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Week of Monday August 9th to Sunday August 15th.
Bitcoin: Bitcoin had it’s third consecutive week of gains, closing higher by +10.09% at $43,858.
Price action has been positive as signs of inflation continue to flash around the economy. Last Friday’s unemployment report showed spikes of wage increases in certain sectors - we’ll break those down later today.
The spotlight last week was on the U.S. Infrastructure bill, which had a crypto regulatory framework included as part of the bill. After a sleepless weekend, the bill has been pushed to a vote today. There are several amendments to the bill being proposed and price volatility could be in the cards once the bill passes.
Regardless of the legislation’s imperfections, it is important not to lose sight of where we are today. The United States Congress had an open debate about a bill to regulate the crypto industry. The level of awareness that this brings to the industry cannot be understated. The fact that there is a framework now legitimizes many activities and allows millions of new people to interact with bitcoin and crypto companies.
An update on inflation at play:
We get a temperature check on inflation in the U.S. this week with July’s Consumer Price Index reading on Wednesday. June’s inflation came in at 5.4% per year, and with the recent upward pressure we’ve seen in both wages and rent, it would not be surprising to see July’s inflation reading in line or higher.
This week we saw both bitcoin and the yield on the 10-year note rally higher on Friday after the jobs report. Of course, there were other factors at play influencing price action for both, but as we’ve mentioned here - the yield on the 10-year note continues to track bitcoin prices rather well.
On the topic of inflation, there are a few indicators that point at potential for it to continue running higher. One such indicator is the fact that monetary velocity still remains at record lows.
An important consideration is that, given the way the formula is calculated (quarterly GDP over M2 money supply), the amount of growth in the M2 money supply will structurally push this rate down until GDP grows by a similar amount. In other words, it will take a long time for GDP growth to make up the magnitude of the increase in M2 money supply.
Despite that, the potential for velocity to increase is very real, and this would certainly put upward pressure on inflation. The catalyst to speed up velocity could be in the U.S. labour market, which has been picking up steam and has enhanced unemployment benefits expiring in September. This may be the spark that velocity needs to put in a base and start rising. More on this in our next section.
The other dynamic at play is that companies do not want to raise prices to remain competitive. So what do they do? They make their products smaller. This practice is typically referred to as “shrinkflation”. Here are some examples. The product images that you are about to see were shared by Lyn Alden and her followers in social media, referencing that most were purchased within weeks or months.
Whether it's through inflation or shrinkflation, the value of what you get in exchange for a buck goes down.
S&P 500: The chart of the S&P 500 looks like a dream. Last week it reached another record high close, up +0.79% at 4,438. The Dow Jones closed higher by +0.78% at a new record of its own, and the Nasdaq had (only) it’s second highest close ever, up 1% last week.
On the surface, it looks like U.S. capital markets are roaring - however, looking deeper, not everyone is dancing at the party. The Russell 2,000 index, which tracks 2,000 small stocks, has not made new highs since March of this year.
While this could be explained as small companies having a harder time luring employees in a tight labour market, it is still interesting to note that not all sectors are as rosy.
To illustrate the tight labour market point, consider last week’s headline above, highlighting there are about 1 million more job openings in the U.S. than there are people looking for work.
This tight labour market will certainly put upward pressure on wages, with smaller companies having to dish out more to lure talent - therefore hindering their ability to compete against the more established players in more mature industries.
It’s a quiet week on the earnings front but we do get a new read on U.S. inflation this week. Details and more in our What’s Ahead Section.
Gold: It was a brutal week for gold, finishing down -2.84% at $1,762/oz.
The price action is consistent with the yield on the 10-year note moving higher in the same period, +3.95% at 1.28%, and a relatively tamed wage inflation which we saw on Friday’s unemployment report. To reiterate, both dynamics add up to a higher real rate of return for treasury bonds, and we know gold is inversely correlated with the real return of treasury bonds.
Looking at the technicals, it’s not all bad for gold. It seems that the descending trendline that we have from last year is getting tested as a support level. The weekly close held a key level and it is already being tested as of Monday’s open in Asia, where a big sell order in the futures markets sent gold prices tumbling.
They have since made a decent recovery, and Wednesday’s CPI reading could be a catalyst for gold’s next move.
DeFi: Both the DeFi index and Ethereum had positive weeks - up 12.15% and 17.96% respectively.
It is interesting to note that ethereum outperformed the DeFi index to the upside this week, which is not typically what we have seen in recent weeks.
More signs of institutional interest around ETH abound. The most recent one courtesy of Genesis Capital’s Q2 lending report, highlights that ethereum lending and trading volumes have gone parabolic in Q2, with ETH representing almost 25% of the overall volume for both trading and lending.
The regulation passed through the recent infrastructure bill will certainly impact some DeFi projects and its end users. However, it should also highlight a path towards compliance - which should help innovation and drive more capital to the space.
Difficulty Commentary: Mining capacity has been roaring back into the network and the next difficulty adjustment is projecting an increase in difficulty of ~9%+.
To put things in perspective, the next adjustment should take us to about 15.5 THs, and the previous all-time high was 23.58 THs. We are still quite a bit away from the top, but slowly crawling back.
The next adjustment should happen at some point Wednesday evening or Thursday morning EST.
Surprisingly, transaction costs have remained consistently low throughout the last few weeks. It continues to be a great time to transact on-chain.
What's ahead for the week:
Over the last year we have documented how the Fed is actively purchasing treasury bonds and mortgage backed securities to keep interest rates low. The intent, of course, is to help the economy improve.
The theory is that the Fed will, eventually, let the market decide where the rates should be and these will rise. When interest rates rise, bond prices fall. And this is why some large investors have signalled recently that they may be rotating away from bonds.
However, theory doesn’t always translate into what happens in the real world. Let’s take the example of Japan, for instance.
In order to push, and keep their rates low, they continued purchasing Japanese treasury bonds until they became over 50% of the total outstanding Japanese Debt.
Where is the U.S. in this regard?
According to data from the Fed, there is currently about $28.13 Trillion in total treasury debt outstanding. The Federal Reserve bank owns $5.27 Trillion of that debt. This means that the Federal Reserve bank of the United States owns 18.7% of the total debt that the United States government has outstanding.
As always, we wrap up with a summary of the upcoming economic data and earnings reports for the week:
10 AM EST - U.S. Job Openings
Meme stock AMC reports earnings.
8.30 AM EST - Consumer Price Index & Core CPI
8.30 AM EST - Producer Price Index
It's a big week coming up, and as always, we'll keep you posted on any relevant news throughout the week right here and from our Twitter account @hodlwithLedn
Canadian Central Banking Updates:
Current Target Interest Rate: 0.00 - 0.25%
Current Overnight Money Market Rate: 0.23%
U.S. Central Banking Updates:
Current Fed Interest Target Rate: 0.00 - 0.25%
Current Effective Federal Funds Rate: 0.09%
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