Crypto markets are in the red amid renewed fears of U.S. stagflation, a worse-case scenario for risk assets.
The market appears to be on a precipice right now as it debates which direction to take, with significant bullish and bearish narratives on the horizon.
As QCP wrote in a note over the weekend, the threat of stagflation – a period of high inflation and low growth – is very real.
“The weaker than expected [U.S.] GDP print points to a more sluggish economy while the higher Core PCE warns of an inflation problem that continues to be a thorn in the Fed’s side,” QCP wrote.
Last week’s U.S. GDP report showed the world’s largest economy grew at an annualized rate of 1.6% in the first quarter of this year following the preceding quarter’s 3.4% growth. Meanwhile, the personal consumption expenditures price (PCE) index, the Fed’s preferred inflation metric, showed prices rose to a 3.4% annualized rate in the first three months of the year from 1.8% in the final quarter of 2023.
The stagflationary combination of slower growth rate and sticky inflation has further weakened the probability of the Fed rate cuts.
Most traders on the prediction market platform Polymarket still see no rate cuts as the most likely scenario, with a 35% chance of this happening, but the chance of 1 rate cut is creeping up, now at 29% versus 26% a week ago and 14% at the start of the month.
QCP also wrote that Janet Yellen’s fiscal strategy, leveraging the Treasury General Account (TGA)—holding close to USD 1 trillion in assets—and the Reverse Repurchase Program (RRP) with USD 400 billion, could inject up to $1.4 trillion in liquidity into the financial system pushing up all risk assets.
As CoinDesk’s Omkar Godbole wrote last week, the key to a continuing bitcoin bull market is the U.S. Treasury’s impending quarterly refunding announcement, which maintains or reduces the current TGA balance of $750 billion.
This $750 billion figure in the TGA is key because it serves as a significant signal to financial markets about the U.S. government’s fiscal intentions, profoundly impacting economic stability and growth.
