'Print Money and People Believe It': RBNZ Governor Highlights Central Banking's Power as Bitcoin ETFs add Half a Billion AUM Monday

“We actually fund ourselves and then work out what dividend is needed to pay… It’s a great business to be in, Central Banking, print money and people believe it…”

- Adrian Orr, Reserve Bank of New Zealand Governor

1. Digital Asset Market: Bitcoin falls 3% following the release of a higher than expected CPI reading. The move began as the Bureau of Labor Statistics published the report, with the 10-year Treasury Yield rising and pressuring risk assets. However, some analysts believe the cryptocurrency rally will continue, with multiple closes above $48,600 potentially leading to new highs, driven by consistent Bitcoin ETF demand with inflows of $493M on Monday. Meanwhile, Ether and Solana's SOL token outperformed as they maintained their value after earlier gains. The upcoming Ethereum upgrade and renewed interest in non-fungible tokens are driving factors for their rising prices.

2. Macro Economics: Consumer prices rose 3.1% in January, lower than expected but still higher than December's numbers. This could complicate the Federal Reserve's plan to cut rates and may allow them to wait until later in the year. Stocks fell and bond yields rose in response. Across the Atlantic, U.K. wage growth eased a little less than forecast in the fourth quarter, while unemployment unexpectedly ticked down, signaling a stubbornly tight labor market and reflecting still-significant inflationary pressures as the Bank of England weighs when to start cutting interest rates. Average pay growth, excluding bonuses, was 6.2% in the three months to December, down from 6.7% in the three-month period to November, according to data published Tuesday by the Office for National Statistics. Meanwhile, the rate of joblessness was 3.8% between October and December, lower than the 3.9% in the three months to November, it said.  That compared with expectations of 6.1% for wage growth and 4.0% for the unemployment rate, according to a consensus of economists polled by The Wall Street Journal.

3. Equities: Stocks fell after hotter-than-expected inflation data for January caused Treasury yields to spike, raising doubts about the Federal Reserve's ability to cut rates. The Dow Jones Industrial Average was down 495 points, or 1.3%, the S&P 500 slid 1.3%, and the Nasdaq Composite fell 1.6%. as Consumer prices in the US rose more than expected in January, with a 3.1% increase over the previous year and a 0.3% increase over the previous month. On a core basis, which excludes volatile costs, prices increased 0.4% month-over-month and 3.9% year-over-year. The higher-than-expected increase may affect the Federal Reserve's decision on interest rates, with markets now pricing in a higher chance of rates staying steady at their next meeting.
   

4. The Fed and US Treasury: Consumer prices rose higher than expected in January, indicating that the economy may not be ready for a cut in interest rates. The increase in housing costs drove the consumer price index up, while food prices also rose. However, energy costs fell. The government will release more inflation data in the coming days and consumer sentiment remains positive. This should shed more light on which way inflation is heading for this year.  Earlier Powell had noted that the picture is unlikely to be clear enough by March to warrant a rate cut, which seems to be neutral for bond markets, but the prospect of ‘higher for longer, if appropriate’ will likely now be taken as a negative by investors, who would prefer to see rates fall. We believe rate cuts are likely later this year. Stock markets reacted negatively to the news, while the yield on 10-year Treasury notes increased by 10 basis points.

   

5. Geopolitical: The Senate passed a $95.34 billion military aid package for Ukraine, Israel, and Taiwan, but it will face opposition in the Republican-controlled House of Representatives. The bill also includes aid for Palestinians in Gaza and support for U.S. partners in the Indo-Pacific region against China. Ukrainian President Volodymyr Zelenskiy praised the bill's passage and urged the House to follow suit. Both houses of Congress must approve the legislation before President Joe Biden can sign it into law. Sadly, there seems to be no end to this madness. 

View from our desk

The steady inflow into Bitcoin ETFs has propelled Bitcoin to the $50,000 level, underscoring the persistent demand that far outstrips the available supply. This dynamic is expected to continue in the coming months, especially with the upcoming halving event next month poised to further constrict Bitcoin's supply. Today's minor dip in Bitcoin's price, triggered by the latest Consumer Price Index (CPI) reading, is not seen as significant. We maintain that Bitcoin's value is not directly tied to its role as an inflation hedge but rather as a unique asset class that is likely to thrive regardless of inflationary trends. The notion that discretionary spending bolsters the value of assets, including cryptocurrencies, supports this perspective, suggesting that Bitcoin's trajectory is shaped by broader market dynamics rather than inflation alone.

The recent consumer price data presented some surprises, particularly concerning core goods and services, highlighting ongoing issues in the housing market. The long-standing shortage in housing supply, with over three years of backlog to address, is not unexpected. Builders have been delaying new permits and construction starts for some time, indicating a significant catch-up phase is on the horizon, which will likely maintain inflationary pressures. Our stance has consistently been that the Federal Reserve will maintain current interest rates for a more extended period than the market anticipates. With the latest economic indicators, we now believe that a rate hike in the second quarter is highly unlikely, with the first cut potentially not occurring until late in the third quarter, around the Federal Reserve's meeting on September 18th, following the summer period. This timeline exacerbates the housing market's dilemma, as delayed rate cut expectations may deter developers from increasing inventory, thereby widening the demand-supply gap.

This complex interplay between Bitcoin's market dynamics, inflationary pressures, and Federal Reserve policies paints a nuanced picture of the current economic landscape. Bitcoin's resilience in the face of fluctuating market conditions highlights its distinct characteristics as an asset class. Meanwhile, the housing market's challenges and the Federal Reserve's cautious approach to interest rate adjustments underscore the broader economic uncertainties. As we navigate these intricate dynamics, the relationship between market expectations, monetary policy, and asset performance remains a critical area of focus, with significant implications for investors and the economy at large.

Happy Trading!

The 1Konto Team

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