Market Lab Report - On inflation; On earnings; On Bitcoin and Ethereum

by Dr. Chris Kacher

On inflation

The June CPI was far milder than expected.  Core CPI rose 0.06% in June, lowering the 12-month rate to 3.27%, which is the lowest in three years.  The six-month annualized rate fell to 3.3%, the lowest since October.  And shelter is cooling (important).



US Consumer Prices fell 0.1% in June, the largest monthly decline since May 2020.


US Core Inflation (excluding Food/Energy) moved down to 3.3% in June, the smallest YoY increase in prices since April 2021.



Jerome Powell reiterated Monday that inflation seems to be moving in the right direction. The spectre of more rate cuts normally bodes well for markets but major indices such as the NASDAQ Composite and S&P 500 were overbought, trading well above their respective 10dmas, so a pullback is not surprising with big techs getting hit the hardest. Many of the largest ones had been trading at or near new highs such as GOOGL, AMZN, AAPL, MSFT, and META. The US is now trying to decide whether to launch the most severe trading restrictions against China which would affect AI chips. Naturally, the semiconductor index (SOX) is getting hit hard.

On earnings

It's earnings season and analysts expect S&P 500 companies to see 8.8% higher earnings per share compared to a year ago, according to FactSet. That would mark the best showing for corporate America since the start of 2022. But the market remains top heavy. The top 10 stocks in the S&P 500 account for 35% of its total market cap. A record low share of individual S&P 500 stocks are outperforming the index.

Last Thursday was the 9th worst day for the index, but the 10th best day for market breadth, according to Bespoke.
The typical stock was up on the day. Invesco’s Equal-Weight S&P 500 ETF finished the day 1.4% in the green and the small-cap Russell 2000 closed 3.7% higher. Advancers to decliners was 2366:403.

With more stealth QE on the way and the potential for strong results this earnings season, major averages could continue to trend higher overall. But the Fed may have to act faster than thought on delivering rate cuts depending on the speed at which the economy weakens. The negative reading on CPI is symptomatic of a contracting economy. But enormous utility from AI on countless levels may postpone recession. The action of leading stocks will tell the story as it unfolds so keep a vigilant eye.

On Bitcoin and Ethereum

As for cryptocurrencies, a big reason for bitcoin's recent correction was due to selling from Germany which recently finished its selling. But there's still the nearly $9 billion in bitcoin from Mt. Gox that will be distributed to creditors, about twice that of the selling done by Germany. As of July 16, Mt. Gox creditors of bitcoin such as Kraken received nearly $6 billion in bitcoin. It will be distributed to retail investors who are owed bitcoin within the next two weeks who can then start selling. We could see a waterfall effect of selling by these retail investors should the price of bitcoin sufficiently weaken due to initial selling by said retailers.

On the other hand, Mt. Gox suspended all trading on Feb 24, 2014 when bitcoin closed at $565. These retailers have therefore seen their holdings increase by a factor of 64000/565 = 113x. Some may therefore sell only a fraction of their coins. Selling pressure should be temporary, but any price correction will depend on what fraction these retailers decide to sell.

Halvings are bullish events. S2F (stock-to-flow) shows that within a few months or less after halvings as denoted by the red dots, Bitcoin tends to trend higher. For those who are unfamiliar with S2F, stock is the number of existing stockpiles or reserves, and flow refers to the rate of production on a yearly basis. To calculate the BTC S2F, you take the number of existing Bitcoin (Stock) and divide them by the annual flow of production (Flow).






Global liquidity has also started to trend higher. The odds of Trump becoming President jumped to 70% due to the attempt on his life. It is likely we will see a Republican Congress and President which means lower taxes and a stronger economy. In consequence, the yield curve has been steepening since such fiscal policies could lead to higher inflation expectations and rising long-term interest rates.

Trump is pro-crypto and said he would never allow a central bank digital currency (CBDC) since it defeats the purpose of cryptocurrencies while BlackRock CEO Larry Fink praised bitcoin as a “legitimate financial instrument.” Fink said, “As you know I was a skeptic. I studied it, learned about it, and came away saying, okay, my opinion five years ago was wrong.”  

Stealth QE meanwhile can help bitcoin grind its way higher in fits and starts much as it did in 2023. And if the economy contracts too quickly, the Fed may use QE in various forms to cut recession short. But this is no guarantee as to when and how much QE the Fed may utilize. Markets can always launch into a steep correction before the Fed comes to its rescue.