Following the biggest drop in more than two years, US stocks are rebounding as investors still believe the Fed will pivot before they risk sending the economy into a severe recession. Recession risks are obviously going up now that the Fed will likely need to take rates above 4.00%, but it is still unlikely we will see them take rates to the 5.00% level. Today’s PPI numbers show that underlying trends are improving and that should lead to optimism that we will continue to see prices come down over the next few months. The Core PPI readings surprised to the upside just like CPI did yesterday.
Cryptos Under Pressure
The latest inflation report ruined a compelling argument for the crypto winter to be over. It seems that financial markets will need to brace for potentially much more aggressive action by central banks and that should spell trouble for all risky assets, including cryptos.
Bitcoin’s November to June crash ($68,991 to $17,599) was shortly followed by a stabilization period that now might get tested. Wall Street was very confident that the end of the Fed rate hiking cycle would happen in December with the rates peaking out at 4.00%, but now that has all changed. Traders should not be surprised if the Fed isn’t done hiking until the February meeting and for rates to rise to 4.50% at a minimum.
Bitcoin’s best case scenario was for the Fed’s soft landing to happen and now that seems less likely as the risk of recession is growing. A broader slowdown is hitting Wall Street and that should keep bitcoin grounded and stuck in this crypto winter.
Ethereum’s Merge should be a pivotal moment for the cryptoverse and its current weakness is more likely reflecting investor expectations that we will see a classic ‘sell the event’ reaction once the Merge is done. Ethereum’s update was embraced by hedge funds and the recent weakness is likely profit-taking. While the Merge is a big technological change that addresses the energy consumption problem, most people won’t really benefit from it until much later.
Ethereum will likely continue to chip away at bitcoin’s lead as the top crypto, but chances of a flippening will have to wait a couple more years.