Digital Assets Morning Call: August 10 2022

Written by Robert Lynch
on August 10, 2022

Game on as bitcoin and ether rally on the back of lower CPI print

US inflation comes in lower than expected, boosting bitcoin and ether prices

The initial reaction supports the notion of less Fed tightening, which is supportive for risk assets, including crypto token prices

But inflation remains elevated and the labor market is still tight, suggesting the Fed policy debate will continue, with associated risks to economic growth and risk asset prices

Bitcoin and ether are back on the rise following US inflation data which came in lower than expected. July CPI rose 8.5% y/y, lower than the 8.7% gain expected and down from the 9.1% reading in June. Also of note is that “core” CPI, which strips out the effects of food and energy prices and gives a better sense of future headline inflation trends, was unchanged at 5.9% y/y, also lower than the 6.1% reading expected and matching the level in June.

Lower inflation implies less Fed tightening…

The initial takeaway for crypto token prices—and risk appetite broadly—has been positive, with bitcoin rising nearly $1,000 to above $24,000 (essentially reversing Tuesday’s declines) while ether has rallied roughly $100 and printed a marginal new cycle high of $1,840 early in the North American trading session (data from

On the surface, the lower inflation print supports the notion that the Federal Reserve will not have to raise rates as aggressively going forward as they have thus far in their tightening cycle. Those sentiments benefit crypto and risk assets in at least two ways.

…which supports risk assets and future economic growth

First, it suggests lower funding costs for investors which essentially increases investor appetite and buying, supporting asset prices in the process. Second and more fundamentally, less Fed tightening improves the chances that the Fed can engineer a slowdown in growth without driving the economy into a recession. The better economic outcome creates a better backdrop for investments generally, including crypto assets.

Balancing the initial positive reaction with the broader economic realities

All that said, there are several factors that are likely to temper some of the market enthusiasm going forward. First, inflation remains high…much, much higher than the Fed’s 2% target. And the CPI data is just one report. It does not necessarily represent a sustained and, just as importantly, substantial decline in the rate of price increases.

Moreover, it is just one measure of inflation and there are several other important metrics that the Fed takes into account. The Fed actually targets a measure called personal consumption expenditures or PCE, and also looks at indicators such as inflation expectations as well as various labor market indicators. So, while the market has understandably welcomed the deceleration in CPI, it remains to be seen whether it will translate into less Fed tightening. In that regard, upcoming Fed commentary around the topic will be important to monitor.

Short-term yields have mostly reversed the gains since the strong US jobs data

Beyond that, the CPI data has essentially reversed the market impact of the strong US labor market report last Friday, an event which saw short-term yields spike higher in anticipation of additional Fed tightening. Specifically, 2yr US Treasury yields jumped 26 basis points to 3.32% on Friday. In the wake of today’s CPI data, that yield is back down to 3.12%, just 6 basis points above its pre-employment data level. So the CPI data has taken out much of the anticipated Fed tightening that the jobs data priced in.

The inflation/recession debate is likely to persist

Importantly, the combination of still-tight labor markets and some deceleration of inflation could well mean that the inflation/recession debate will persist. That has been and looks to remain a key feature for financial markets. If so, it also means that the market sensitivity and volatility around upcoming economic data will persist, as those reports fuel either side of that debate.

A short-term positive does not displace medium-term risks

In short, the crypto gains on the back of lower CPI data are welcome, if not surprising, and those sentiments can persist for a while longer. But the reality is that there are still risks of higher inflation and lower economic growth. Those risks may only become more evident over time, but if they materialize would ultimately reintroduce headwinds to crypto token prices and risk assets more broadly.

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Robert Lynch

Robert Lynch

Head of Research and Strategy | Robert Lynch is an experienced financial market strategist, focusing on macro markets including currencies, interest rates, commodities and cryptocurrencies. He is trained and practiced in the analysis of economic developments, monetary and fiscal policy, political events and technical indicators in order to generate actionable investment solutions.