Macro Market Impact: Bitcoin, Stocks, Gold, and USD Reacts Ahead of FOMC Meeting
While PPI, just like the consumer price index, had its historical increase, retail sales figures actually fell in May, indicating the economy isn’t that hot. Markets are eagerly awaiting Fed chair Jerome Powell’s post-meeting news conference to decide where to next.
The Federal Reserve is to release new forecasts following its two-day meeting on Wednesday.
While some economists expect the Fed to mention tapering of the bond-buying program, much detail on the same isn’t expected.
Allianz chief economic adviser Mohamed El-Erian recently said in an interview that Fed officials had put themselves into a corner with their “backward-looking monetary new framework” that will make it very difficult for them to take their foot off the pedal.
Meanwhile, the producer price index (PPI), which measures the average prices of goods and services produced, rose 6.6% during the 12-month period ending in May.
Just like the consumer price index saw its biggest increase since 2008, the PPI figure was also the greatest in history ever since the Bureau of Labor Statistics first started calculating it in 2010.
The Fed, however, is maintaining that “inflation will be transitory” and that they're “not thinking about raising rates.”
Based on annualized 2Y/2Y CPI reading, which gets rid of YoY denominator issues, “inflation is rising, but it’s nothing to get too concerned about yet,” also wrote Jeff Dorman, Chief Investment Officer at digital assets management firm, Arca.
Interestingly, retail sales figures, which fell by 1.3% in May, showed that despite all the new money pumped into the market, the economy isn’t that hot. Analyst Mati Greenspan in his daily newsletter Quantum Economics wrote,
“This will have to be a topic of discussion in the upcoming Fed meeting tomorrow, where they will undoubtedly be asking themselves whether the juice is worth the squeeze.”
Effect on the Market
As we reported, the market is eagerly awaiting Fed chair Jerome Powell’s post-meeting news conference and how they react to the high inflation. Ahead of this meeting, Bitcoin has dropped under $39k.
S&P 500 and tech-heavy Nasdaq are unsure currently following their new peaks on Monday. Gold started the day by going down, continuing from last week, but is now seeing a slight rise in value at $1,860 per ounce. The US dollar index is also up above 90.5.
While “BTC exhibits a modest positive correlation to equity markets and gold. Its correlation to US 10y Treasury futures is very slightly negative,” noted Jonathan Cheesman, head of over-the-counter and institutional sales at crypto derivatives exchange FTX.
For this reason, statisticians often argue that BTC is not driven by macro, but “I would argue that while the daily correlations are obscured by crypto volatility, macro markets do have an impact. Particularly when there are substantial shifts in policy. Crypto has certainly enjoyed a significant tailwind from the policy response to the covid disruption,” he added.
Overall crypto prices are driven by adoption as it's still an emerging asset class. Macro markets do have an impact, but this impact is usually dominated by crypto idiosincratic volatility.
Great thread on the FOMC and crypto. https://t.co/tJgxwoGCmv
— Alex Krüger (@krugermacro) June 15, 2021
According to hedge fund billionaire Paul Tudor Jones who is a Bitcoiner and is eyeing the meeting if the central bank officials talk down inflation and fail to take action, that would be a “green light to bet heavily on every inflation trade,” which involves BTC, gold, and commodities.
Raising interest rates, on the contrary, won’t be good for the stock market and even crypto. However, with crypto already having its 50% pullback, “digital assets are not nearly as overvalued as the stock market is right now,” said Greenspan.
The macro market DOES drive crypto, but only when it has to. In March 2020, crypto had no choice but to go down with (e.g.) SPY — the whole world was watching, and when the whole world watches people will buy BTC when it lags below SPY, and vice-versa. https://t.co/00BEuag5jM
— Sam Trabucco (@AlamedaTrabucco) June 16, 2021
With Bitcoin seen as a hedge against Fed money printing and the inflation, it causes, “if the Fed does crash the market, there's a real chance that bitcoin, and possibly other cryptocurrencies, may be seen as safe havens,” Greenspan added.
Arca’s CIO is of similar opinion as he points out the great macro setup for digital assets — Fed balance sheet printing new all-time highs, low rates and declining US dollar, and the equity volatility index (VIX) back to post Covid lows.