How a US recession can favor cryptocurrencies

How a US recession can favor cryptocurrencies - US recessionTwo consecutive quarters of negative GDP growth are often cited as the main definition of an economy in recession. US Treasury Secretary Janet Yellen on Thursday argued that the US economy was not actually in recession in the first half of 2022 as the job market remained strong. Generally, the labor market worsens in the event of a recession.

Cryptocurrencies are holding up despite growing US economic pessimism

However, the labor market has shown some signs of moderation in recent weeks, with weekly jobless claims rising. Furthermore, while consumer confidence is declining and inflation-adjusted consumer spending has been stagnating for some time due to high inflation, other indicators point to weakness in other sectors of the economy.

PMI data released last Friday showed that the dominant US services sector likely contracted in July. Although Yellen can claim that the US has not been in a recession in the first half of the year, things are not looking good for the second half of the year.

Despite growing pessimism over the US economy in recent weeks, cryptocurrency prices have soared. At current levels of around $ 23.800, Bitcoin is up more than 35% from its June lows in the $ 17.500 area. Meanwhile, at current levels above $ 1.700, Ethereum is up nearly 100% from its June lows of around $ 880 per token.

If the economic situation is so bad, why have cryptocurrency prices managed to recover?

The easing of financial conditions favors speculative risk assets

Amid mounting evidence that the United States is entering or already in a recession, there is growing optimism that skyrocketing inflation may have reached its peak. As optimism about a more favorable inflation outlook grows, bets are also growing that the US Federal Reserve won't have to be so aggressive with its rate hikes in the coming quarters, which the bank is implementing to try to bring back the rate. inflation to its long-term target of 2,0%.

Indeed, during this week's Fed meeting, where the bank raised interest rates by 75 basis points for the second consecutive time, returning roughly in line with the so-called neutral rate of 2,25-2,50, XNUMX% that neither stimulates nor slows the economy, Fed Chairman Jerome Powell sounded a little more dovish. He noted the recent economic slowdown and evidence that US price pressures may have already peaked and refused to support further outsized rate hikes at upcoming Fed meetings.

Money markets, which can be thought of as the market's view of the direction the Fed will take for interest rates, subsequently moderated bets on the tightening for the remainder of 2022 and 2023. The market now appears to be predicting a hike. rates of 50 basis points in September, followed by a series of hikes of 25 basis points in the remainder of 2022 / early 2023 that will bring interest rates close to 3,5%.

Money markets see the Fed cut rates to around 3,0% for the remainder of 2023

In response to the Fed's recent moderation of tightening bets, US bond yields adjusted for inflation expectations fell sharply. The 5-year TIP yield ended the week at -0,09%, down nearly 70 basis points from previous monthly highs. 10-year TIP yields hovered around 0,11%, down around 60 basis points from previous monthly highs.

Analysts interpret real yields in positive territory, such as at the beginning of the month, as restrictive for the economy, while near-zero real yields have a neutral impact. In other words, financial conditions are likely to have returned from slightly tight to roughly neutral.

More favorable financial conditions have historically favored speculative risk assets such as US tech stocks and cryptocurrencies. This is because more favorable financial conditions reduce the attractiveness of holding low-yielding bonds, forcing them Investors to choose riskier asset classes.

In light of the above, further worsening economic conditions in the US, if it helps bring inflation back under control and further reduce the Fed's tightening bets, has the potential to drive up cryptocurrency prices. As inflation begins to decline, traders may continue to raise bets on the Fed rate cut for the second half of 2023 and beyond.

If the Fed begins to credit these bets, showing itself more dovish in the last meetings of 2022, this could translate into further easing of financial conditions, which could act as a major tailwind for cryptocurrencies.

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