Resilient Economy, Rising Yields, and Bitcoin’s Geopolitical Ascent
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Cliff-Notes:
- December's strong jobs report highlights the US economy's resilience, but rising yields and a stronger dollar pose challenges for risk assets like bitcoin.
- Geopolitical developments, including Trump's proposed Strategic Bitcoin Reserve, underscore bitcoin's growing importance as an asset.
- While short-term headwinds may persist, bitcoin is positioned as the ultimate safe haven amid escalating geopolitical competition and fiscal uncertainty.
Today, we received a slew of economic data that further confirms the resilient nature of the US economy we've been experiencing for several months now.
December's nonfarm payrolls report showed 256,000 jobs added last month, compared to 165,000 expected. The unemployment rate also fell from 4.2% to 4.1%, defying expectations that it would stay flat:
On the flip side, this robust economic growth is being met with heightened consumer inflation expectations and worsening sentiment heading into next year. The UMich consumer survey on current economic conditions rose sharply from last month and exceeded expectations. However, expectations for the year ahead missed forecasts and came in lower than last month. This pessimism stems from 1-year and 5-10-year inflation expectations both hitting 3.3%, surpassing analyst estimates and showing a significant increase from the previous month.
Despite this positive economic data, the stock market is tumbling. At the time of writing, the S&P 500 is down 1.25%, and the Russell 2000 is down 2.4%.
The market’s reaction to better-than-expected December NFP data (+256k jobs vs. +165k expected) and a slight decline in unemployment (4.1% vs. 4.2%) reflects the current "good news is bad news" paradigm for equities. While the Federal Reserve is cutting rates, strong labor market data signals continued economic resilience, complicating the need for continued monetary easing.
Investors fear that persistent labor market strength could reignite inflationary pressures, potentially forcing the Fed to reconsider its dovish stance. The positive rolling 10-day correlation between the S&P 500 and the Citi Economic Surprise Index highlights this dynamic: strong economic data erodes equity sentiment by fueling expectations of tighter financial conditions, despite an ongoing easing cycle. This interplay between economic resilience, rising yields, and valuation pressures is amplifying market volatility as investors reassess their outlook:
In essence, the market is nuking because more Americans are employed. Distortions like these are a downstream effect of the Fed's top-down interest rate setting. The market reaction function is toward what the Fed will do instead of how the economy is doing. This disconnect is yet another reason why calls to end the Fed continue rising—and why bitcoin continues to attract those seeking a hedge against central planners.
On a day when both equities and US Treasuries are selling off, bitcoin is bucking the trend, up 3.3%, outperforming commodities like crude oil, natural gas, copper, and gold. This is a glimpse of bitcoin’s future: as monetary policy becomes increasingly backward and fiscal conditions worsen, bitcoin is positioning itself as the safe-haven asset of choice.
Rates along the US Treasury curve continue to rise sharply. 2-year yields are up 12 bps, and 10-year yields are up 8 bps, as markets reprice expectations for the Fed to maintain higher rates for longer or delay further cuts. The story of 2025 could be this: rising long-end yields, driven by economic strength, ultimately undermining that strength. Higher yields pressure equity valuations, particularly in growth-sensitive sectors, as rising discount rates filter through to mortgage rates, credit card rates, and other borrowing costs that affect everyday Americans.
Note that the 2-year yield (in blue) was calling for the end of the Fed's rate hiking cycle (orange) in 2022. Now, as the Fed cuts rates, 2s are again leading the way, moving higher and approaching a potential cross above the Fed funds rate (orange). The bond market, as always, leads the Fed—not the other way around:
Markets now price in just one 25-basis-point rate cut for 2025, down from three cuts expected just a month ago. December’s blowout jobs report feels like the crescendo of recent economic optimism. As such, the Fed is likely to hold rates steady for now, with further cuts coming only on an as-needed basis. Consumers and businesses, many of whom refinanced at historically low rates, are somewhat insulated from the current high real rates, but this reprieve won’t last forever:
Eventually, elevated rates will weigh on economic activity. The strong dollar, bolstered by rising yields, presents a further challenge for risk assets. Dollar strength is pulling down global M2 (denominated in USD), despite most countries increasing their money supply in absolute terms. This has negative implications for risk assets, including bitcoin, as the global money supply contracts.
Bitcoin’s price has closely tracked global M2 over the last 14 months. If rates continue climbing, bitcoin could face near-term headwinds before recovering:
However, the longer-term picture for bitcoin remains bullish. With just 10 days until Donald Trump enters office as the 47th President of the United States, bitcoin’s geopolitical significance is at an all-time high. Trump is set to become the first US president to campaign on establishing a Strategic Bitcoin Reserve (SBR) and positioning the United States as the global hub for bitcoin adoption.
Trump has already pledged not to sell the 207,189 bitcoin held by the United States, despite the DOJ clearing its sale. This legal maneuver, however, will likely strengthen Trump’s resolve to preserve and expand the US’ bitcoin reserves, likely fast-tracking the establishment of an SBR.
Simultaneously, credible reports from Russia suggest they are developing a National Bitcoin Reserve, further escalating bitcoin’s geopolitical importance. As one of the US’s major adversaries, Russia’s plans to adopt bitcoin could spark a global competition for bitcoin accumulation, with countries vying to attract capital and ensure monetary sovereignty.
Given the sudden, immense geopolitical importance of bitcoin, and that an SBR has a relatively high likelihood of coming to fruition, it isn't a stretch to say that bitcoin will be on the balance sheet of several G20s this year.
In the near term, bitcoin may face challenges from a strong dollar and rising yields. But in the longer term, bitcoin will be just fine. Any near-term weakness we may experience will be quickly overshadowed, especially if a global bitcoin accumulation race among superpowers with infinite balance sheets begins. All it takes is one.
Take it easy,
Joe Consorti
Theya is the simplest way to take full control of your bitcoin. With our flexible multi-sig vaults, you decide how to secure your keys.
Whether you prefer keeping all keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple devices, it's always Your Keys, Your Bitcoin.
Get started with Theya on the App Store or via our Web App.