A Big Week for Bitcoin: A Clarity Vote and an FOMC Meeting in the Balance

Producer Prices: Hot Headline, Oil Underneath

Thursday’s producer price release came in hot. The year on year number was 5.4 percent against 5.3 percent expected and 4.8 percent last, and core was 4.6 percent as expected against 4.3 percent last. The market saw it as a hot number: an increase off 4.8 percent the previous month, followed by an overshoot of expectations on the hot side. Pricing moved towards more Fed hikes and Bitcoin reacted as expected, dropping about 2 percent from 78,300 to 76,500.

Behind the headline the detail was not nearly that bad. Basically all of the increase was due to oil prices, which was fairly obviously going to feed through with oil back at the highs. The core number was in fact 0.1 lower on the month than expected. The market focused on the headline, which was certainly not a headline that would give a Fed already leaning 60/40 in favour of a hike any reason to scale back.

CPI: No Headline Improvement, but the Lowest Core Since 2021

Friday’s CPI printed at 3.4 percent year on year, in line with expectations and flat against the last print. Core month on month was 0.1 higher than expected at 0.3 percent against 0.2 percent, and core year on year came in at 2.4 percent against 2.5 percent last.

There are two ways of reading it. The market’s reading was that there is no improvement in headline CPI, still at 3.4 percent and way outside the Fed’s target, and pricing moved to a 90 percent chance of a hike this week. Notable, though, was the reaction in Bitcoin and risk assets generally, which held in very well and actually rallied, with Bitcoin moving all the way up towards 80,000 and retracing into Friday’s close. The core detail paints the other picture: 2.4 percent was in line, but there is very clear disinflation in core metrics and that was the lowest core reading since 2021. The chart of core CPI is simply trending lower as expected.

Long Yields: The Weak Point, and Why a Hike Helps

The biggest macro driver at the minute is long yields in the US, and that is the weak point of the market. Ten years are now at 4.97 percent. If tens break through 5 percent it starts to get a little worrisome for risk assets. On that basis there is a good chance risk assets trade well on anything that drives ten year yields lower.

The two main drivers of lower long yields are oil prices, so any positive news out of the Iran situation would help, and higher Fed funds, which would likely flatten the curve. That produces the counterintuitive conclusion Jesse arrived at: if the market gets a one off hike this month, risk assets will probably trade quite well on it.

Oil: Brent at 107 and Edging Toward the Danger Zone

Brent is now back at 107 dollars, which is certainly edging closer to the danger zone. Above 120 is the breakout level, and those are prices the market has not really experienced for a sustained period during the war. That is where risk assets would start to take note.

As it stands, stocks were marginally lower on the week at minus 1 percent, with the S&P at 7,650. Overall there was not much new direction in risk assets or in Bitcoin over the week.

CLARITY: A Final Offer, and Odds That Have Doubled

Tuesday brings the CLARITY vote. Last night a new draft was released by the Republicans containing 126 changes. Two are notable. The ethics provisions were changed to give state attorneys authority on rulings. The stablecoin yield provision was changed to include a circuit breaker, which could be triggered if widespread deposit flight from community banks were observed. The Republicans have moved a long way towards what the Democrats were asking for, and are calling this their last and final offer.

Odds of CLARITY passing this year have moved up significantly, from around 15 percent going into the weekend to 33 percent now. Jesse’s assessment is that the crypto market is still definitely positioned for this not to pass, so the risk into Tuesday’s vote is certainly to the topside. The text as it stands looks to him like it gives the Democrats pretty much everything they were asking for. What remains is whether this becomes a party political vote in which the Democrats simply do not want to let a piece of Trump legislation pass, particularly given how much he has extracted from crypto through the Trump coin and his other holdings.

The Fed on Wednesday: Likely a Hike, and the Tails Are the Risk

Wednesday brings the Fed, with an 85 percent probability of a hike now priced. Jesse thinks it is likely they go along with the hike: when something is that close to fully priced, going against the pricing creates more market disruption than going with it. A hike is not outrageous with headline CPI still at 3.4 percent, even though there is clearly disinflation in core metrics. One hike now would also appease those who think Warsh is simply a Trump appointee installed to cut rates. On that path he would expect risk assets to take it quite well and long term yields to come down a little, producing a reasonable all round reaction.

The risk sits at either extreme. If they hike and the talk is very hawkish, suggesting a great many more hikes are needed, the market starts pricing a proper hiking cycle, and the liquidity drain from that would hit risk assets. There is a tail the other way too: if they do not hike and sound dovish, or do not hike and the market no longer believes the hawkish rhetoric it has heard so many times, there would be a knee jerk higher in risk assets on the liquidity push, but long term yields in that scenario could become unanchored, which is the real weak point. Those tails are where the risk lies, and it is hard to take significant risk going into the two events. Hopefully the picture is clearer after Wednesday.

Bitcoin: Three Weeks in the Range, Skewed to the Topside

Bitcoin has so far respected its range between 75,000 and 82,000, and has been there for nearly three weeks. A push through either level should see continuation. If forced to pick, Jesse sees risk skewed to the topside from this week’s events, so the question is whether there is a breakout through 82,000. Beyond that sits 85,000, and through there the market is probably back into bull territory and looking for a move back up to 100,000.

Flows and Options: An Outflow Week, Skew Back to Puts

ETFs had an outflow of 460 million dollars last week, but that came after three really big weeks of inflows, so September is still up 300 million dollars on the month.

In options, DVol is pretty depressed and trading around 38. Five delta calls are at 43 percent and five delta puts at 47 percent, so the skew is slightly back in favour of puts. That is roughly what would be expected going into a week carrying large event risk.

Liquidity: Ample on Most Factors, Dragged Back to Neutral

The Hilbert Global Liquidity Index is at 6.49, indicating flattish moderate liquidity. The factors are basically split: most indicators show ample liquidity, but the index is being dragged down by Treasury risk premium and Treasury volatility, which leaves it back in neutral territory. The six factor Z score is at plus 0.91, up 0.2 on the week, but still very much in neutral territory.

DeFi: USDe Yields Break Through 5 Percent

USDe yields continue to push up and are now through 5 percent at 5.09 percent, and it looks like that will continue. All the revenue streams feeding into it are improving: the basis has marginally improved, the better crypto market has improved DeFi yields, Fed funds pushing higher lifts the return on their Treasury holdings, and there is the diversification of their collateral into real world asset AAA funds. All of that is coming together to significantly boost yields that were in the low threes. TVL is up about 100 million dollars on the week at 4.6 billion.