With today’s release of the Personal Consumption Expenditure (PCE) price index by the Bureau of Economic Analysis, the Bitcoin market just experienced the most important macro event of the week. Ahead of the Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) on May 2-3, all eyes were on the PCE today.
The latter is known as the Fed’s favorite inflation gauge. (versus CPI). It measures prices paid by consumers for domestic purchases of goods and services and excludes food and energy.
The baseline was as follows: February’s core PCE index was +0.3% on a monthly basis, below the forecast of +0.4%. For March, analysts expected an increase of +0.3%. On an annualized (YoY) basis, an increase of 4.5% was expected, a slight drop from the previous month’s 4.6%.
Hitting expectations or any “positive” surprises were expected to be bullish for the Bitcoin market. Renowned analyst Ted (@tedtalksmacro) stated up front: “Bulls want to continue seeing it trend south!” and added the chances for a bullish surprise were good: “CPI + PPI prints earlier in the month, at least for now, suggests that the path of least resistance is for lower inflation numbers.”
PCE Slightly Impacts Bitcoin Price
These expectations were not met. As reported by the Bureau of Economic Analysis, core PCE came in at 0.3% on a monthly basis, as expected. On an annual basis, core PCE fell to 4.6%, also delivering the expected number.
BREAKING: US PCE data is out!
Headline y/y 4.2% vs 4.1% expectation
Headline m/m 0.1% vs 0.1% expectation
Core y/y 4.6% vs 4.58% expectation
Core m/m 0.3% vs 0.3% expectation
— Markets & Mayhem (@Mayhem4Markets) April 28, 2023
Bitcoin price reacted in line with expectations. At the time of writing, BTC was sticking to the price level around $29,300.
The big question, however, will be whether progress in fighting inflation is enough for Fed Chairman Jerome Powell. In a phone prank with a fake Ukraine President Volodymyr Zelenskyy yesterday, Powell acknowledged that there are at least two more rate hikes coming, followed by a long period of high interest rates with significant negative effects on the US economy and the US labor market.
Powell also stated that a recession in the United States is likely. “This is what it takes to get inflation down. By cooling off the economy and cooling off the labor market inflation comes down. We don’t know of any painless way for inflation to come down.”
In a prank call with a fake Zelenskyy Jerome Powell, Chairman of the Federal Reserve, admits at least 2 more upcoming interest rate hikes followed by a long period of high rates with significant negative effects on the US economy and the US labor market. https://t.co/vDb19Ed5ux
— Kim Dotcom (@KimDotcom) April 27, 2023
What Will The Fed Make Of The Data?
After the latest macro data, Fed Funds Futures traders expect a probability of more than 80% for a 25 basis points (bps) rate hike next Wednesday. The probability according to the CME FedWatch Tool was at 88% before the release of the PCE and remained at this level afterwards.
Still, the market is calling Powell’s bluff. Liz Young, head of investment strategy at SoFi shared the chart below and stated prior to the PCE release:
Market pricing implies 88% odds of a rate hike next week, up from earlier in the month. Some traders are starting to bet on a hike in June as well, but that’s less certain. Either way, markets still think we’re going to get multiple cuts later in 2023 & early 2024.
Today’s release is not expected to change this. On the other hand, a second wave of bank failures is currently brewing in the US. Higher interest rates are likely to push more regional banks to their limit. Bitcoin could once again be the beneficiary, as the Fed can’t hike as high as they would want to.
At press time, the Bitcoin price stood at $29,314.
Featured image from iStock, chart from TradingView.com