The Macro Pulse | Bond Bloodbath: What does this mean for Crypto?

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July 12, 2023



Global bond sell-off creating headwinds, yet crypto maintains an underlying strength. A reversal in yields can trigger the next leg higher.

- Eurozone Deflation
- US Labour Market - Slowly Softening
- Bond Bloodbath Creating Headwinds
- Curious Dollar Weakness?

Eurozone Deflation

Eurozone Producer Price Inputs declined 1.5%, led by a 5% MoM decline in energy prices.

As a lead on Consumer Prices, this suggests Eurozone inflation is quickly heading sub 2%.

The composite PMI meanwhile fell into contraction territory at 49.9, with the service sector starting to crack, falling from 55.1 to 52.0.

ECB continues to talk hawkish, but I guess “everyone's got a plan until they get punched in the face.”

Meanwhile, the cold front in China continues to be felt. China services PMI is well below expectations at 53.9 Vs. 56.2 expectations are raising concerns for the global growth outlook.

The risk of a Central Bank policy error is growing daily.

Non-Farm Payrolls

US Non-Farm Payrolls and Average Earnings - Slowly Softening

Non-Farm Payrolls came in at a weaker 209K, Vs. 230k exp with April and May estimates revised lower a combined 110k.

Although stronger at 0.4% Vs. 0.3% MoM, average earnings growth remained at 4.4% on a YoY basis and has been in a general downtrend. The Fed would like to see this come lower, but there’s no evidence of a wage/price spiral.

After the blowout ADP print of 497k, the softer NFP comes as some relief.

Overall, the Labour market appears to be cooling, even if it remains robust, although we know it’s a lagging indicator.

This report needed to be weaker to deter a July hike but will ultimately change little for the Fed, which wants continued evidence that inflation is falling. Eyes on Wednesday CPI. 👀

Bond BloodBath

Global Bond Yields Breaking Higher

Last week, a vicious sell-off in bond markets acted as a persistent headwind to crypto majors; despite continued positive sentiment, Blackrock’s Larry Fink described Bitcoin as an “international asset” and “digital gold.”

Bond markets have traded heavy since the upward revisions to US Q1 GDP, and the blowout ADP number triggered some towel-throwing from bond longs driving 10yr yields above 4% and 2yr to 5.11% highs. Ouch.

The weaker NFP print restored calm, with 2yr yields reversing sharply from a peak of 5.11% to close Friday at 4.95%.

The global nature of the bond sell-off is curious, given the weak data across Europe and Asia.

Equally curious is the underlying dollar weakness, offsetting higher yields' negative impacts.

With recent management changes at the PBOC, a line has also been drawn under RMB weakness. Or did Yellen, on her visit, strike some kind of deal?

Either way, the soft dollar is offsetting the negative impact of higher yields for crypto and is a significant development to watch.

Underlying Strength

In light of these headwinds from the bond market, crypto’s resilience has been notable and points to underlying, idiosyncratic strength.

Our flows continue to see vega demand, with December outright Calls and spreads for both BTC and ETH still dominant flows. This market is positioning for a break higher.

Should Friday’s yield reversal mark the yield top and underlying USD weakness gather momentum, crypto majors can propel into a new higher range.

CPI may provide the trigger.

David Brickell 💜

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