Is inflation a problem again?

TRADERS’ RISK CALL 15 Feb 2024

This week, we discuss the following:

  1. We just had the US consumer price index numbers on Tuesday. What does Vee think of it? 
  2. We’re seeing cryptocurrencies performing quite well in the past few days. Why is that the case?

Transcript:

We just had the US consumer price index numbers on Tuesday. So what do you think of it? 

We recently received the US Consumer Price Index (CPI) figures on Tuesday. The CPI data for January showed a year-on-year increase of 3.1%, a slight decrease from December’s 3.4%, yet above the expected 2.9%. This unexpected rise led to a notable market reaction, with stocks surging over 2% and bond yields significantly increasing. Although the CPI data was higher than anticipated, it’s seen as positive since it continues the trend of decreasing inflation, aligning with levels last observed in November. This pattern suggests a gradual move toward the desired inflation rate.

The Federal Reserve Chair, Jerome Powell, emphasized in a “60 Minutes” interview following the January policy meeting, the importance of ongoing confirmation that inflation is steadily moving towards the Fed’s 2% target before considering rate cuts. He clarified that “good data” need not surpass previous figures but must simply be positive. This perspective is crucial, especially considering that last year’s CPI figures were significantly higher. With the rolling 12-month window in effect, the current data is replacing much higher figures from the previous year, contributing to a downward trend in the annual inflation rate.

So we’re seeing cryptocurrencies performing quite well in the past few days. Why is that the case?

Bitcoin has been experiencing a notable increase, recently reaching $52,000. This surge is largely attributed to the impact of ETFs, particularly in Asia, with net inflows reaching around 4.7 billion dollars. This inflow signifies a growing acceptance of Bitcoin as a legitimate investment, much like gold became mainstream following the launch of gold ETFs. Daily Bitcoin production is outpaced by the inflow, suggesting a stronger demand than supply, which typically leads to price increases. Importantly, ETF investments are often long-term, indicating a less volatile, more sustained demand for Bitcoin.

Bitcoin’s current market behavior differs from previous cycles, with less media frenzy and more stable demand driving its price increase. The market cap of Bitcoin is currently around one trillion dollars, and the continuous flow into ETFs suggests a long-term holding strategy rather than short-term speculation. This trend indicates a potential for even higher prices in the future as the market continues to mature and stabilise.