Equities and crypto are bouncing as the U.S. Bureau of Labor Statistics released its new PPI report that holds promise for riskier assets.
The world’s largest crypto by market cap, bitcoin, is still reeling from higher-than-expected inflation numbers yesterday, tanking around 6% yesterday and recovering 0.2% after today’s favorable Aug. 2022 producer price index numbers. Cardano (ADA) is up 0.4% since yesterday, with ETH and Solana still in the red.
Prices of riskier assets like cryptocurrencies tend to increase with lower PPI numbers, according to trader @wolf_of_streets.
A lower PPI also means that the Federal Reserve is likely to pause its series of interest rate hikes, reducing the risk of a U.S. recession and the likelihood of cryptos tanking further.
So far, stocks and cryptos have remained tentative as the market absorbs the news.
Interest rate pause on the horizon?
The new numbers for the Aug. 2022 producer price index show a decline of 0.1% compared to July 2022. This is the second consecutive decline in PPI, which could mean that PPI has already peaked, which bodes well for riskier assets in the short to medium term. The PPI dip happened primarily because of a lower final demand goods index, which dropped 1.2% compared with July. In turn, the lower final demand goods index is rooted in a 6% reduction in final demand energy, which is filtered down to consumers as lower prices at the gas pump.
According to Credit Suisse chief equity strategist Jonathan Golub, favorable PPI numbers have already been priced into the stock market. “Every one of us sees when we go to the gas station that the price of gasoline is down, and oil is down. We see it even with food. So, it really is showing up in the data already. And, that’s a really big potential positive,” he said on Sep. 12, 2022.
PPI measures producers’ cost inputs to create raw, semi-finished, or finished goods. If the cost of inputs increases, some of that cost is absorbed by the producer and some passed on to the consumer, increasing the price for the end-user. If input costs decrease, the producer makes a bigger profit and can offer consumers lower prices.
Golub believes that the month-on-month decline in PPI signals that the Federal Reserve, the U.S. custodian of consumer price stability, will ultimately pause further interest rate hikes. The Fed is scheduled to make its third successive interest rate hike announcement next week to tame inflation, which rose 0.1% in Aug. 2022, defying economists’ expectations.
Before the PPI announcement, the market couldn’t settle on the Fed’s interest rate number, but it has now priced in a hike of 75 basis points for next week’s Fed meeting.
Stocks may rally in Q1 2023 if Fed rate predictions materialize
Following the red-hot inflation numbers released yesterday, cryptos tanked in tandem with the broader equities markets as the market dispensed with higher-risk assets like bitcoin, ether, Cardano (ADA), and Solana. Major cryptos ceded gains accrued in the previous two weeks, while stocks gave up four straight sessions of gains to reach lows not seen since June 2020.
But Golub is optimistic that, should the Fed decide to pause hikes, stocks could rally by the first quarter of 2023.
Given recent correlations with stocks, crypto could rally too.
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