Higher CPI inflation forces markets to reprice – Bitcoin Magazine
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Inflation is not over
Despite the general consensus and sentiment for good inflation news over the past month, the higher-than-expected US Consumer Price Index (CPI) has derailed any short-term bullish momentum for risk assets that has built up over the past week. As a result, stocks, bitcoin and credit interest rates exploded with some volatility today. The S&P 500 index closed down 4.3% with bitcoin after a 10%-plus down move. Last time this happened for shares was June 2020.
It’s a similar event that we saw last month for July data, but in reverse and on a larger scale. Markets cheered a loosely confirming trend with peak inflation last month, only to have today’s data say otherwise. Now we look to the broader market for risk and rates over the next few days to confirm this new rally downtrend or some relief with the consolidation expected to take place late tomorrow night.
Both headline and core CPI beat expectations which had consensus positioning for a month-on-month slowdown. Instead, we got both overall CPI and core CPI which rose month-on-month to 0.12% and 0.57% respectively. In simpler terms, inflation has not been overcome yet, and there is more work to be done (or attempted to be done) on the monetary policy front. The Cleveland Fed Inflation Nowcast mostly managed the forecasts for August.
Consumer price index year over year and monthly change simple average
The consumer price index year-on-year and monthly change without regard to food and energy
While we did see some inflation across energy commodities decline, it was not enough to offset rising inflation in the services sector. Higher and elevated wage growth remains an important, sticky part of inflation that has yet to come down. Housing inflation is also still a problem and has not yet abated. Housing inflation and prices have typically been the last to fall into a pending period of deflation and/or recession. Rent inflation (also known as owners’ equivalent rent (OER)) is a significant component that can hold up CPI prints for longer, as there is usually a six to nine month lag.
Overall, the inflation picture appears to be sticky and expansionary. Based on the Federal Reserve’s statements in recent months, there is a clear sign of continuing aggressive monetary policy via interest rate hikes.
Source: Michael McDonough, Bloomberg
Immediately after the release of the CPI data, stocks and bitcoin started to sell off and the dollar soared. The price action of the asset classes was less about inflation itself and more about the market’s expectations of future monetary policy from the Federal Reserve.
As soon as CPI data was released, the dollar soared while stocks and bitcoin sold off
Interest rate expectations immediately jumped to new annual highs, with the market now pricing in a Fed Funds rate of 4.46% for December this year, which is almost 200 basis points short of the current rate target of 2.25-2.50%.
The market is now pricing in a Fed Funds rate of 4.46% for December this year
Bitcoin in particular was subject to a large liquidation in open interest, as traders speculating on peak inflation by going long futures were now massively underwater.
Open interest liquidated with longs closing their positions
The decline in stablecoin margin open interest was greater than 30,000 bitcoin from the release of CPI data to the close of older markets. Assuming most of the decline in open interest was long closing positions, the market faced the equivalent of approximately 25% of MicroStrategy’s bitcoin inventory under selling pressure within a few hours.
That said, we are as doomed as ever for a final moment of capitulation that has yet to take place across global financial markets. Long-term investors should not fear downside volatility, but rather embrace it, and understand the unique opportunity it presents to buy high-quality assets at fire sale prices.
