Risk-Off Is Back: Crypto, Equities Slide on Persistent Inflation

Derivatives markets show a 40% probability of rates eventually going greater than 5.5%, another possibility traders hadn’t considered at the beginning of February


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The Federal Reserve’s preferred inflation gauge showed higher prices have been more persistent than originally thought, sending stocks and cryptocurrencies into the red Friday. 

The core personal consumption expenditures price index (PCE), which the central bank finds more comprehensive than the consumer price index, showed inflation rose 0.6% in January. 

Year over year, prices are up 4.7%, a far cry from the Fed’s 2% target, according to data from the US department of commerce. 

The S&P 500 and Nasdaq Composite indexes fell about 1.5% and 2% on the news. Bitcoin (BTC) and ether (ETH) trended downward as well, each shedding around 1%. 

Friday’s PCE reading paints a negative picture for markets, Tom Essaye, founder of Sevens Report Research, said, because it shows disinflation is slowing and inflation pressures are bouncing. 

“To be clear, [the report] won’t be enough to change the Fed’s thinking (this is very old data at this point) nor was it enough to move bonds or currencies,” Essaye added. “But for a market that’s concerned about stagflation, this report won’t do anything to ease those concerns.”

Thursday’s revised gross domestic product figures are also not helping to put investors at ease, Essaye said. The updated numbers showed US economic activity only grew modestly, which, coupled with increasing inflation, sets the stage for stagflation. 

Markets were less certain about a 25 basis point increase following Friday’s PCE report, which previously was the largely accepted consensus, data from CME Group shows. Futures markets are now pricing in about a 36% chance of a 50 basis point increase, a scenario markets thought was near impossible only earlier this month. 

Derivatives markets also show a 40% probability of rates eventually going greater than 5.5%, another possibility traders hadn’t considered at the beginning of February. The current target is between 4.5% and 4.75%. 

The Fed’s next policy-setting Federal Open Market Committee meeting is scheduled for March 15 and 16. A summary of economic projections will also be released following the meeting along with comments from Chair Jerome Powell.

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