Markets are irrational. If you look at the most recent price action you might end up being confused. US CPI is still sky-high but the crypto market is throwing a party. And it does not stop there, the stock market has also reacted positively to the news. This raises the question of why is everybody so happy despite a negative outlook on the economy. The target for inflation is around 2 % and with the current numbers, the Fed is far away from meeting its goals.
Why is the crypto market pumping and what should we all pay attention to in the months to come?
It’s all about expectations
The recent relief rally started simply because the inflation rate decreased in July. In June we had 9,1% inflation and now we have 8,5 % for the last month. The reason why this is so bullish is the expectation that the Fed does not need to approach inflation with a hawkish stance but might even change its policy if inflation should decrease further in August.
Please note that these expectations might be disappointed because there are also other data points that the Fed needs to pay attention to. The unemployment rate looks good at the first glance but if you dig deeper into statistics, you will find that full-time and part-time employment is decreasing while side jobs growing rapidly. What does that mean? Well, it could mean that many people in the US are struggling to pay their bills and need to take several jobs to make a living.
Ever since the Biden administration started to sell the news that the definition of a recession has changed, the unemployment rate has been stressed in that context. Investors who are interested in where the US economy is going are well advised to pay close attention to the data related to US employment. This data will reveal if the White House has calculated correctly or simply misunderstood its job.
The fact that the market is about to experience a recovery should not be confused with a bull market. Stocks and crypto are highly sensitive to the Fed’s decisions and to CPI data. For example, should inflation increase in August then the party might be over in September when the numbers are in.
That being said, this uncertainty also creates a lot of chances. On the upside as well as on the downside of each trade. Crypto is known to be highly volatile and many analysts have pointed out that usually stocks pave the way before the crypto markets follow.
If that pattern should be true, the S&P 500 as well as the Nasdaq 100 will tell what direction we are heading in the immediate future. The only independent event that is exclusive to crypto right now is the Merge. Again, this comes with an upside and a downside. Should the transition to proof of stake succeed in September then this could create bullish momentum. On the other hand, if anything goes wrong or the Merge gets postponed again this could have a devastating effect on the market.