Why bitcoin is leading this week’s Fed rally: Morning Brief

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Friday 29 July 2022

Today’s newsletter is by Jared Blikre, a reporter focused on the markets at Yahoo Finance. Follow him on Twitter @SPYJared.

The Nasdaq is on a two-day tear, rising 5% after the Federal Reserve announced another 0.75% interest rate hike and GDP data showed another quarter of negative growth.

Impressive, to be sure, but a move overshadowed by some of what we’ve seen in the crypto markets this week.

The price of bitcoin (BTC-USD) has risen over 12% since Wednesday morning, with ethereum (ETH-USD) up by more than double that.

All this fits into the framework of an environment. The Macro Compass claims can be defined by investors who say – “the riskier the better.”

Since the market’s last bottom on June 16, we’ve seen many of the styles and sectors that took us into bear market territory lead us toward a potential way out.

And this week’s post-earnings reactions from names like Amazon ( AMZN ) and Microsoft ( MSFT ) show investors are still itching to give companies the benefit of the doubt. All this makes the action in names like Meta Platforms (META) more painful.

Which brings us back to bitcoin.

In May, bitcoin’s correlation with stocks peaked at 0.82. The maximum correlation for an asset pair is 1, which means that these assets will move in the same direction in the same order of magnitude.

But this correlation between stocks and crypto peaked when both markets were on the decline following the implosion of stablecoin Terra. Since then, the crypto markets had generally lagged the stock market and stayed out of this recent rally. The peak in the correlation between these asset classes in recent days again shows the nature of this new environment – “the riskier the better.”

As stocks have risen amid optimism about the Fed’s plans, cryptoassets have also rallied, with the correlation between bitcoin and the S&P 500 returning to near 0.7.

The story continues

Fed Chairman Jerome Powell catalyzed this risk ramp on Wednesday when he repeatedly stressed that the Fed will be “data dependent” going forward, effectively ending a 15-year experiment in transparency.

Markets will no longer hang on the economic forecasts of economists and Fed officials at the Marriner Eccles Building in DC. Throw these summary financial projections out the window.

Markets live and die by actual data, as they once did. For hardcore Fed watchers, this means the stakes were just raised for the next rounds of inflation data.

The next CPI is in two weeks, and the Fed’s preferred measure of inflation — personal consumption expenditures — falls today.

The Fed is also closely watching inflation expectations, and the University of Michigan’s Consumer Sentiment data, which measures inflation expectations up to 10 years out, is also due later this morning.

When these two reports surprised to the upside just before the June meeting, the Fed made the decision to raise interest rates by a more aggressive 0.75%, which at the time was the largest increase since 1994. Earlier this week, that move was matched.

This week’s risk rally suggests that investors are betting that future moves by the Fed will be more modest.

And as long as risk remains in this market, expect bitcoin to continue forging a path higher.

What you should see today

Financial calendar

• 8:30 a.m. ET: Employment Cost Index2Q (1.2% expected, 1.4% last quarter)

• 8:30 a.m. ET: Personal incomemonth-on-month, June (0.5% expected, 0.3% last month)

• 8:30 a.m. ET: Personal expensesmonth-on-month, June (0.9% expected, 0.2% last month)

• 8:30 a.m. ET: Real personal consumptionmonth-over-month, June (-0.4% last month)

• 8:30 a.m. ET: PCE deflatormonth-on-month, June (0.9% expected, 0.6% last month)

• 8:30 a.m. ET: PCE deflatoryear-over-year, June (6.8% expected, 6.3% last month)

• 8:30 a.m. ET: PCE core deflatormonth-on-month, June (0.5% expected, 0.3% last month)

• 8:30 a.m. ET: PCE core deflatoryear-over-year, June (expected 4.7%, 4.7% last month)

• 9:45 a.m. ET: MNI Chicago PMIJuly (55 expected, 56.0 during the previous month)

• 10:00 a.m. ET: University of Michigan Sentimentprovisional July (51.1 expected, 51.1 during the previous month)

• 10:00 a.m. ET: University of Michigan Current AffairsJuly final (57.1 expected, 57.1 during last month)

• 10:00 a.m. ET: University of Michigan expectationsJuly final (expected 47.5, 47.3 last month)

• 10:00 a.m. ET: University of Michigan 1-year inflationJuly finale (5.2 expected, 5.2% last month)

• 10:00 a.m. ET: University of Michigan 5-10 Year InflationJuly final (2.8% expected, 2.8% last month)

Earnings

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