(Kitco News) – Asset prices trended higher in early trading on Friday despite a higher-than-expected Producer Price Index (PPI) reading that complicates the Federal Reserve’s decision on interest rates following Thursday’s cooler-than-expected Consumer Price Index (CPI) report.
According to the latest release by the U.S. Bureau of Labor Statistics, the PPI rose 0.2% from May to June and registered a year-over-year increase of 2.6%, well above expectations of 2.3% and up from 2.2% the previous month. Core PPI also outpaced expectations, with the YoY reading coming in at 3.0%, 0.5% higher than anticipated, and well above the 2.3% recorded in May. Month-over-month core PPI increased 0.4% from May.
Investors have chosen to focus on the positive CPI report in making their trading decisions as the rallies for stocks and crypto suggest they remain optimistic about the likelihood of an interest rate cut in September. The CME FedWatch Tool now puts the odds of a rate cut in September at 96%, up from 93% a day ago.
Data provided by TradingView shows that after hitting a low of $56,542 in the early hours on Friday, Bitcoin (BTC) began to climb higher and got a boost as the PPI was released, spiking to $58,045.
BTC/USD Chart by TradingView
While Bitcoin is showing some signs of strength as the large sales by the German government began to subside, sentiment in the crypto market remains low, and multiple analysts have warned that further downside is not out of the question.
According to Barry Bannister, managing director and chief equity strategist at Stifel, Bitcoin’s recent struggles and 23% fall from its all-time high could portend a similar downtrend in the stock market.
Bannister told MarketWatch that the correlation between Bitcoin and stocks has grown stronger since 2020, when the Federal Reserve stepped in to boost liquidity in the market, and warned that an “imminent S&P 500 summer correction is coming.”
He suggested that the eventual outcome hinges largely on the Fed and whether or not it lowers interest rates.
“It’s the availability of cheap, Fed liquidity that drives the price of Bitcoin,” Bannister said. “Every single dovish pivot for the past 13 years has marked a sharp Bitcoin increase, and Bitcoin is a non-interest-bearing asset that thrives on lower interest rates and available liquidity.”
He added that the 24/7 nature of the Bitcoin market and its high volatility make it a good gauge of investor sentiment and Fed policy changes, implying that the S&P could drop 10% to 20% from its recent peak based on Bitcoin’s performance.
Bannister warned that a failure to reduce interest rates could spark such a downturn as “we’ve reached the end of the line where the economy is not quite as strong and inflation sticky would simply be the worst possible outcome.”
Following Thursday's rejection below $60,000, market analyst Justin Bennett noted the formation of a rising wedge on the Bitcoin chart, “which could point to further downside.”
$BTC rejected from $60k yet again.
And now we have a potential rising wedge forming, which could point to further downside.
We'll see if we get a full retest of channel resistance, but this 4h pattern is one to watch.#Bitcoin pic.twitter.com/hyjOW2t7UP— Justin Bennett (@JustinBennettFX) July 11, 2024
Market analyst Rekt Capital identified $56,750 as the key support level to hold to prevent a further slide lower.
“Bitcoin has failed to Daily Close above black & has since rejected from the Lower High resistance (orange),” Rekt Capital said. “BTC has since dropped into the Range Low of $56750 (purple) and this is where BTC needs to hold to enable another challenge of the Lower High.”
At the time of writing, Bitcoin trades at $58,013, an increase of 0.55% on the 24-hour chart.
