- Crypto markets will watch data out of the US, Eurozone and UK for signs that inflation has peaked this month.
- Traders will also be watching growth data, with analysts increasingly expecting a US (and UK/EU) recession.
- The Fed and ECB will both lift interest rates this month, with central bank tightening still a key crypto theme.
Crypto Weighed By Macro Concerns
A deterioration of the macroeconomic environment has been the main driver of the latest downturn in cryptocurrency markets that began at the end of 2021, analysts now unanimously agree. Central bankers at the likes of the Fed, ECB and BoE were all wrong-footed in their assumption in 2021 that the burst in global inflation pressures would prove temporary. In fact, inflationary pressures worsened in the first half of 2022, forcing an abrupt about-turn in their respective monetary policies.
The Fed has already lifted interest rates by 150 bps this year (to a 1.50-1.75% range) and is signaling rates rising above 3.0% by the year’s end. The BoE has already lifted interest rates by 115 bps (to 1.25%). Meanwhile, the normally ultra-dovish ECB has signaled its intention to raise benchmark interest rates from current -0.5% levels to above zero by the end of Q3. All three, and many other central banks around the world, are scrambling to catch up with inflation and preserve credibility.
The sudden scramble to (first) end risk asset pumping quantitative easing programs and (second) to rapidly raise interest rates has delivered a hammer blow to risk assets such as tech/growth stocks and crypto. When the macroeconomic backdrop becomes more uncertain, speculative risk assets such as these are amongst the first that nervous investors will shed in favor of safer assets.
And the macro backdrop is very uncertain indeed. No one really knows how long it is going to take for the Fed and other major central banks to get inflation under control. Many fear that they may fail to do so, as happened back in the 1970s/80s.
That is why markets, including risk-sensitive stocks and crypto, have been very sensitive to macroeconomic data and central banks this year.
Recession to the Rescue?
Inflation isn’t the only economic worry playing on investors’ minds. Growth also appears to have slowed across major economies in recent months, according to a variety of data including consumer and business surveys, consumer spending reports and business sentiment data.
Investors have recently been upping bets that a recession in the US, Eurozone and UK (as well as other regions) will bring inflation under control. That’s why, in the last few weeks, global commodity prices have been collapsing, bond yields have been dropping, long-term inflation expectations have been falling back to central bank targets and central bank tightening bets have been wound down.
The idea that a global recession could snap inflation and lead to the eventual return of more accommodative central bank policy has not yet lifted crypto prices substantially above this year’s lows. Bitcoin is still near $20,000, for example.
But if macro events in July feed into the narrative that 1) inflation is peaking/has peaked already 2) growth is weakening and 3) central banks won’t have to be so hawkish in 2023, crypto could be in for a relief rally.
Here are 10 key macro events to keep an eye on this month that could shift the macroeconomic narrative:
Friday, 9 July – US Labour Market Report (June)
This Friday’s official US Labour Market Report for June will tell us how many jobs were added to the economy last month, what the unemployment rate was and how much wages went up. Yes, inflation is high and growth appears to be slowing.
But the labor market remains a bright spot in the US economy for now. Its strength has been one of the factors behind why the Fed is being so aggressive with its rate hikes – because it thinks the US economy, underpinned by its strong labor market, can “handle” them.
Strong labor market numbers on Friday won’t come as a surprise and probably wouldn’t impact markets too much, as they wouldn’t affect Fed thinking too much. The Fed is already expected to hike rates by 75 bps later this month, and a strong labor market report won’t change that.
Anything that damages the perception of a strong US labor market would have much more market impact. Signs of weakness would likely result in recession bets being further extended, coupled with increased bets that 1) inflation will come down in the coming quarters and 2) the Fed won’t have to hike as aggressively.
Depending on how you view it, this could be bullish for crypto.
Wednesday, 13 July – US Consumer Price Inflation Data (June)
Aside from the Fed policy announcement later in the month, this will be the most important data point. May Consumer Price Inflation data released in June surprised to the upside and forced the Fed’s hand to accelerate the pace of rate hikes to 75 bps from 50 bps back in May.
Another upside surprise could further increase Fed tightening bets and, as happened back in June, trigger severe selling pressure in crypto markets. Meanwhile, crypto bulls want to see signs that inflationary pressures have eased, after an alternative measure of May inflation released at the end of June (PCE inflation data) showed this.
Friday, 15 July – US Retail Sales Data (June)
Recent US Retail Sales reports have shown that inflation-adjusted spending growth in the US is negative. If this trend continues in June, it will only support growing recession bets.
Friday, 15 July – US University of Michigan Consumer Sentiment Survey (July)
The preliminary University of Michigan Consumer Sentiment survey for July provides another, slightly timelier insight into US consumer health. One of the most widely watched parts of this survey at the moment is the Consumer Inflation Expectations index, given uncertainty about inflation.
An upside surprise on this data point back in June was another reason why the Fed accelerated the pace of rate hikes last month.
Wednesday, 20 July – UK Consumer Price Inflation (June)
Whilst cryptocurrency markets are most interested in US economic trends, traders also pay attention to global trends. UK Consumer Price Inflation will show the extent of the inflation problem in the UK, the fifth-largest economy in the world.
Thursday, 21 July – ECB Policy Announcement
The Fed is the most important central bank for cryptocurrency markets right now. But if the ECB was to surprise later this month with a larger than expected hike of 50 bps versus the 25 bps move it has previously signaled, that could weigh on crypto sentiment.
Wednesday, 27 July – Fed Policy Announcement
Alongside US Consumer Price Inflation data, the Fed’s policy announcement will be the most important macro event this month. Markets expect another 75 bps rate hike taking the target interest rate range to 2.25-2.5%.
Crypto traders will closely scrutinize what Fed Chair Jerome Powell has to say in the post-meeting press conference. Will the Fed hike rates by 75 bps rate again in September? Will the Fed slow rate hikes if there is a recession? How bad does Powell think the economy has gotten? How high might interest rates go next year?
Thursday, 28 July – US GDP Growth Data (Q2)
Negative trends in consumer spending in the last few months risk pushing US GDP lower for a second successive quarter, which would confirm a technical recession. If the US economy has already shrunk in H1 2022, can the Fed and other institutions continue to credibly forecast positive growth in the US for the full-year 2022?
Friday, 29 July – US PCE Inflation Data (June)
PCE inflation data, particularly the core component, is the Fed’s favored measure of inflation. May PCE data showed YoY core PCE price pressures falling to a six-month low, contributing to hopes that US inflation has now peaked. This month’s PCE data will be viewed in that context.
Friday, 29 July – Eurozone Consumer Price Inflation (July)
Eurozone Consumer Price Inflation will show the extent of the inflation problem in the world’s second economic zone this July.