Bitcoin Waits for Guidance From U.S. Inflation Data, Bond Market

As an analyst, I anticipate that the data to be released at 12:30 UTC (8:30 ET) will indicate a 0.1% increase in the cost of living in the world’s largest economy from May to June. This follows a month of no change in May. Consequently, there will be a year-over-year rise of 3.1%. Regarding the core Consumer Price Index (CPI), which excludes food and energy prices, economists surveyed by Dow Jones predict a monthly increase of 0.2% and a yearly growth of 3.4%.

As a crypto investor, I eagerly anticipate the release of the latest inflation data. If this number aligns with the forecasts, it will be a positive sign that the Federal Reserve (Fed) is making steady progress towards its 2% inflation target. This development could pave the way for the long-awaited interest rate cuts in 2023, as the central bank aims to support economic growth amidst current market uncertainties.

If the chances of interest rate reductions rise, it’s likely that this development will benefit risk assets such as bitcoin. Bitcoin, being the leading cryptocurrency, may continue its price uptick which started after the July 5 lows of approximately $53,500, based on CoinDesk’s data. However, efforts by buyers to push the price above $59,000 have yet to yield success.

The upcoming release of Consumer Price Index (CPI) data is of great importance, with financial markets anticipated to show substantial reactions following the announcement. According to Wintermute, a leading algorithmic trading firm, the optimistic forecasts for late 2024 and early 2025 among analysts rely heavily on the Federal Open Market Committee (FOMC) decreasing interest rates. Historically, lower policy rates have led investors towards longer-term investments such as cryptocurrencies.

The rate of inflation has decreased significantly from its peak of 9.1% in 2022. However, despite this decrease, the Federal Reserve has continued to emphasize that more progress is needed against inflation before considering lowering interest rates again. Testifying before Congress on Tuesday, Fed chairman Jerome Powell echoed this sentiment, adding that the central bank will not delay rate cuts until inflation falls to 2%.

Based on data from the Federal Reserve’s CME FedWatch tool, traders have adjusted their predictions following last week’s disappointing employment report. Currently, they estimate a roughly 70% likelihood of an interest rate reduction by the Fed during its September meeting. Furthermore, there is growing anticipation among traders for another potential cut in December.

Focus on bonds

The anticipated decrease in the Consumer Price Index (CPI) may cause the U.S. Treasury yield curve to react, potentially shaping the overall market mood and possibly affecting the value of assets such as bitcoin.

As an analyst, I would interpret this situation as follows: The expectation for slower inflation and greater rate cuts can lead to a rise in prices for two-year notes, causing their yields to decrease. This is due to investors being more willing to pay a premium for securities with higher current yields when anticipating lower future interest rates. On the other hand, the yield on 10-year notes may remain high as concerns over larger budget deficits under a potential Trump presidency persist, keeping yields elevated. Recently, the odds of Republican candidate Donald Trump winning the November 4 elections have increased.

In simpler terms, the difference between the interest rates on ten-year and two-year government bonds is expected to widen significantly, leading to what’s called a “bull steepening” of the yield curve. This curve has been inverted since mid-2022, meaning that the two-year bonds have been providing higher yields compared to ten-year bonds.

Based on the CAIA Association’s findings, a swift normalization of an inverted yield curve, indicated by bull steepening periods, has typically occurred during economic downturns and been accompanied by heightened risk aversion.

CAIA noted that significant market downturns, or bear markets, occurred during the following timeframes: 1990-1992, 2001, 2003, 2008, and 2020. Each of these periods was marked by economic recessions.

As an equity market analyst, I can tell you that historically, equities tend to underperform during such economic regimes. Their returns during these periods have consistently lagged behind the overall average historical returns.

In her July 4 newsletter, Noelle Acheson, the author of Crypto Is Macro Now, noted that a significant increase in the steepness of a trend has historically signaled the start of a recession.

As a researcher, I’ve noticed that Acheson mentioned the yield curve has become steeper recently, largely due to persistent political uncertainties in the United States. He further stated that this trend increases the probability of a Trump victory in the near term, which could lead to inflationary pressures as a result of imposed tariffs and the need to finance proposed tax cuts through increased issuance.

Investment banks like JPMorgan and Citi are betting on the steepening of the yield curve.