Higher CPI Inflation Forces Markets To Reprice

The August CPI inflation data were worse than expected and markets reacted by revising their prices. Bitcoin drops more than 10%, while the S&P 500 closes lower by 4.3%.

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Inflation is not over

Despite sentiment and consensus for positive inflation news, the U.S. August Consumer Price Index print (CPI) was higher than expected. This has stifled any short-term bullish momentum that's been building for risk assets over the past week. Today's volatility saw equities, credit yields and bitcoin explode. Following a 10% plus move, the S&P 500 Index fell 4.3%. This was the last time it happened for equities in June 2020.

Similar to the July data last month, it's reversed and has greater magnitude. Markets cheered on the loosely confirmed trend of peak inflation last months, but today's data proves otherwise. We now look at the wider market for rates and risk over the next few day to confirm or disprove this new rally downtrend.

Both Core CPI and headline CPI exceeded expectations, despite the consensus positioning for month over month deceleration. Both headline CPI as well as Core CPI rose month-over-month, to 0.12% and respectively 0.57%. Simply put, inflation is not under control and there's still a lot of work (or trying to) to be done on the monetary policy front. The August forecast by the Cleveland Fed Inflation Nowcast was pretty accurate.

Consumer price index, year-over-year, and simple monthly change average

Monthly change in the Consumer Price Index year-over-year without taking into account food and energy

While we saw some inflation across energy commodities fall, it was not enough to offset rising inflation in the service sector. The key part of inflation that has yet to fall is the high and persistent wage inflation. Housing inflation remains a problem and is still on the rise. Prices and housing inflation have been the first to fall in a period of deflation and recession. Because it is usually a six-to nine-month delay, rent inflation (aka owners equivalent rent (OER),) can help to keep CPI prints longer.

The inflation picture appears to be stable and growing. It's clear that the Federal Reserve has made statements in recent months. This is a signal to continue aggressive monetary policy via rate increases.

Source Michael McDonough. Bloomberg

The CPI data was released immediately and equities, bitcoin and the dollar began to rise. The inflation was not the only factor in the price movement of asset classes, but rather the market's expectations about future monetary policies from the Federal Reserve.

After the release of CPI data, the dollar shot up while bitcoin and equities fell.

The market priced in a Fed Funds Rate of 4.46% for December, which is nearly 200 basis points lower than the current target rate rate range of 2.25-2.5%.

Markets are currently pricing in a Fed Funds Rate of 4.46% December for this year

Bitcoin was the subject of a significant unwind in open interests as traders speculated on peak inflation by buying long futures now that they were underwater.

Longs are closing their positions and open interest remains unwinded

From the time CPI data was released to the close legacy markets, the decline in stablecoin margin opened interest was more than 30,000 bitcoin. The market was under selling pressure for approximately 25% of MicroStrategy’s bitcoin stash, assuming that the majority of the declines in open interest were longs closing positions.

We are still convinced that the ultimate capitulation moment has yet to take place across global financial markets. Long-term investors should not fear downturn volatility but embrace it and recognize the unique opportunity to purchase high quality assets at fire sales prices.

By: Dylan LeClair And Sam Rule
Title: Higher CPI Inflation Forces Markets To Reprice
Sourced From: bitcoinmagazine.com/markets/higher-cpi-inflation-forces-markets-to-reprice
Published Date: Thu, 15 Sep 2022 03:00:00 GMT

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