Bitcoin remained stable above the $30,000 mark on Monday, buoyed by China’s latest producer price index (PPI) data, which suggests that the global cycle of tightening liquidity, initiated in early 2022 and affecting risk assets including cryptocurrencies, is nearing its conclusion. The National Bureau of Statistics (NBS) revealed that China’s PPI, a gauge of factory-gate prices, experienced a year-on-year decline of 5.4% in June, marking the ninth consecutive monthly drop and the sharpest plunge in seven years.
The repercussions of this deflationary trend are expected to manifest in lower export prices and deflationary pressures across the global economy. China, as the largest trading partner for many of the world’s prominent economies, holds significant sway over international trade dynamics. Deflation, characterized by a prolonged decrease in the general price level, occurs when the inflation rate turns negative.
The persistent deflation originating from one of the world’s largest manufacturing hubs is anticipated to provide some relief to central banks in the West. These banks have been aggressively raising interest rates to combat soaring inflation levels that have reached multi-year and, in some cases, multi-decade highs, causing adverse effects on the broader economy. Since March 2022, the U.S. Federal Reserve (Fed) has increased rates by over 500 basis points, currently ranging between 5% and 5.25%. Earlier this year, the Fed encountered a banking crisis, while Credit Suisse in Europe had to be bailed out by Swiss rival UBS.
David Brickell, director of institutional sales at crypto liquidity network Paradigm, commented on the situation, stating, “China is exporting disinflation across the Western world. We are witnessing the impact on producer prices, although it has yet to fully trickle down to consumer prices. Ultimately, this will benefit risk assets as it signifies the end of the global tightening cycle.” In May, the U.S. saw the smallest annual increase of 1.1% in producer prices in nearly two and a half years, while the consumer price index (CPI) rose by 4%, the lowest rate in two years. Refinitiv data cited by CNN suggests that the CPI growth rate further slowed to 3.1% in June.
Despite the release of China’s PPI data, the response has been relatively subdued, failing to ignite a risk-on rally. Bitcoin continues to hold steady above $30,000, lacking clear directional momentum, while S&P 500 futures registered a 0.5% decline on the day. The dollar index saw a marginal increase of 0.15%, reaching 102.42. Presently, investors appear fixated on the negative implications of the data, perceiving a stagnant economic recovery as China’s figures continue to decline. Earlier this year, market analysts touted China’s reopening as a major catalyst for global growth and risk assets, in stark contrast to the current market sentiment.
The weakness observed in S&P 500 futures and Asian stock markets following the data release can be attributed to the strong correlation between global earnings and Chinese producer prices. Jeroen Blokland, founder of True Insights, expressed concerns on Twitter, stating, “The latest PPI number does not bode well for earnings.” According to Brickell, Bitcoin is likely to embark on its next upward move once bond yields reach their peak. He explained, “The knee-jerk reaction is to focus on the negative implications of a Chinese growth slowdown. Risk assets are also adjusting to the sharp bond sell-off of last week. As yields top out, I expect stocks to stabilize. A reversal in yields is expected to trigger the next significant rise in BTC, especially given the underlying weakness in the dollar.”
In the past week, the U.S. 10-year Treasury yield climbed to a four-month high of 4.09%, with the two-year yield reaching its highest level since 2006 following the release of strong U.S. ADP private payrolls data on Thursday. Although the nonfarm payrolls report for June indicated a slowdown in job creation, the unemployment rate declined alongside an unexpected increase in average hourly earnings, keeping yields on an upward trajectory. Higher bond yields tend to discourage capital inflows into risk assets. However, if Wednesday’s U.S. CPI data confirms a continued slowdown in the inflation rate, yields may reverse course and begin to decrease.