Fiscal Dominance, Flows from China, Plus Some Thoughts on Global Conflict (Core Strategy Rebalance)
What BTC Shrugging Off CPI Says About Current Fiscal Situation
The most significant piece of macro data this week was the CPI. Headline CPI registered at 3.5%, surpassing the anticipated 3.4%, while core CPI remained steady from last month at 3.8%, also above the expected 3.7%. This increase was largely attributed to rising costs in auto insurance and shelter. Consequently, interest rates saw a sharp rise, with the 10-year Treasury yield climbing by 20 basis points—a situation further exacerbated by a poor 10Y auction on Wednesday.
The DXY ascended back above 105 as major equity indices experienced declines. Despite this, Bitcoin closed the day in the green, surprising many. This was a massively bullish sign, which, in our view, is a nod to fiscal dominance, the stimulative effect fiscal spending is having on the economy and financial assets, as well as the precarious position that the Fed and the Treasury have found themselves in.
In our outlook for the year, we presented the following chart and discussed how the divergence between gold and real rates suggests that the opportunity to curb inflation with rate adjustments may be over, whether achieved or not. The peak in real rates has occurred – and the market knows this.
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FLOWS AND SENTIMENT STILL SUBDUED Last week, we received a better-than-expected CPI print, but the DXY continued to move higher due to global weakness and a hawkish Fed. We discussed the risks appearing in the metrics we use to gauge sentiment and flows. The overall lack of follow-through in the crypto market was evident. Volumes, net ETP flows, the Coinbase discount, stablecoin market cap trend, and search interest for key...
We wrote on Thursday about how the reaction to recent macro data has been quite underwhelming. Crypto broadly rallied in response to a cool CPI number, but indicators such as a muted Coinbase premium and low exchange volumes suggest animal spirits are still lacking. Muted volumes relative to market prices, and low social interest as proxied by Google search trends further evidence a lack of risk appetite in the market....
OVERALL, IT WAS A GOOD CPI/FOMC DAY As any market observer knows by now, CPI came in remarkably cool yesterday. May CPI data was soft across the board, with headline inflation at 0.0% M/M vs. 0.1% expected and core inflation at 0.2% M/M vs. 0.3% expected. The unexpected data fueled a violent rally across all risk assets as rates fell, and the futures market started to price in additional cuts,...
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