U.S. Inflation is set to make a strong comeback. Financial experts predict the Consumer Price Index (CPI) for July, scheduled to be released on August 10, to show a 3.3% inflation in the country’s economy. Despite a slowdown to 3% last month, the latest figure has far exceeded the Federal Reserve’s 2% target rate.
In efforts to combat rising inflation, the Central Bank has been reducing liquidity in the monetary system by raising interest rates on the dollar. Since the unemployment rate in the country dropped to a 40-year low of 3.5% in June, analysts surely expect the Fed to take measures at the upcoming Federal Open Market Committee (FOMC) meeting to tighten up the economy.
Markets Trade Near All-Time-Highs Despite Rising Inflation
The S&P 500, which was trading at only 6% below its all-time high, closed at a low on Tuesday after Moody’s cut the rating of 10 small-to-mid-sized U.S. banks by one notch and placed six big banks, including Bank of New York Mellon, U.S. Bancorp, State Street, and Truist Financial, on review for potential downgrades.
The ratings drop has reignited fears about the health of the U.S. banking sector and the economy as a whole. Meanwhile, Nasdaq closed within 5% of its all-time highs
Under normal circumstances, the stock markets trading at such a level would signify a bullish sign for risk-on assets like commodities and cryptocurrencies. But times have changed and investors are using the stock market as a safe haven against surging inflation, which has climbed over 4% between April 2021 and May 2023.
Investors No Longer Deem Gold, Bonds, and Real Estate As Hedge Against Inflation
Gold, which has been the traditional safe haven for investors, is struggling to get past the $2,000 mark. This indicates that there is a lack of confidence among investors in the hard asset as they believe it is no longer a strong hedge against economic risks.
The U.S. bond market is also losing its appeal due to rising federal debt, which has now reached $36 trillion dollars. In July, the U.S. Treasury Department revealed that its quarterly net borrowing estimate stood at $1 trillion.
This, on top of the Fitch credit ratings downgrade of the U.S. government from the top-tier AAA to AA+ level, has further fueled concerns about the country’s economic situation.
The real estate market has also been severely impacted by the growing inflation numbers. Rising mortgage rates and limited supply despite high demand in the market have seen major real estate companies lose over 20% of their revenue in the first two quarters compared to last year. Estimates show that the American real estate sector expects a further decline of 15% to 20% in transaction value in the third quarter of 2023.
Bitcoin Holders are Accumulating More Than Selling, Indicating a Possible Crypto Bull Market
All these factors are pushing traditional investors to seek alternative markets, which brings them to Bitcoin. Despite the cryptocurrency trading around the $29,000 mark, whales – the largest holders of the asset, and fishes – small-scale holders, continue to increase their leverage long positions using derivatives.
Typically, inflation is seen as a positive factor by Bitcoin (BTC) and cryptocurrency investors, who expect prices to rise to their all-time highs. The crypto market hit its all-time best in 2021 with BTC crossing $65,000 in August and then touching $69,000 in September.
This was when inflation was rampaging the U.S. economy and the Federal Reserve was expanding the money supply by printing more dollars and hiking interest rates.
However, this time around, the situation is a little different. The Fed has been working hard to reduce liquidity in the system and as a result, it is unclear how inflation will affect cryptocurrencies.
In the case of Bitcoin, futures trade at a slight premium over its spot market. This is because traders demand more money from buyers to delay the settlement. Usually, BTC futures contracts sell at a 5% to 10% annualized premium.
At the moment, BTC futures on trading platforms Deribit and OKX is going at an 8% premium, which is said to be the highest basis rate in three weeks. What this means is that professional traders are willing to pay extra to leverage the long run on Bitcoin. Thus indicating that general sentiment toward the crypto market is bullish.
Market sentiment for an asset is measured by determining whether more activity is going through call (buy) options or put (sell) options. A put-to-call ratio of 0.70 indicates that the more a put option’s open interest slows, the more bullish the call is, therefore, the market has a positive sentiment. If the put option indicates a ratio of 1.40, then the market is deemed bearish.
The put-to-call ratio for Bitcoin has been below 1.0 since July 24, 2023, indicating a strong demand for call (buy) instruments. Looking at the latest available data, it is apparent that investors are expecting a potential price appreciation for Bitcoin, believing it will majorly benefit from the inflation surge.
On the contrary, if investors come to realize that the Federal Reserve is unlikely to create a soft landing for the economy and the country will be swallowed whole by a severe recession, then they are more likely to hoard up U.S. treasuries and cash positions in the initial stage.
However, there is no data to suggest that Bitcoin will surge in the short-to-mid term if inflation becomes widespread in the United States. But there still remains hope for bullish crypto investors as the digital asset is showing strong support at the $29,000 mark.
At the time of writing, Bitcoin (BTC) is trading at $29,938 – up 1.6% in the last 24 hours.
