Market Lab Report - Inflation & rates damaging sentiment

by Dr. Chris Kacher

Inflation & rates damaging sentiment

For the year ahead, consumers now predict inflation to hover at 3.5% — up from last month’s expectation for 3.2%. Data from Kalshi shows markets now see just a 33% chance of one interest rate cut in 2024, and 27% chance of zero.



The latest University of Michigan monthly consumer survey showed sentiment tanked 13% in May compared to April, hitting its lowest level in six months. It was the largest drop since 2022.



High interest rates and elevated prices particularly in the necessities of food and gasoline are hitting consumers hard. According to the Michigan survey, Americans believe unemployment, interest rates, and cost of living are all moving in the wrong direction.

Liquidity issues

Despite the one-trick pony by Powell's announcement on tapering the taper during his prior testimony in early May, global liquidity is likely to resume its downtrend while stablecoin liquidity is no longer moving higher but tracking sideways.



A lot of froth sent both stocks and cryptocurrencies higher early this year with major stock indices and cryptocurrencies both peaking in March. With inflation and interest rates at issue, much weight is being placed on the PPI and CPI reports. Most data matched expectations except for the CPI which came in at 0.3% vs est 0.4%. Stocks, bonds, and Bitcoin rallied on the news.

Meme coins still are trading at excessive levels to the tune of more than $50 billion. There is little to no fundamental value driving these coins, just sentiment and the hope of making quick gains. Most other altcoins even in the hot areas of gaming and AI also had huge moves higher so could also be argued to be trading at well overvalued levels. Until liquidity improves which will be guided by inflation and interest rates, stocks and cryptocurrencies face serious headwinds.

In 2023, global liquidity fell until Nov-2023. During this time, Bitcoin was only boosted by news-driven announcements such as the banking crisis in Mar-2023 which caused the Fed to launch emergency QE measures, or favorable announcements concerning a Bitcoin spot ETF. But outside of these events, Bitcoin would drift lower much as it has been doing since Mar-2023. In consequence, it is likely it will take either a major bullish news event or a resurgence in global liquidity to push cryptocurrencies back into uptrends. Interestingly, the downtrends in the price of Bitcoin in 2023 were mild suggesting that despite the reduction in global liquidity, stealth QE remained live and well. Despite a fall in global liquidity, it will always remain positive because central banks must print fiat to service onerous levels of debt, unfunded liabilities such as pensions and IRAs, and other major expenses. This put a "floor" of sorts on Bitcoin's price.