. Now we look to the broader market for risk and rates over the next few days to confirm this new rally downtrend or some relief with the Merge expected to take place late tomorrow night.

Both headline CPI and Core CPI beat expectations that had consensus positioning for month-over-month deceleration. Instead, we got both headline CPI and Core CPI rising month-over-month to 0.12% and 0.57% respectively. In simpler terms, inflation has not been vanquished yet and there’s more work to do (or attempt to do) on the monetary policy front. The Cleveland Fed Inflation Nowcast pretty much nailed their August forecast.

Consumer price index year-over-year and monthly change simple average

Consumer price index year-over-year and monthly change without factoring in food and energy

Although we did see some inflation across energy commodities come down, it wasn’t enough to offset the growing inflation in the services sector. Higher and elevated wage inflation remains a key, sticky part of inflation that is yet to come down. Housing inflation is also still an issue and has yet to come down. Housing inflation and prices have typically been the last to fall into a pending deflationary and/or recessionary period. Rent inflation (aka owners’ equivalent rent (OER)) is a significant component that can keep up CPI prints for longer as it’s usually a six-to-nine-month lag.

Overall, the inflation picture looks to be sticky and broadening. Based on the Federal Reserve’s statements over the last few months, it’s a clear sign to keep aggressive monetary policy via rate hikes going.

Source: Michael McDonough, Bloomberg

Immediately following the release of the CPI data, equities and bitcoin began to sell and the dollar soared. The price action of the asset classes was less about the inflation itself and more about the market’s expectations for future monetary policy from the Federal Reserve. 

Once CPI data was released, the dollar soared while equities and bitcoin sold off

Expectations for rates immediately jumped to new yearly highs, with the market now pricing in a Fed Funds rate of 4.46% for December of this year, which is almost 200 basis points less than the current rate target rate range of 2.25-2.50%. 

The market is now pricing in a Fed Funds rate of 4.46% for December of this year

Bitcoin in particular was subject to a large unwind in open interest as traders speculating on peak inflation by going long futures now were underwater en masse. 

Open interest unwinded with longs closing their positions

The decline in stablecoin margin open interest was greater than 30,000 bitcoin from the release of CPI data to the close of legacy markets. Assuming the majority of the decline in open interest was longs closing positions, the market faced the equivalent of approximately 25% of MicroStrategy’s bitcoin stash in selling pressure in the course of a few hours.

With that said, we are as convicted as ever in an ultimate capitulation moment having yet to occur across global financial markets. Long-term investors shouldn’t fear downside volatility, but rather embrace it, understanding the unique opportunity it provides to buy high quality assets at fire sale prices.

Related Posts

John McAfee is the Creator of Bitcoin: TikTok Influencer Makes Wild Claim. Or is it?

John McAfee is the creator of Bitcoin. This is the remarkable claim of a TikTok influencer who calls himself Harry the Soul Coach. He says, “John McAfee…

Covalent CEO: There’s an ‘unresolved backlog’ of unfilled Web3 data roles

The demand for on-chain analysts is set to further increase with Web3 data outgrowing Web2 data over the next 20-30 years, says Covalent’s Ganesh Swami. Ganesh Swami,…

The Dangerous Implications Of Central Bank Digital Currencies

There are a variety of reasons consumers should be wary of developments surrounding central bank digital currencies. Natalie Smolenski is a senior advisor at the Bitcoin Policy…

The SEC is bullying Kim Kardashian, and it could chill the influencer economy

The feds should have tried to work with Kardashian to establish more transparent norms for influencers rather than slapping her with a $1.26 million fine for promoting…

How Satoshi Nakamoto And Bitcoin Mirror The United States’ Founding Principles

The governance and origins of Bitcoin closely resemble those presented in the founding documents of the United States. This is an opinion editorial by Buck O Perley,…

Moët Hennessy USA files NFT & Metaverse Trademark Applications

One of the top leading beverage companies — Moët Hennessy, submitted not one but five NFT and metaverse trademark applications for the names “Moet,” “Moet & Chandon,”…

Generated by Feedzy