Macroeconomic fears resurfaced this week, putting pressure on risk assets, including bitcoin. The top cryptocurrency traded at $43,300, representing a 6% drop for the week. Bitcoin weekly loss seems to be connected with US CPI forthcoming release. Latest moves in crypto markets put in the context do not seem that unexpected.
U.S. consumer price index (CPI) for March is due for release on Tuesday. The data is expected to show the cost of living in the world’s largest economy rose to an annualized 8.3% in March versus 7.9% in February, according to Dailyfx. An above-8% CPI print, the first since 1982, could see investors reassess the pace of the Fed’s tightening, injecting volatility into bonds and risk assets.
With soaring inflation, retail investors do not have enough money to invest significant amounts in what they deem as ‘risky’ assets like cryptocurrencies. “Higher inflation has become increasingly broad-based. Since the start of 2021, the share of items in the consumer basket has seen very large price rises and has increased steadily, the Bank for International Settlements said in a note published on April 5. “In particular, growth in services has accelerated. Because growth in service prices tends to be more persistent than that in goods, inflation may be becoming more entrenched.”
Bitcoin’s rising correlation with equities means it could underperform traditional store of value assets like gold in the coming months. The yellow metal and oil outperformed the S&P 500, Wall Street’s benchmark index, by significant margins during previous periods of stagflation.
History could repeat itself, drawing investors away from equities, especially tech stocks and toward energy. Analysts at JPMorgan foresee a 40% rally in commodities in the coming months.
In the end CPI data showed inflation rising at faster-than-expected 1.2% in March to an annual pace of 8.5%. The core rate, however, rose less-than-expected 0.3% in March to an annual pace of 6.5%. Right before the CPI release Bitcoin traded at less than $40,000 for the first time since March 16. After release it rose to more than $41,000.
April 2022 CPI data are scheduled to be released on May 11, 2022, so let’s wait and see how the situation evolves.