PRO Friday Roundup 4/14/23
A breakdown of the latest in the bitcoin futures market and consumer inflation expectations.
Relevant Past Articles:
State of the Futures Market
As bitcoin futures markets continue to evolve over time, the perpetual futures market still plays the dominant role. Although not as extreme as what we saw back in 2020 and 2021, the periods of deep negative perpetual funding rates have proved to be local bottom areas for the bitcoin price as shorts pile on during times of fear and excess selling. So far, we’ve seen these dynamics play out both around $15,000 and on the recent price retest just below $20,000. Both occasions acted as catalysts for taking the price higher in an increasingly illiquid market over the last few months.
Below are daily and hourly comparisons where this dynamic is much easier to see on the hourly chart. What’s to look out for now is if we’re to see another period of deep negative perps funding in this trend higher or if the market is led by spot selling on any retrace (and lack of negative perps funding) back towards the 200 WMA, now around $25,700.
From the rise in open interest and shift in the mean funding rate since the start of the year, there’s been a bullish momentum flip and sentiment across the board as overall speculation has picked up. Yet, this has come at a time where growth in the perps market has far outpaced growth or activity in the traditional calendar bitcoin futures market (i.e. products like what the CME offers).
Inflation Expectations Come In Hot
As the first quarter came to an end, the US economy experienced a gradual moderation due to high inflation and borrowing costs, which constrained household spending and manufacturing activity. March retail sales witnessed their most significant decline in four months, mainly due to decreased gas station receipts and a slowdown at auto dealers. Factory output also fell more than anticipated, while inflation pressures have only started to slowly dissipate. Despite these challenges, the Federal Reserve is expected to opt for another quarter-point rate hike at its next meeting, with some policymakers open to a pause.
The University of Michigan's consumer survey showed that year-ahead inflation expectations increased significantly in early April, largely driven by higher gas prices. Consumers now anticipate a 4.6% annual price increase over the next year, up from 3.6% in March. However, expectations for the next five to 10 years remain at 2.9% for the fifth consecutive month. The labor market continues to be a bright spot, with low unemployment and strong job additions, but slowing demand for workers and rising layoffs could limit further wage growth.
It has been interesting to observe the confluence of a deteriorating business cycle amidst the inflationary impulse, as the bond and stock markets continuously attempt to front-run a Fed pivot, while fundamentally misunderstanding what additional central bank monetary easing would do to already piping hot inflationary conditions. To display central banks, take a look at U.S. 1-year Treasury yields and 1-year forward inflation expectations. The days of zero-interest rate policy with baseline 2% year-over-year inflation that no matter how loose monetary policy was at the time look to be over.
As the economy is still churning hot in nominal terms, the rate hike cycle can be sustained, but not without some significant second-order consequences…
The fiscal deficit to start the calendar year in 2023 for the U.S. Government is on pace to far outpace spending in 2022, just as the Treasury General account is running dangerously low in funds. While this tightening cycle looks to have another leg up coming, an eventual pause & pivot won’t remove the effects of compounding debt across public balance sheets.
It's hard to stop the bushfire of inflation when the fiscal authority of the United States is keen on pouring gasoline into the fire. Just ask the Congressional Budget Office for their long-term views on deficit spending, as the CBO’s deficit estimates increased another $3.1 trillion to $18.8 trillion of additional deficit spending through 2032.
Final Note
Despite being -56% from all-time highs, the backtest of a dollar cost averaging into bitcoin, gold, and U.S. equities, starting on November 10th, 2021 (the date of the bitcoin all-time high), yields some rather interesting results:
At the time of writing, bitcoin is +17%, gold +11% and stocks +1%.
Narrative violation.
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