Softer payrolls and inflation data improve Bitcoin outlook
Bitcoin wrapped up a tough second quarter (Q2) with a decline of 14.20%, falling below $60,000 as the debasement trade came under renewed pressure following the Federal Open Market Committee’s (FOMC) hawkish meeting in mid-June.
The statement dropped previous easing language and, in the accompanying press conference, new Federal Reserve (Fed) Chair Kevin Warsh struck a hawkish tone, repeating ‘price stability’ multiple times. At the same time, Warsh made it clear he was no fan of forward guidance and wanted markets to react to data rather than front-run the Fed’s policy intentions.
The last part of that message is crucial because, at the start of the third quarter (Q3), the two key data points have come in cooler than expected.
Released in early July, the June non-farm payrolls report showed the United States (US) economy added just 57,000 jobs, well below expectations of around 115,000. While the unemployment rate fell to 4.2%, this was partly due to a sharp fall in the labour force participation rate to 61.5% from 61.8% previously.
Then came last night’s pivotal consumer price index (CPI) report. Headline CPI fell 0.4% month-on-month (MoM), the first monthly decline since May 2020, mainly due to falling energy prices. This allowed the annual headline inflation rate to fall to 3.5% from 4.2% in May and below forecasts of 3.8%. The more important core inflation rate fell to 2.6% in June from a seven-month high of 2.9% in May and below the expected 2.8%.
Within the CPI report, the weakness was broad-based and evident across categories including shelter inflation, education, transportation and medical care services, thereby providing some evidence that disinflation may be an underlying trend rather than noise.
Why is this important?
Despite another inflationary rise in crude oil prices overnight and some hawkish comments from Fed Chair Warsh, who said the inflation mission was not accomplished after the soft June inflation report, the US rates market finished the overnight session pricing in just 6 basis points (bp) of rate hikes for the Fed’s upcoming meeting on 29 July, down from 12 bp previously, and around 33 bp of hikes into year-end, down from 44 bp previously.
The easing of imminent Fed rate-hike concerns has provided a tailwind for Bitcoin (and risk sentiment more broadly), which has just recorded its best day of gains since mid-April, closing at $64,976 (+4.38%) and marking its highest daily close in four weeks.
Looking ahead, should incoming US data continue to come in on the cooler side, there is scope for Bitcoin to continue exploring the upside. That said, if the data starts to come in warmer, it would not take much to force the Fed’s hawkish bias into action, thereby putting an end to Bitcoin’s current renaissance.
