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Bitcoin Market Intelligence - Issue #10

Jan Wüstenfeld
Jan Wüstenfeld
Bitcoin: Bear market rally or the start of true price recovery?

Since the last issue of the newsletter, a lot has happened, and we have seen both financial markets and bitcoin perform well since then (Bitcoin is up by roughly 9.6%).
The big question now is:
  1. Is this a bear market rally where we will see a price dump once again in the near future? or
  2. Are we witnessing the start of the price recovery?
While I am leaning towards it being a bear market rally, particularly the speech by Jerome Powell after the FOMC meeting two weeks ago may have marked the end of the bear market.
Fed did hike interest rates by 75bps on July 27
Powell in speech hinting at slow down of monetary tightening
Fed becoming more data dependent
Markets reacting positively to Powell’s speech, possibly expecting pivot in early 2023 and pricing that in
Strong jobs report in the US 528,000 vs 250,000
75bps hike probability now at around 68%
Uncertain and volatile weeks ahead as Fed’s action less clear due to data dependency and not forward guidance
Probability that this is true recovery higher after Powell’s speach, but still leaning more towards it being a bear market rally
The day after I sent out the previous issue, the Fed announced another 75bps hike, the second 75bps hike in a row, taking the benchmark rate to 2.25%-2.5%. So far, so good, and nothing out of the expected.
More important is the speech by Powell that followed afterwards, where he explained the decision of the FOMC and their strategy going forward.
“And we’re going to be thinking about our policy stance and where does it really need to be? And I also mentioned that as this process, now that we’re at neutral, as the process goes on, at some point, it will be appropriate to slow down. And we haven’t made a decision when that point is, but intuitively that makes sense, right? We’ve been front-end loading these very large rate increases, and now we’re getting closer to where we need to be. So that’s how we’re thinking about it. In terms of September, we’re going to watch the data and the evolving outlook very carefully.”
While he also said that the Fed is committed to fighting inflation, markets appear to have interpreted his statement as a pivot or at least that monetary tightening is going to slow going forward.
The neutral interest rate is the interest rate where according to the Fed, the economy is growing at its potential (not overheating), employment is at its maximum and stable price growth is achieved. So anything that goes beyond that when it comes to monetary tightening puts the Fed in a restrictive territory where they potentially break something.
This may be one of the reasons that Powell then stated that they are becoming more data-dependent.
Not surprising, financial markets interpreted that as some sort of pivot or slowing down in monetary tightening and reacted positively to his speech. Maybe anticipating a pivot in early 2023 along the lines?
We have seen financial conditions loosen during that week, as the National Financial Conditions Index (NFCI) suggest. In the week ending July 29, the NFCI indicated a loosening of financial conditions as it went down to -0.19 from -0.17 a week before.
We will know if financial conditions have further loosened over the last week tomorrow on the next release date of the NFCI.
“Positive values of the NFCI have been historically associated with tighter-than-average financial conditions, while negative values have been historically associated with looser-than-average financial conditions.”
Graph 1: National Financial Conditions Index (Source: Federal Reserve Bank of Chicago)
Graph 1: National Financial Conditions Index (Source: Federal Reserve Bank of Chicago)
I do not think Fed wants to see this easing of financial conditions and financial markets rally in their fight against inflation.
That could also be seen during the days that followed when some Fed speakers reinforced the Fed’s commitment to fighting inflation, seemingly trying to go against the perception of markets that the Fed will pivot or slow down monetary tightening.
But financial markets did not seem to buy it, only reversing some of the gains made.
All in all, the Fed is now increasingly watching the incoming data before taking a decision rather than hiking more or less on autopilot. This is making the next move by the Fed less predictable, which will likely increase volatility over the coming weeks.
Particularly also considering that the next scheduled FOMC meeting and interest rate decision is still some time away as there won’t be a meeting in August, and the next interest rate decision is scheduled to be on September 21.
At the end of the last week, a strong jobs report came in for the US, massively beating expectations. 528,000 jobs have been added in June. That is more than double the expected 250,000. That puts the unemployment rate at 3.5%. This means that the labour market is still incredibly tight in the eyes of politicians and central bankers.
On the one hand, that is good for the Fed as they do not at present have to worry about fulfilling their mandate of full employment and can fully focus on fighting inflation. But on the other hand, a tight labour market may add to inflationary pressures as workers can demand higher wages, adding to inflation, which could force the Fed to become more restrictive.
While this is not as relevant for the decision of the Fed TXMC has pointed out why not all in the job report is as rosy as it seems:
This trend is typically only seen when unemployment is rising (people exiting labor force involuntarily).

What is new is that we have historically low unemployment while the non-working population in aggregate is growing.

You can't fight demographics.
MacroAlf has also put out a great thread digging deeper into the jobs report and why, from an inflation perspective, these are developments that the Fed does not want to see:
In general, this report came in very hot on the surface: everything the Fed doesn't want to see...well, it was in there

- Huge beat & prior numbers revised up
- Hourly earnings up (wages picking up)
- Labor force participation rate down (less labor supply)

Let's dig deeper

Most likely due to the strong jobs report the probability of a 75bps hike in September did increase from 41% a week ago to roughly 68% at present.
Graph 2: Target Rate Probabilities next FED meeting (Source: CME FedWatch Tool)
Graph 2: Target Rate Probabilities next FED meeting (Source: CME FedWatch Tool)
How financial markets and Bitcoin will perform in that environment is not that easy to predict as the Fed’s actions will be harder to anticipate going forward. Since the next meeting is still a few weeks away, markets may recover further until it becomes clearer what the Fed will do in September and CPI numbers for July and August are released.
Considering the last FOMC meeting, the likelihood of this being a true recovery has increased. But as inflation is still high, I am still leaning more toward this being a bear market rally.
However, as these are uncertain weeks, don’t take my word for it!
The next clues on where we are headed will be the release of the US CPI numbers for July tomorrow (Wednesday, August 10, 2022, at 8:30 A.M. Eastern Time), and for the Fed’s decision in September maybe more important, the CPI numbers for August released on September 13.
While the CPI numbers will certainly still come in high, the Fed is going to watch closely whether there are signs of price pressures decreasing.
I will leave you with some food for thought regarding inflation numbers. According to the consumer survey of the Federal Reserve Bank of New York, the median one- and three-year-ahead inflation expectations both declined sharply in July compared to June (6.8 percent to 6.2 percent and 3.6 percent 3.2 percent).
Do you think this decline in inflation expectations by consumers is warranted or that inflation is here to stay? Interested to hear your thoughts.
Graph 3: Consumer Survey Expectations Inflation Rate (Federal Reserve Bank of New York)
Graph 3: Consumer Survey Expectations Inflation Rate (Federal Reserve Bank of New York)
Stay safe out there! Don’t trust! Verify! Make up your own opinion and consider multiple sources. 
Jan Wüstenfeld
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This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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Jan Wüstenfeld
Jan Wüstenfeld @JanWues

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