It’s CPI day!
Today’s CPI is a potential curveball for crypto markets that have found a stable base to start the year.
There is no question that the expectation for markets is another weak CPI reading, that will cement a step-down to 25bp hikes from the next FOMC meeting (Jan 31st) onward.
Markets are currently pricing a 79% chance of a 25bp hike, a terminal rate of 4.94% in June, and 75bp of cuts by next January. (Chart 1)
2023’s pricing is already 3 hikes below the median FOMC expectation of 5.25% by December 2023, and 2024’s pricing is lower than even the lowest dot! (Chart 2)
This huge disconnect exists in spite of the repeated warnings by the Fed that there will be no cuts this year, and that they are determined to take rates above 5%. And their rate forecast is already based on inflation falling to 3% by year-end.
The reason for this disconnect is due to sensitivities of the Y/Y reading to the individual M/M readings – for example, if we continue having a -0.1% M/M like the one forecast today (on a non-seasonally adjusted basis), then we will hit the Fed’s 2% Y/Y target by May! (Chart 3)
The market is thus on the optimistic side of monthly disinflation (flat to 0.1% M/M NSA), while the FOMC is on the more pessimistic side (>0.2% M/M NSA every month from here). It should be noted that the long-term run rate for inflation pre-pandemic has been 0.2% M/M.
Today’s CPI
Nevertheless, the market is banking on the FOMC’s confirmation bias to the data – with no release more important than CPI.
Tonight’s expectations are 6.5% for headline and 5.7% for core, and we expect that even a 6.6% will be taken positively by markets.
Anything higher however would be bearish for markets, with a 7% handle on headline or 6% handle on core an absolute disaster which will quickly take us to fresh cycle lows.
Our expectation band for BTC moves on CPI is as follows:
>7% (5% chance) : Down 10% on the day, 15k by FOMC
6.9-7%(10% chance) : Down 5% on the day, test Oct lows by FOMC
6.7-6.8% (20% chance) : Down 3-5% on the day, test YTD lows by FOMC
6.4-6.6% (30% chance) : Up 2% on the day, uncertain after
6.1-6.3% (25% chance) : Up 3-5% on the day, test 20k by FOMC
<6% (10% chance) : Up 5-7% on the day, break 20k before FOMC
There is a split between the most accurate forecast models right now:
1. On the bull side : CPI Fixing market (6.3-6.4% forecast) – correctly predicted direction of past 10 CPI prints! (Chart 4)
2. On the bear side: Web 3.0 Truflation community model (6.8% forecast) – as unbelievable as its model framework, has been within 10bp accuracy for past 7 CPI prints! (Chart 5)
Technically, many key markets are at a make-or-break level – all contingent on today’s print.
1. NASDAQ – 10,500-10,700 support / 12,000 resistance (Chart 6)
2. DXY – 102 – 103 support / 105.5 resistance (Chart 7)
3. BTC – 17,000 support / 18,500, 21,000 resistance (Chart 8)
4. ETH – 1,180 support / 1,500, 1,700 resistance (Chart 9)
BTC and ETH will follow NASDAQ closely, which means a break of the super key 10,500 to 10,700 support on NASDAQ will have us testing cycle lows on BTC and ETH soon after.
In summary:
• Whisper is for a weaker-than-expected CPI (bull side) and markets are setup for that.
• Pain trade is for a stronger-than-expected print (bear side).
• We expect follow-through on whatever number comes out, and for markets to trend into FOMC at month-end.
