Macro Comment (10.12) Core CPI in September Stabilizes, Bitcoin Still Bullish

Core CPI in September Stabilizes, Bitcoin Remains Bullish Macro Insights (10.12)

Author: macrofang, PSE Trading Trader

Inflation remains high, but core CPI meets expectations

Although monthly CPI (+0.4%) was higher than the expected +0.3%, core CPI (+0.3%) was in line with expectations. According to data from the Bureau of Labor Statistics, core Consumer Price Index (CPI) rose 0.3% in September, excluding food and energy costs. Economists believe this is a good indicator of underlying inflation dynamics, while the overall CPI rose 0.4% mainly due to energy costs.

The recent inflation data reflects the impact of a strong labor market on boosting consumer demand, which may keep price pressures above the Federal Reserve’s target. In recent meetings, most officials believed that additional interest rate hikes would still be needed this year unless inflation shows signs of easing, despite the recent surge in bond yields.

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However, comments from some Federal Reserve representatives suggest that the central bank may maintain stable rates at the upcoming November 1st meeting, indicating that further rate hikes may not be necessary.

Although prices for used cars and auto parts have seen significant declines, the most notable price increases are in housing costs, vehicle insurance, and entertainment services (including sports event tickets). Housing costs, which account for about a third of the overall CPI index, contributed more than half of the monthly increase, with hotel accommodation experiencing the most significant growth. Sustaining consistent adjustments in this category is critical for the continued downward trajectory of core inflation.

Initial jobless claims: short-term drag, long-term bullish

Of course, the surge in yields may cause some short-term drag on the stock market, but we shouldn’t overlook the overall trend for small details. There are many positive factors: strong employment data, rising labor force participation, and controlled wage pressures. These are all good news for the stock market. We remain rational and hedge tactical risks, but strong growth, a strong labor market, and fewer inflation concerns tilt the balance towards long-term equity holdings. However, we should not turn a blind eye to some potential risks: the Fed’s adjustment to the labor market, the prospect of higher terminal rates – which have almost knocked on our door – and potential volatility in the credit and real estate industries.

In terms of employment, the continued low level of initial jobless claims in recent weeks is a pleasing sound to anyone supportive of the economy. Moreover, it is worth celebrating that 336,000 jobs were added in September. A tight labor market is a good sign. We expect the number of initial jobless claims for the week ending October 7th to increase slightly to 211,000, compared to 207,000 the previous week, but overall, the numbers remain low.

As for the number of ongoing unemployment claims, they have also remained relatively low. They have increased compared to last year, but it is not overly concerning. Considering seasonal factors, we expect them to continue to rise in the coming months. We expect the number of ongoing unemployment claims for the week ending September 30th to increase to 1.695 million, compared to 1.664 million last week. Overall, it’s an interesting situation, so stay tuned!

FOMC Meeting Minutes: Fed Ends Rate Hikes!

According to market expectations, the minutes of the FOMC meeting on September 20th presented an optimistic outlook for the market and stocks. One important point is the Fed’s upward adjustment to the “dot plot,” indicating a hawkish stance. However, this stance was emphasized with a reminder of the current policy rate constraints and a call for cautious implementation of any future rate hikes.

The outlook suggests that an immediate rate hike in November will only be triggered if there is a significant positive surprise in CPI inflation.

Although the possibility of further rate hikes later this year or next year cannot be completely ruled out, the decision threshold has been raised, indicating a more cautious approach, which is generally favorable for the market. Despite strong expectations for GDP growth, Fed officials have predicted a slowdown in economic growth and inflation, which helps stabilize market expectations.

The focus now is not on rate hikes, but on how to maintain interest rates at a restrictive level until there is confidence in downgrading sustainable inflation. The recent positive employment data and the approach to avoiding a government shutdown crisis have balanced concerns raised by the rapid rise in long-term rates. The Fed’s cautious and balanced approach, coupled with expectations of stable rates until a possible economic downturn next year, suggests a stable and positive environment for the market and stocks. However, the situation is still dynamic, and the possibility of rate hikes remains if inflation and actual economic activity data warrant it.

Market Unfazed by War: Bitcoin Still Bullish

Financial markets can often draw useful lessons from history, and this is an interesting reminder.

Previous geopolitical conflicts have often had limited impact on the US stock market. Although geopolitical escalations can be very serious, past experience suggests that such events are unlikely to have a significant impact on the fundamental US economy or corporate earnings.

Take the example of the January 2020 US airstrike that killed Iranian General Qasem Soleimani.

This event further reinforces the lesson not to sell stocks because of such events, as historical evidence shows that stocks have successfully weathered heightened geopolitical tensions.

It highlights the surprising resilience of the market during turbulent periods. From the start of the Second World War in 1939 to its end in 1945, the Dow Jones Industrial Average rose by 50%, averaging over 7% per year. Therefore, during the two most destructive wars in modern history, the US stock market achieved an overall growth of 115%. This emphasizes that the relationship between geopolitical crises and market outcomes is not as direct as it may initially seem.

War = Risk Appetite

After Russia’s invasion of Ukraine on February 24, 2022, global markets, including the US S&P 500 index, initially fell by over 7%, due to increased economic sanctions against Russia and concerns about commodity prices. However, despite sustained oil price increase above $100 per barrel, the market rebounded within a month, with the S&P 500 trading above the pre-invasion levels.

Rising Interest Rates = Defensive Stocks Underperform

War + Rising Interest Rates = Bullish for Risk Assets (BTC Bullish)

Digital Gold: Bitcoin in Political Turmoil = Safe Haven Asset

The relationship between gold and bitcoin (BTC) as stores of value is evident. The popularity of bitcoin is largely attributed to its demand as a digital asset. Bitcoin’s market capitalization reached $540 billion, accounting for approximately 10.8% of the market capitalization of financial gold. The market value of gold exchange-traded funds (ETFs) is $200 billion.

This lays the foundation for the potential approval of a Bitcoin ETF by the Securities and Exchange Commission (SEC) for listing in the United States, which could bring in an influx of $20-30 billion in funds. This, in turn, could trigger a significant increase in cryptocurrency prices. Despite the slow progress of the SEC in approving a Bitcoin ETF, delaying the decision on new applications until October, the crypto market remains optimistic about the potential wave of mainstream investment that this approval could bring.

The report highlights the advantages of Bitcoin over gold, as private keys can be memorized, eliminating the risk of confiscation. Storing assets in the form of gold is somewhat outdated in the digital era, and transporting gold across borders is subject to restrictions, while Bitcoin offers an efficient solution. It allows for the quick and discreet transfer of value across borders.

Therefore, based on the current technological environment, Bitcoin primarily plays the role of a value reserve comparable to gold and a speculative financial asset.

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