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In today's volatile market, swift and strategic trades are essential. It’s crucial to anticipate macroeconomic shifts, especially as Bitcoin continues to trade within a broad range. That’s why, in last week’s report, we analyzed Bitcoin’s evolution as the Fed cut interest rates, and wrote about the U.S. inflation index.
We expected the FOMC minutes to lean dovish, with Fed Chair Powell emphasizing labor market weaknesses. This dovish softer stance fueled Bitcoin's surge, which resulted in solid returns. Liquidity inflows have reached a new high for the year at $61.9 billion, driven by increased stablecoin minting and rising leverage through Bitcoin perpetual futures, further fueling positive price momentum.
As critical macroeconomic data looms, Bitcoin's upward trend may persist, bolstered by consistent, modest inflows into Bitcoin Spot ETFs. The macro environment has seen notable shifts since early July, with the U.S. dollar peaking, Treasury yields declining and oil prices falling. This has coincided with a three-month decline in the ISM® manufacturing index, indicating potential economic weakness.
Consequently, risk assets have faced sharp sell-offs, exacerbated by rising unemployment. Since Bitcoin is correlated with risk assets such as stocks, the correlation that a stronger ISM manufacturing index could be bullish for stocks should also be valid for Bitcoin (and vice versa). With weak economic indicators and a declining dollar, Powell's recent speech has set expectations for increased market liquidity, potentially benefiting risk assets like Bitcoin.
Exhibit 1: SP500 (LHS, YoY %) vs. ISM Manufacturing Index (RHS)
However, this positive outlook hinges on the broader economy’s stability. Next week's key data points (ISM manufacturing index, U.S. unemployment rate and nonfarm payrolls) will be critical in shaping the market's direction for the remainder of 2024. Optimistic results could stabilize the economy and support rate cuts, without stoking fears of economic weakness.
Most economists expect a soft landing for the economy, and any weakness in those indicators would likely result in higher odds of a U.S. recession. However, judging by the stock market performance when a weaker Purchasing Managers’ Index (US PMI) was released, and tech stocks fell 1.5%, there’s a bit of worry brewing under the surface due to the non-zero probability that the U.S. economy is indeed weaker than expected.
Most experienced crypto traders know that a recession would result in the Federal Reserve injecting stimulus into the financial markets and economy, which has benefited Bitcoin. But how fast would the Fed react to support the economy? In any such scenario, Bitcoin would price lower, in conjunction with other risk assets.
However, this is not our base case. Expectations are that macroeconomic data could reverse some of the weakness of the past three months. This would leave risk assets to benefit from lower interest rates, which appears to be assured with Fed Chair Powell’s confirmation last week. As a critical beneficiary of lower interest rates, Bitcoin should benefit if economic growth remains solid.
Explore additional insights from 10x Research: https://10xresearch.co/latest/