What Impact Will December CPI Data Have On Risky Assets?

Will CPI data confirm US highest Inflation in 4-Decades? This is only one of several persistent questions raised by traders who are awaiting the important economic data as tighter Fed monetary policy could subject risky assets from stocks to cryptocurrencies to more downward pressure.

Bitcoin traders generally bet that the largest cryptocurrency could be an effective hedge against inflation. That is why they will be watching Wednesday’s data as the U.S. Labor Department is expected to release its Consumer Price Index (CPI) report for December.

The widely followed CPI is expected to reflect an accelerating inflation, already at the highest point in 39 years, from November.

A faster-than-expected uptick in prices could push the Federal Reserve to tighten monetary policy aggressively over the next few months. In turn, could put more downward pressure on risky assets from stocks to bitcoin and other cryptocurrencies.

The CPI is estimated to have risen 7.1% in the 12 months through December, according to data from FactSet. On a month-to-month, seasonally adjusted basis, the headline index probably rose 0.4%.

The core CPI, which excludes food and energy movements, is forecast to rise 0.5% month over month. The report will be of special interest for the cryptocurrency investors who look at bitcoin as a hedge against inflation. The U.S. inflation rate surged to 6.8% in November, the highest since 1982.

Bitcoin prices quadrupled in 2020 and rose about 60% last year when traders said the Fed’s loose monetary policies could eventually lead to a fast climb in consumer prices.

But as inflation ticked up, and Fed officials signaled they would move aggressively to accommodate and contain inflation, the price trend has reversed: Bitcoin is down more than 13% over the past 30 days.

It is expected that the December CPI will remain fairly high. But what is more important is that the current supply chain pressures are temporary and are already showing a few signs of easing. By the middle of 2022, CPI inflation will likely decline in the 2.0% to 2.5% range.
Yet, traders are not sure the inflation data tomorrow is going to put investors’ minds at ease, with CPI seen hitting a multi-decade high above 7%. A higher reading could ghost investors once again just as equity markets appear to be stabilizing.

According to the CME’s FedWatch, almost 70% of the market participants are expecting the March rate hike, so bitcoin may be able to defend $40K in case of another selloff wave, but it is not the time for optimism in the short run.

As for Bitcoin, the risk-off overhang is front and center. It appears as if institutions are ready to pounce as leverage has been getting slowly flushed out of the system, even with outflows the last few weeks of institutional funds being fairly large. The downward move in Bitcoin over the last few weeks has happened on low volume, which could lead to the possibility of a huge short covering event.

Still, the key factor in reading tomorrow’s data is to digest and fully understand the underlying causes of the current inflation and the implications thereof, rather than simply focusing on the actual figure.