30 Jan Bitfinex Alpha | Recession Fears Still Not Out of the Woods, but Bitcoin Holds Bullish
It is a conundrum for markets and economic policy makers that when the economic data is indicating a slowdown, it is taken as a positive.
Signs of declining US business activity and declining personal consumption would seem to indicate that the string of interest rates increases we have seen – and will continue to see following the FOMC meeting this week – is having the desired effect of slowing down the economy. It implies that inflationary forces are being tamed, which to the market’s eye, means there won’t be many more rate rises to come. Hence, Bitcoin prices and other risk assets have remained firm over the past week.
There is, of course, some need for caution. Though the rate of inflation growth is slowing, prices are still rising faster than worker pay. While policy makers want demand to lessen, they have to be careful what they wish for.
Consumer spending is slowing, but it is this that drives demand and is the main engine of the economy. With personal savings low amidst still-elevated prices, the restoration of increased spending will not return soon. This leaves weaker growth prospects for 2023.
The saving grace is that the labour market remains strong. For us, this is a critical determinant of monetary policy. The monthly jobless claims report is a robust leading indicator of the strength of the economy. A dip here will show that monetary tightening is having a durable impact – and it will be an important factor in future Fed policy.
Fourth quarter GDP numbers, which were also released last week, appeared to indicate that a recession had been averted and perhaps a soft landing has been achieved. However, a look at final sales and net trade exports show more anaemic growth.
We expect interest rates to rise again this week, but as discussed in last week’s Bitfinex Alpha, any decline in the Employment Cost Index, which is also released this week, will likely presage a slowdown or even a pause in future rate increases.
Further, there is a litany of forward-looking indicators that suggest a recession is coming. The Global Credit Impulse, the Conference Board Leading Economic Index, and the Housing Market are all predicting a slowdown in corporate earnings growth and a recession in the US economy in the second or third quarter of this year.
So, where does this leave Bitcoin? Looking at BTC’s forward performance after eight green candles on the daily timeframe – going as far back as 2015 – it seems that the bottom might be in for BTC. But while the historical technical data looks positive, BTC is more correlated to US equities than ever before.
Another positive indicator for BTC is that short-term holders are selling profitably into spot markets, while long-term holders are not. The Spent Output Profit Ratio for short-term holders remains above equilibrium, in contrast to the SOPR for HODLers. Indeed, the P&L for the entire market is positive for January 2023 the first time since April 2022. If this continues, it looks increasingly bullish for BTC.