Higher CPI Inflation Forces Markets To Reprice

The below is an excerpt from a current edition of Bitcoin Magazine Pro, Bitcoin Magazines premium markets newsletter. To be amongst the very first to get these insights and other on-chain bitcoin market analysis directly to your inbox, subscribe now.Inflation Is Not Over Despite the overall consensus and sentiment for good inflation news this previous month, the higher-than-expected U.S. August Consumer Price Index (CPI) print has thwarted any short-term bullish momentum for danger assets thats been constructing over the recently. As a result, equities, bitcoin and credit yields took off with some volatility today. The S&P 500 Index closed down 4.3% with bitcoin following on a 10% plus down move. The last time this took place for equities was June 2020. Its a comparable occasion to what we saw last month for July data, however in reverse and with more magnitude. Markets cheered on a loosely confirming pattern of peak inflation last month, just to have todays information say otherwise. Now we want to the more comprehensive market for threat and rates over the next couple of days to confirm this new rally sag or some relief with the Merge expected to take location late tomorrow night. Both heading CPI and Core CPI beat expectations that had consensus positioning for month-over-month deceleration. Rather, we got both heading CPI and Core CPI increasing month-over-month to 0.12% and 0.57% respectively. In easier terms, inflation has not been beat yet and theres more work to do (or attempt to do) on the financial policy front. The Cleveland Fed Inflation Nowcast practically nailed their August forecast.Consumer price index regular monthly and year-over-year modification simple averageConsumer cost index year-over-year and month-to-month change without considering food and energyAlthough we did see some inflation across energy commodities boil down, it wasnt enough to balance out the growing inflation in the services sector. Greater and elevated wage inflation stays a secret, sticky part of inflation that is yet to come down. Housing inflation is also still a concern and has yet to come down. Real estate inflation and costs have generally been the last to fall under a pending deflationary and/or recessionary period. Rent inflation (aka owners equivalent lease (OER)) is a substantial part that can keep up CPI prints for longer as its normally a six-to-nine-month lag. Overall, the inflation photo looks to be sticky and expanding. Based on the Federal Reserves declarations over the last couple of months, its a clear indication to keep aggressive monetary policy via rate walkings going.Source: Michael McDonough, BloombergImmediately following the release of the CPI data, equities and bitcoin began to offer and the dollar soared. The price action of the possession classes was less about the inflation itself and more about the markets expectations for future financial policy from the Federal Reserve. Once CPI data was launched, the dollar soared while equities and bitcoin sold offExpectations for rates right away leapt to brand-new yearly highs, with the marketplace now pricing in a Fed Funds rate of 4.46% for December of this year, which is nearly 200 basis points less than the current rate target rate variety of 2.25-2.50%. The market is now pricing in a Fed Funds rate of 4.46% for December of this yearBitcoin in specific went through a big unwind in open interest as traders speculating on peak inflation by going long futures now were underwater en masse. Open interest unwinded with longs closing their positionsThe decrease in stablecoin margin open interest was greater than 30,000 bitcoin from the release of CPI data to the close of legacy markets. Assuming the bulk of the decline in open interest was longs closing positions, the marketplace dealt with the equivalent of around 25% of MicroStrategys bitcoin stash in offering pressure in the course of a couple of hours.With that stated, we are as founded guilty as ever in a supreme capitulation moment having yet to happen across international monetary markets. Long-term financiers should not fear downside volatility, however rather welcome it, comprehending the unique opportunity it provides to buy high quality properties at fire price.

To be amongst the very first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now.Inflation Is Not Over Despite the general consensus and belief for great inflation news this past month, the higher-than-expected U.S. August Consumer Price Index (CPI) print has hindered any short-term bullish momentum for risk assets thats been constructing over the last week. Markets cheered on a loosely verifying trend of peak inflation last month, only to have todays data say otherwise. The Cleveland Fed Inflation Nowcast quite much nailed their August forecast.Consumer rate index year-over-year and regular monthly change simple averageConsumer cost index year-over-year and regular monthly change without factoring in food and energyAlthough we did see some inflation throughout energy commodities come down, it wasnt enough to balance out the growing inflation in the services sector. Greater and elevated wage inflation stays a secret, sticky part of inflation that is yet to come down.

Other Questions People Ask

How does higher CPI inflation force markets to reprice risk assets?

Higher CPI inflation forces markets to reprice risk assets by altering investor expectations regarding future monetary policy. When inflation data exceeds expectations, as seen with the recent U.S. August CPI print, it leads to increased volatility in equities and cryptocurrencies like bitcoin. This results in a sell-off as traders adjust their positions in anticipation of tighter monetary policy from the Federal Reserve, which can significantly impact asset valuations.

What impact does higher CPI inflation have on bitcoin prices?

The higher CPI inflation has a direct negative impact on bitcoin prices, as evidenced by the recent 10% drop following the CPI announcement. Investors often react to inflation data by selling off riskier assets, including bitcoin, in favor of safer investments. This behavior is driven by the expectation of rising interest rates, which can diminish the appeal of holding non-yielding assets like bitcoin.

Why did markets react negatively to the higher-than-expected CPI data?

Markets reacted negatively to the higher-than-expected CPI data because it contradicted the prevailing sentiment of peak inflation. Investors had been optimistic about a potential easing of inflation pressures, but the new data indicated otherwise, prompting a reassessment of risk. This led to a significant sell-off in equities and bitcoin, as traders anticipated more aggressive monetary policy from the Federal Reserve to combat persistent inflation.

What does the rise in Core CPI indicate about inflation trends?

The rise in Core CPI indicates that inflation trends are not subsiding as hoped, particularly in the services sector and wage growth. This persistent inflation suggests that the Federal Reserve may need to maintain or even increase its rate hiking strategy to control rising prices. As a result, markets are forced to reprice their expectations for future interest rates, leading to increased volatility across various asset classes.

How should investors respond to higher CPI inflation and market repricing?

Investors should respond to higher CPI inflation and market repricing by reassessing their portfolios and considering opportunities in high-quality assets. While volatility can be unsettling, it also presents unique buying opportunities for long-term investors. Understanding the implications of sustained inflation can help investors make informed decisions about asset allocation and risk management in a changing economic landscape.