Financial markets were trading higher on Wednesday afternoon as weak U.S. Consumer Price Index (CPI) data boosted investor expectations for rate cuts.
Data provided by the U.S. Bureau of Labor Statistics showed that after excluding food and energy prices, the "core" CPI rose 3.6% year-on-year. This data was consistent with market forecasts, slightly lower than the 3.8% increase in March. The CPI in April was 0.3% month-on-month, 0.1% lower than expected.
It was the first time in more than four months that the reading met or fell short of market expectations, which traders viewed as a positive sign for interest rates and the likelihood of a rate cut before the end of the year.
Data provided by the CME FedWatch tool showed that after the CPI release, the market now expects the Fed to start cutting interest rates at its September meeting with a probability of about 70%, up from 45% last month.
Benefiting from the positive impact of low CPI, the S&P, Dow Jones and Nasdaq all hit or approached record highs on Wednesday, closing up 1.17%, 0.88% and 1.40% respectively.
According to BitPush data, Bitcoin was in an upward trend on Wednesday, surging from a low of $61,315 to a high of $66,420 in the afternoon. As of the time of writing, BTC was trading at $66,035, up 7.21% in 24 hours.
Altcoin rose on the back of Bitcoin’s momentum, with nearly all of the top 200 tokens by market cap rising on Wednesday. Livepeer (LPT) was the best performer, up 20.8%, followed by Axelar (AXL) and GMX (GMX), up 18%. Ribbon Finance (RBN) was the biggest loser, down 21.5%, Pepe (PEPE) down 2.6%, and Starknet (STRK) down 1.9%.
The overall cryptocurrency market cap is currently $2.38 trillion, with Bitcoin’s dominance rate at 54.7%.
CPI cooling does not mean the Fed's inflation progress has won
While the market may have reacted positively to the CPI data, Youwei Yang, chief economist and vice president of BIT Mining, warned that it is too early to declare victory on inflation progress.
“Despite policy easing and consumer price index (CPI) inflation running at 3.4% as expected, the current global economic landscape remains dangerously close to a mild stagflation scenario,” she said in a note. “Today’s policymakers appear to be underestimating stagflation risks, echoing the 1970s, albeit without the extreme inflation rates of that era.”
She added: “Despite these risks, many investors and policymakers remain overly optimistic, as evidenced by historically high price-to-earnings ratios in many major market sectors. Cryptocurrencies are always the first to react when markets face potential risks, and as such have been falling over the past few months, even as AI-driven stock growth appears to have given financial markets a worrying false exuberance.”
Bitfinex analysts also expressed concerns, warning that the decline in CPI does not guarantee that the Federal Reserve will lower interest rates.
They said: “Investors viewed this as a bullish shift as it marked the first decline in CPI inflation in the past three months and came after the Fed announced its intention to taper quantitative tightening. CPI had formed a local top over the past two months so this was seen as positive for risk assets but it had the opposite effect. However, we still have inflation above 3% and yesterday’s PPI inflation data showed a third consecutive month of increases and while the decline in inflation data is good news, investors will have to wait and see if the Fed sees this as positive enough news to cut rates.”
Leena ElDeeb, research assistant at 21Shares, said, "CPI alone is not enough to convince the Fed to cut interest rates, especially considering that the data is still well above the 2% target, as expressed at the FOMC meeting two weeks ago, and hopes of a rate cut in the short term have become slim."
ElDeeb warned that “with rate cuts still in doubt, the recovery is likely to be slow. Typically, higher interest rates reduce the appeal of risky assets such as tech stocks and Bitcoin, as investors can earn significant returns from safer options such as U.S. Treasuries. This drives short-term investors to traditional markets.”
ElDeeb added: “However, despite its short-term impact on the market, many investors take a long-term view on Bitcoin as a global asset that can protect against currency debasement and economic instability. While the Fed’s policies may cause short-term volatility, they will not fundamentally change Bitcoin’s long-term trajectory.”
“Bitcoin is therefore currently uniquely positioned as both a risk-on and risk-off asset, leading unique market dynamics,” she concluded.
Dan Tapiero, CEO of investment firm 10T Holdings, believes that if Bitcoin can regain support at $65,000, its price could continue to surge by more than 45%. He said on the X platform: "Breaking through $65,000 will go straight to $90,000... and then more, a very clear horizontal overlapping flag consolidation is about to be completed."
Market analyst Mustache agreed with Tapiero’s speculation, noting on Wednesday that “Bitcoin’s weekly Stoch RSI just crossed bullish,” suggesting that “the biggest move is coming.”
