Bitcoin Is Shaping Up For A Big Q4
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Cliff-Notes:
- August CPI came in stable with headline inflation flat at 0.2% MoM, while YoY inflation decelerated to 2.5%, signaling disinflation despite stubborn core CPI growth.
- The market expects a 25 bps Fed rate cut next week, but rising Treasury yields reflect concerns that core inflation may slow further rate cuts.
- Bitcoin stands to benefit from rising liquidity, a weakening dollar, and falling yields, positioning it for a strong Q4 as macro conditions improve.
Today's CPI report for August came in as expected (for the most part). Month-over-month headline CPI inflation remained flat at 0.2% which caused the YoY pace to decelerate from 2.9% in July to 2.5% in August. This brings annual CPI inflation down to the top end of the Fed's long-term target range:
Core CPI surprised to the upside, coming in hot at 0.3% MoM versus the analyst expectation of 0.2%. Disinflation is undeniable, as headline CPI is now coming into the runway for the Fed's target. Housing and non-housing services like medical care, transportation, utilities, and personal services inflation are still stubbornly elevated. These components of the basket are important to the Fed, as they weigh heavily on consumer health. This is an unwelcome development for the Fed which has put the inflation battle on the backburner and is cutting rates next week because it is now fully focused on supporting the labor market:
The report confirmed that disinflation is still intact, solidifying the expectation that the Fed will cut by 25 basis points at next week's meeting instead of a larger 50-bps cut. Meanwhile, yields in the US Treasury market are up across the board. 10s are up 3 bps as the market prices in entrenched core services inflation, and 2s are up 7 bps as the market prices in a Fed who will be slow to cut because of it:
The market is increasingly worried that the Fed has waited too long to cut rates and there is now downside risk to growth. This is what the spread between 2s and Fed Funds has been telling us for over a year, especially in recent weeks where the difference has widened to 190 basis points—i.e. the market thinks the Fed needs to take policy rates 190 bps lower than where they are right now:
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Crude oil is down 15% this month and 22% since April due to weakening global demand. UST yields are dropping as people bid US government bonds and anticipate slower growth and inflation. The yen is strengthening against the USD which puts pressure on global investors who have borrowed cheaply in the yen to invest billions into US capital markets.
The state of oil, UST yields, and the yen all paint the picture of a global growth slowdown; with falling demand for the blood of economic growth, rising demand for risk-off assets, and a forcible unwind of the carry trade which underpins billions of dollars in global assets.
Economic growth is slowing down, but volatile labor market data has many fearing that the Fed may have been too late to step in and prevent the current slowdown from becoming a recession. Credit spreads may be starting to price in some of this fear at the margin.
Risk premiums for US investment-grade and high-yield bonds have widened 6 basis points and 25 basis points respectively on average in the past 2 weeks. Corporate funding stress for companies is still muted and at two-year lows, but are beginning to rise in recent weeks as uncertainty about the strength of the US economy rises heading into the Fed's first rate cut next week:
Liquidity in US financial markets will rise as the Fed starts cutting its policy rates. Pair the Fed's rate cuts with an immediate liquidity response from policymakers if the United States does plunge into recession, and any downside is severely mitigated while rising liquidity remains a certainty. Bitcoin (orange) is the world's best proxy for global liquidity (blue)—so, recession or not, bitcoin wins:
Macro is driving bitcoin right now, as evidenced by the rising correlation between Bitcoin and the S&P 500. At the beginning of the year, ETF mania and a whole host of other BTC-native factors drove bitcoin's bull market. August 2024 cemented macro's stronghold over Bitcoin's day-to-day price action, with rising talk of rate cuts and hard landings causing correlations across risk to shoot up. As we brace for the Fed's first rate cut next week, bitcoin is driven heavily by the macro environment:
With yields moving lower, the dollar weakening as a result, and global liquidity on the rise, it is Bitcoin's turn to wake up and smell the coffee. The S&P 500, if not for worse-than-expected earnings from some key players, has had an uninterrupted bull throughout the summer as BTC consolidated. Gold had the exact same.
As we head into the final quarter of the year, Bitcoin appears poised to benefit from the confluence of lower yields, a softer dollar, and rising liquidity. While macro conditions continue to drive market action, Bitcoin’s fundamentals, combined with easing monetary policy, position it well for a strong finish to 2024.
Take it easy,
Joe Consorti
Theya is the world's simplest Bitcoin self-custody solution. With our modular multi-sig vaults, you decide how to hold your keys.
Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.
Download Theya on the App Store.