The reason bitcoin leads this week’s Fed rally: Morning Brief

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Friday 29th July 2022

Today’s newsletter is from Jared Blikre, a market-focused journalist on Yahoo Finance. Follow him on Twitter @SPYJared.

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

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

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

All of this fits into the structure of an environment, according to The Macro Compass, can be defined by investors as “the more risky, the better.”

Since the last market low on June 16, we have seen many of the styles and sectors that brought us into bear market territory lead us towards a potential way out.

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

Which brings us back to bitcoin.

In May, bitcoin’s correlation with equities peaked at 0.82. The maximum correlation for any pair of assets is 1, which means that these assets would move in the same direction of the same magnitude.

But this correlation between stocks and cryptocurrencies peaked as both markets were down after the implosion of stablecoin Terra. Since then, cryptocurrency markets have generally lagged behind the stock market and stayed out of this recent rally. The spike in correlation between these asset classes in recent days once again shows the character of this new environment: “the more risky, the better”.

As stocks rose amid optimism about the Fed’s plans, cryptocurrencies also rose, with the correlation between bitcoin and the S&P 500 near 0.7.

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

US Federal Reserve Chairman Jerome Powell attends a press conference in Washington, DC, US, on July 27, 2022. The US Federal Reserve raised its benchmark interest rate by 75 basis points on Wednesday, the second in a row for that size. , as high inflation showed no clear signs of easing.  (Photo by Liu Jie / Xinhua via Getty Images)
US Federal Reserve Chairman Jerome Powell attends a press conference in Washington, DC, United States on July 27, 2022. (Photo by Liu Jie / Xinhua via Getty Images)

Markets will no longer cling to economic projections from economists and Fed officials at the Marriner Eccles building in Washington Throw those economic projection summaries out the window.

Markets now live and die based on actual data, as they once did. For avid Fed watchers, this means that the stakes have just been raised for the next rounds of inflation data.

The next consumer price index is two weeks away and the Fed’s preferred inflation measure, personal consumption spending, falls today.

The Fed is watching inflation expectations closely and also University of Michigan consumer sentiment data, which measures inflation expectations up to 10 years out, is also expected this morning.

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

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

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

What to watch today

Economic calendar

  • 8:30 am ET: Labor cost index2nd quarter (1.2% expected, 1.4% in the previous quarter)

  • 8:30 am ET: Personal gainmonth-over-month, June (0.5% expected, 0.3% previous month)

  • 8:30 am ET: Personal spendingmonth-over-month, June (0.9% expected, 0.2% in previous month)

  • 8:30 am ET: Real personal consumptionmonth over month, June (-0.4% in previous month)

  • 8:30 am ET: PCE deflatormonth-over-month, June (0.9% expected, 0.6% in previous month)

  • 8:30 am ET: PCE deflatoryear-over-year, June (6.8% forecast, 6.3% in previous month)

  • 8:30 am ET: PCE core deflatormonth-over-month, June (0.5% expected, 0.3% previous month)

  • 8:30 am ET: PCE core deflatoryear-over-year, June (4.7% expected, 4.7% previous month)

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

  • 10:00 ET: Sentiment of the University of MichiganJuly preliminary (51.1 expected, 51.1 during the previous month)

  • 10:00 ET: Current conditions of the University of Michiganfinal in July (57.1 expected, 57.1 during the previous month)

  • 10:00 ET: Expectations of the University of Michiganfinal in July (47.5 expected, 47.3 in the previous month)

  • 10:00 ET: University of Michigan 1-year inflationfinal in July (5.2 expected, 5.2% during the previous month)

  • 10:00 ET: Inflation 5-10 years of the University of MichiganJuly final (2.8% expected, 2.8% in the previous month)

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