CPI numbers from US-led markets rallied, leaving bitcoin in the dust as FTX shocked the crypto world. The Federal Reserve is testing a CBDC.
“Fed Watch” is a macro podcast, true to the rebellious nature of bitcoin. In each episode, we challenge traditional narratives and Bitcoin by examining current macro events around the world, with a focus on central banks and currencies.
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In this episode, CK and I cover our reactions to the FTX debacle, the latest U.S. Consumer Price Index (CPI) numbers, and the new central bank digital currency (CBDC) pilot by the Federal Reserve and the banks. We are approaching the G20 meeting in Bali, but we are running out of time at the end and we are not going into it in depth.
United States CPI figures
We had to skip last week’s show due to scheduling conflicts, so we missed covering the CPI numbers. This week I read some of the important data details.
The headline CPI change for October was +0.4%, almost half of the Cleveland Fed’s Nowcast CPI projection of 0.76%, and well below the Fed’s forecast. industry by 0.6%. This really shocked the market and stocks rebounded strongly.
Bitcoin’s expected reaction would have matched that of stocks had it not been for the FTX crash at the time – even though FTX didn’t hold any bitcoin anyway, as it turns out. This bitcoin price development was therefore a favorable development for the industry. The correlation between altcoins and bitcoins won out over the correlation of bitcoin with stocks. However, this is proof that bitcoin is fundamentally oversold.
Housing was the largest component of the monthly CPI and accounted for almost half of the increase. On the show, I spend time explaining how the shelter component is designed to be staggered 12 to 24 months. Without the addition of the lagging housing sector, the CPI would have been 0.2% for the month. On an annualized basis, it’s 2.4%.
It is important to focus on the month-over-month change, as this is the fundamental unit used to create the overall year-over-year (YOY) figure. The YOY shift doesn’t do a good job of recognizing directional shifts like the CPI spike. You can think of it as a rolling cumulative change over a 12-month period, similar to a moving average. The influence on the rolling 12-period cumulative change of a sudden qualitative change will be minimal in the early periods. It’s only once the new trend is firmly established that the broader 12-period average clearly communicates the data.
In this case, the annual change in the CPI is still 7.7%, even though the last four months have been 0%, 0.1%, 0.4% and 0.4%. If you annualize the last four months, you get 2.7%, not 7.7%. Also keep in mind that half of the recent increases are due to the lagging housing component. It is no exaggeration to say that the current rate of price change is less than 2% on an annualized basis.
We’ve gone through 10 charts from the show, but I won’t cover them all here.
The first is bitcoin. You can clearly see the pattern bursting and the ensuing FTX dump. The horizontal area was the previous support turned into probable resistance. I also added a green line to indicate the level with the most volume per price resistance as well, which is $19,000.
Next is the US dollar. The display is the current rally, the high and the new possible upper range. I expect the behavior of the dollar to remain similar to the post-GFC era.
The behavior of the dollar so far has been very similar to 2015 when the dollar rallied to the 1.618% Fibonacci extension and then narrowed to the range – as you can see on the pink line. A copy of the pattern with matching tops.
I expect the dollar to remain in a tight range as the financial system slowly recovers from the damage caused by the acute shortage of dollars. We can see this recovery in many currency charts, such as the Hong Kong Dollar, Japanese Yen and Euro.
We spent a few minutes discussing the table above. For the first time in this cycle, 5- and 10-year Treasury yields entered the Fed Funds target range. Not only that, but the 10-year fell below the reverse repurchase agreement (RRP) rate of 3.8% and the Fed Funds lower limit of 3.75%.
This is a major shift and a major part of my analysis of Fed monetary policy going forward. If rates stop listening to Jerome Powell, the Fed will be forced to pivot.
Federal Reserve Digital Dollar Pilot
We were surprised to hear about the Federal Reserve’s pilot program with banks moving forward to test a new USD CBDC. We’ve been pretty clear on “Fed Watch” that we don’t expect the Fed to approve the use of a CBDC, but will legitimize USD stablecoins, bringing them into the system of the Federal Reserve.
I read an article on The Street, however, during the show, I ran out of time to cover it in detail. I recommend reading it in full.
“The proof-of-concept (PoC) project will test a version of the Regulated Liability Network design that operates exclusively in US dollars where commercial banks issue simulated digital cash or “tokens” – representing the deposits of their own customers – and settle via a simulated central bank reserves on a shared multi-entity distributed ledger.
I don’t blame you if you don’t understand that word salad. CK and I are bitcoin specialists and we can barely keep up with it. Nothing in this pilot program shows that the Fed is close to a CBDC. We stand by our reasoning that Jerome Powell and the Fed will not go down this road, but they need to move quickly to clarify their intentions and bring USD stablecoins into the fold or the next president may follow globalist trends.
I also quote Vice President Randal Quarles’ 2021 speech on CBDCs, where he demonstrates a solid understanding of the CBDC game. We also recommend that you read it in full.
“I insist on three points. First, the US dollar payment system is very good and improving. Second, the potential benefits of a Federal Reserve CBDC are unclear. Third, developing a CBDC could, I believe, pose considerable risks.
Finally, we cover the G20, but to be honest, we don’t have time to do it justice. Here’s a link to The Guardian’s five takeaways from the G20 meeting.
This is a guest post by Ansel Lindner. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.