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Welcome to the On the Margin Newsletter, curated by Ben Strack and Casey Wagner. Here’s what you’ll uncover in today’s edition:
As we edge closer to the Federal Reserve’s forthcoming interest rate decision, data strongly supports a 25-basis point cut. For those anticipating a larger 50-basis point cut, temper your expectations.
Today’s consumer price index (CPI) report revealed that inflation is climbing in line with predictions, showing a modest increase of 0.2% for August. Over the past 12 months ending in August, the annual inflation rate settled at 2.5%, marking the lowest year-over-year rate since February 2021.
Core CPI, which filters out volatile food and energy prices, rose slightly more than anticipated, registering a 0.3% increase in August compared to the expected 0.2%. The core CPI over the past twelve months stands at 3.2%, aligning with forecasts.
Despite data aligning closely with expectations, market reactions were initially lukewarm. The S&P 500 plummeted by as much as 1.6% following the report’s release but managed to recover, trading 0.2% higher by 2 pm ET. Similarly, the tech-heavy Nasdaq Composite dipped by as much as 1.5% in the morning but rebounded to trade 1% higher at 2 pm ET.
In the cryptocurrency space, Bitcoin and Ethereum presented mixed outcomes. Bitcoin saw a slight increase of 0.2% over 24 hours as of 2:10 pm ET, according to Coinbase data, while Ethereum dropped by 1.3%.
Though these movements are encouraging signs, it’s premature to declare a definitive return to risk-on assets, especially since Bitcoin remains down over the week and month. Should the Fed opt for an aggressive 50 bps cut or more, we could see a rapid unwinding of risk-on assets.
Leena ElDeeb, a research analyst at 21Shares, commented that investors might exercise caution under aggressive rate cuts, potentially impacting risk-on assets in the short term but not altering Bitcoin’s long-term prospects.
Michael Brown, a senior research strategist at Pepperstone, emphasized the significant leeway the Fed has to lower rates, pointing out that with 500 bps of room and the potential end of quantitative tightening, equity dips should remain shallow. This confidence could encourage investors to position themselves further out on the risk curve.
CME data today shows an 87% probability of a 25 bps rate cut next week and a 45% chance of another 25 bps reduction in November. The labor market data will be crucial in determining the size of the rate cut. The August jobs report showed job gains falling short by nearly 20,000 and significant revisions for July and June’s figures. More disappointing data in September could push central bankers toward more aggressive actions.
Michael Saylor’s recent interview on CNBC saw him predicting Bitcoin’s value could soar astronomically over the next two decades, exceeding VanEck analysts’ $2.9 million BTC price prediction by 2050. While Saylor is a renowned Bitcoin bull, it’s essential to consider these predictions with caution.
The debate last night failed to address crypto-related questions, focusing instead on inflation, immigration, abortion, and foreign policy—critical issues deserving attention. Tim Kravchunovsky of Chirp expressed disappointment at the lack of crypto discussion but acknowledged it wasn’t surprising given its current political relevance.
Crypto market reactions to the debate were evident as Bitcoin dipped by about 2% during and immediately after before recovering on Wednesday. BDE Ventures CEO Brian Evans noted that pro-crypto remarks from Harris could have spurred market movement, but this did not materialize. Despite Harris emphasizing competition with China in AI and quantum computing, many viewers felt her performance was stronger than Trump’s.
On Tuesday, tZero Group Inc. announced it had secured its special purpose broker-dealer license in the US, becoming only the second firm to achieve this milestone after Prometheum Inc. Alan Konevsky, CLO of tZero, highlighted this as a unique opportunity to build infrastructure supporting regulated digital assets in the US. The license allows tZero to custody digital asset securities, treating all custodied tokens as securities regardless of issuers’ classifications.
Konevsky hopes this license will pave the way for safe and regulated digital asset securities trading in the US. He emphasized that recognizing these assets as securities should come hand-in-hand with developing appropriate regulated infrastructure.
tZero plans to launch its custody service early next year, starting with its preferred stock TZROP. Konevsky stated that tZero aims to support custody of any digital asset security it can lawfully manage under SEC and FINRA guidelines.
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