Equities and crypto are jumping as the US Bureau of Labor Statistics releases its new PPI report, with the promise of riskier assets.
Bitcoin, the world’s largest cryptocurrency by market cap, is still battling higher-than-expected inflation numbers yesterday, tanking around 6% yesterday and recovering 0.2% after today’s favorable August 2022 Maker Price Index numbers. Cardano (ADA) is up 0.4% since yesterday, with ETH and Solana still in the red.
The prices of riskier assets like cryptocurrencies tend to rise with lower PPI numbers, according @wolf_of_streets to the merchant.
A lower PPI also means the Federal Reserve could halt its series of interest rate hikes, reducing the risk of a US recession and further reducing the chances of cryptos tanking.
So far, stocks and crypto have remained tentative as the market absorbs the news.
Interest rate break on the horizon?
The new figures for the Producer Price Index for August 2022 show a decline of 0.1% compared to July 2022. This is the second consecutive fall in the PPI, which could mean that the PPI has already peaked, which bodes well for riskier assets in the near term. middle term. The PPI decline was mainly on account of lower final demand goods index, which fell 1.2% compared to July. In turn, the lower Final Demand Goods Index is rooted in a 6% reduction in final demand energy, which is filtered to consumers as lower prices at the gas pump.
According to Jonathan Golub, Chief Equity Strategist at Credit Suisse, the favorable PPI number has already been priced in the stock market. “Every one of us sees that when we go to the gas station the price of gasoline goes down, and oil goes down. We also see it with food. So, it’s actually already in the data. And, it’s actually a huge potential positive,” he said on September 12, 2022.
PPI measures the cost inputs of producers to make raw, semi-finished or finished goods. If the cost of inputs increases, some of that cost is absorbed by the producer and some is transferred to the consumer, increasing the price for the end user. If the input cost is reduced, the producer makes more profit and can offer lower prices to the consumers.
Golub believes that the month-on-month decline in PPI signals that the Federal Reserve, the US custodian of consumer price stability, will eventually halt further hikes in interest rates. The Fed is set to announce a third consecutive interest rate hike next week to tame inflation, which rose 0.1% in August 2022, defying economists’ expectations.
Before the PPI was announced, markets couldn’t settle on the Fed’s interest rate number, but it is now priced up 75 basis points for next week’s Fed meeting.
Stocks could rally in Q1 2023 if Fed rate prediction comes to fruition
Following red-hot inflation numbers released yesterday, the market moved away from high-risk assets such as Bitcoin, Ether, Cardano (ADA), and Solana as the crypto tanked in tandem with the broader equity markets. The major crypto gave up the gains it earned over the past two weeks, while the stocks gave up four straight sessions of gains not seen since June 2020.
But Golub is optimistic that, if the Fed decides to halt the hike, the stock could rise through the first quarter of 2023.
Given the recent relationship with stocks, crypto could also rebound.
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