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

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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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