Dear subscribers,
The Fed raised interest rates by 75bps in the July FOMC meeting, as the market expected. To put the hike into perspective, leading up to 2018 it took almost 3 years to reach the 2.25-2.5% rate, whereas now it took five months. Markets reacted positively to the news, and bitcoin rose above $23k where it faces renewed pressure.
For the complete analysis and bitcoin’s development, be sure to check out Uncharted #20.
Let’s dig in!
TL;DR
Bitcoin is holding strong above $22k despite alarming incoming macroeconomic data.
Decisive price action followed the Fed’s decision to increase rates by 75bps in the July FOMC meeting.
Bad news has been bullish for bitcoin as they encourage the Fed to ease off the policy-tightening pedal.
Eroding disposable income and a decreasing saving rate have shaken out retail investors.
ETF fund flows reflected a change in sentiment as bitcoin logged $85 million in inflows, and short-bitcoin recorded the first weekly outflows in 5 weeks.
Caution is advised. The Swissblock Bitcoin Risk Signal crossed over to the high-risk regime.
Bitcoin bullish on negative news
During a macroeconomic data charged week, bitcoin has outperformed traditional assets as it held above $22k. The decisive price action sent a wave of optimism, undermining a subsequent - and aggressive - 75bps rate hike and recession-driven systematic risks, driving bitcoin’s decoupling from traditional assets (Figure 1).
Figure 1: Bitcoin decoupling from traditional assets
On Wednesday, the Fed raised interest rates by 75bps, setting the benchmark rate of 2.25%-2.50% (Figure 2). Although the rate hike may seem expeditious, investors believe the deteriorating economic conditions will lead to a dovish policy at the beginning of 2023. Notice how the Chicago PMI index dropped 44% since 2021 due to a decrease in new orders, inventories, production, and order backlogs, pointing to slowing aggregate demand.
Figure 2: Chicago PMI reflected a deteriorating economy
Investors fear that the Fed will tighten conditions to the extent that the economy would slow to recessionary levels. As a consequence, pessimistic data and news drove markets higher as it was taken as discouragement for aggressive rate hikes. Notice the significant negative correlations between macroeconomic surprises, bitcoin, and the S&P 500 (Figure 3).
Figure 3: Bitcoin and the S&P 500 bullish on negative news
On Thursday, the 2Q22 GDP QoQ rate came in lower than expected at -0.9%. The latter entails a technical recession and the second consecutive quarter of negative growth. Traditional markets reacted accordingly, and capital flowed to US Treasuries, lowering yields, driving US equities and bitcoin higher (Figure 4), and extending the negative correlation to macroeconomic surprises. Notice how risk-on assets dropped on an expansive ISM PMI print (Figure 4).
Figure 4: Lower yields driving capital to risk-on assets
According to Chair Powell, US economic conditions do not constitute a recession. The labor market is too tight for a recession, the unemployment rate is near a 50-year low (3.6%), and about 2.7 million people were hired in H1 2022. The increase in initial jobless claims (Figure 5) is only the beginning of a decline from very high levels of job creation (10.698 million according to July’s JOLTs report).
Figure 5: Tight labor market
J Powell argued that, as long as the labor market remained tight, consumers’ - potential investors - balances would remain with sufficient money to fuel the economy. However, according to TheBlock Research, the participation of retail investors has declined in 2022, potentially due to the decrease in disposable income and rise in food and energy prices driving the saving rate lower (Figure 6).
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