Markets
Bitcoin Awaits US Inflation Data, Bond Market
With the oversupply of Saxony in Germany almost finishedThursday’s release of the U.S. Consumer Price Index (CPI) report will be key to determining the price of bitcoin (BTC) market trajectory.
Data due at 12:30 UTC (8:30 a.m. ET) are expected to show that the cost of living in the world’s largest economy rose 0.1% month-on-month in June after holding steady in May, leading to a 3.1% increase from a year earlier, according to economists polled by Dow Jones. The core CPI, which excludes more volatile food and energy prices, is expected to have risen 0.2% from May and 3.4% from June last year.
If the actual figure matches estimates, it would confirm continued progress toward the Federal Reserve’s 2 percent inflation target and set the stage for the bank to begin its much-anticipated rate-cutting cycle this year.
The increased rate cut outlook will likely bode well for risk assets including bitcoin, helping the leading cryptocurrency extend its price recovery from July 5 lows around $53,500. CoinDesk Data show that the recovery has stalled, with buyers struggling to establish themselves above the $59,000 mark.
“The CPI data will be closely watched, with markets expected to react significantly to the release. Analysts’ optimistic outlook for late 2024 and 2025 hinges on the FOMC cutting policy rates, as lower rates typically increase liquidity, pushing investors into ‘long-tail’ assets like cryptocurrencies,” algorithmic trading firm Wintermute told CoinDesk in an email.
The inflation rate has slowed significantly from its 2022 peak of 9.1%. Yet in recent months, the Fed has reiterated the need to see further progress on the inflation front before ending high interest rates. On Tuesday, Fed Chair Jerome Powell said as much in testimony before Congress, while emphasizing that the bank would not wait for inflation to fall back to 2% before cutting rates.
According to the CME’s FedWatch tool, since Friday’s weak jobs report, traders have priced in about a 70% chance of a Fed rate cut in September and see an increasing likelihood of another cut in December.
The response of the US Treasury yield curve to the expected weak CPI release could influence overall market sentiment, including that of bitcoin.
Slowing inflation and rising bets on rate cuts could push up prices on two-year bonds, leading to lower yields. That’s because when investors anticipate lower interest rates, they’re willing to pay a premium for a security that offers a higher yield in the present. At the same time, the yield on 10-year bonds will likely remain elevated as markets recover. fear larger budget deficits under a potential Trump presidency. Republican candidate Donald Trump’s chances of winning the November 4 election have recently increased.
The net effect will be what is called bull lean of the yield curve, represented by the spread between 10-year and 2-year bond yields. The curve has inverted, with 2-year bonds consistently offering a relatively higher yield since mid-2022.
According to the CAIA association, bull steepening periods, characterized by a rapid normalization of an inverted yield curve, have historically occurred during periods of economic contraction and have coincided with risk aversion.
“Typical periods of price increases were: 1990-1992, 2001, 2003, 2008 and 2020, and all were periods of recession,” CAIA said in an explanatory statement.
“Stocks typically do not do well during these types of regimes, and their performance during these periods is clearly below the overall historical average,” CAIA added.
Noelle Acheson, author of the Crypto Is Macro Now newsletter, made a similar observation in the July 4 issue, saying, “A sharp acceleration has always preceded the onset of a recession.”
Acheson added that the curve has steepened somewhat recently due to continued political uncertainty in the United States. “It also makes a Trump victory more likely in the interim, implying a potential rise in tariff-fueled inflation and a flood of issuance to fund promised tax cuts,” Acheson said.
Investment banks like JPMorgan and Citi bet on the steepness of the yield curve.