13.04.2023 – The price of Bitcoin is picking up. The e-currency has just marked a new ten-month high – and conquered the $30,000 mark. The reasons: On the one hand, the flight from inflation. On the other hand, BTC is suddenly considered a safe haven in the banking crisis.
The day after, the market digests two important pieces of news: First, the inflation rate in the US has risen slightly less than feared. Second, according to the minutes of its March meeting, the Federal Reserve could pause its rate hikes. Or it could continue tightening – if the banking sector is robust enough. The stock market still has no answer as to what exactly will happen next.
This is what yesterday’s data brought: Consumer prices rose 5.0 per cent in March compared to the same month last year. That’s the smallest gain in the Consumer Price Index (CPI) since May 2021, and analysts on average had expected inflation to fall to 5.1 per cent. In February, inflation had stood at 6.0 per cent. But the core inflation rate climbed to 5.6 per cent, as expected. In February, it had still stood at 5.5 per cent. In this core inflation, the statisticians exclude energy and food prices. In other words, they make the situation look good – because energy and food are precisely the goods that people cannot do without.
And so the great coffee-rate reading has begun: The inflation rate is cooling down. But it is still far from the Fed’s target of 2.0 per cent. However, the question arises again whether the banks do not urgently need a lower interest rate so that their business does not collapse. Most of the financial market had recently expected a rate hike of 0.25 percentage points in May. However, it is still unclear how much the recent banking crisis will affect lending and inflation. In other words: potentially less credit, less economic activity, fewer jobs.
Here are a few voices. Richard Flynn of Charles Schwab UK said: “The fall in the rate of inflation is being welcomed by investors, who may speculate that the Fed could soon pause its cycle of monetary tightening. That being said, whilst the rate of inflation has fallen, it remains far above the Fed’s 2% target. Officials have been laser-focused on fighting inflation and may decide that additional tightening is required to achieve its target when the FOMC meets later this month.” Karyne Charbonneau of CIBC Capital Markets said: “The pace of core inflation maintains the case for a follow-up rate hike by the Fed in May, provided banking system issues look sufficiently stable.”
Adam Crisafuli of Knowledge Vital leaned the furthest out of the window, stating an end to tightening: “The huge 100bp dip in the Y/Y pace of inflation is a big, positive development, and probably means the Fed is done hiking. However, the Y/Y pace of core inflation rose M/M for the first time since Sept 2022, and this is what the Fed cares most about (which means Powell and his colleagues will be stubborn in pushing back against any talk of rate cuts). While this CPI is bullish for stocks, we think the Q1 earnings season will matter much more for the S&P.”
In view of the CPI data, the March Fed minutes took a back seat. Moreover, they contained little that was concrete anyway – only the currently particularly pronounced on the one hand/on the other. Several participants in the Federal Open Market Committee (FOMC) said that it might be appropriate to leave interest rates unchanged for the time being. The steps taken so far had certainly helped to reduce short-term risks. If necessary, tightening could be continued. The panel agreed, however, that the demand for labour exceeded the supply. This raises the danger of a wage-price spiral.
Our conclusion: What is clear is that nothing is clear. The bullish factors seem to prevail. Traders should ride the wave, but in view of the great brooding, always be prepared for setbacks. Which opens up opportunities on the short side. With this in mind: Bernstein Bank wishes you successful trades and investments!
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