Bitfinex Alpha | Economic signals are mixed ahead of Fed rate decision, but Bitcoin price is undervalued
The U.S. economy is facing multiple challenges including a widening trade deficit, a slight increase in wholesale inventories, and a slowdown in the growth rate of the service industry. While factory orders data released last week looked positive, the overall economic outlook reflects the economy's precarious balance. So far, markets are still bracing for a pause in rate hikes at this week's FOMC meeting.
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The US trade deficit widened to the largest gap in eight years in April, jumping $14 billion to $74.6 billion. The increase - the largest since April 2015 - set off alarm bells among economists who fear that if the trend persists, GDP could be slashed by 2.5 percentage points in the second quarter. A recovery in merchandise imports coupled with a decline in energy exports contributed to the surge.
A silver lining came in the form of an improvement in the performance of wholesale inventories. The latest data suggest that the decline in April was less sharp than expected, which may indicate that wholesalers are restocking in anticipation of higher sales ahead.
However, subdued growth in the US services sector in May dampened the positive sentiment. Although the non-manufacturing PMI reported a reading of 50.3, indicating a slight increase, the pace of growth was significantly slower than earlier in the year. While still above contractionary territory, the decline in the services PMI and continued contraction in the manufacturing sector signaled caution.
Markets are no doubt eager to see how these various economic indicators will play out in the broader economic landscape. Will a modest improvement in wholesale inventories be able to offset a troubling trade deficit and boost GDP? Or will a slowdown in services and weak manufacturing output hold back jobs? The answers to these questions will significantly affect the policy responses of the US government and the Fed in the coming months. As they grapple with these complex economic dynamics, monitoring the changing situation remains critical.
Bitcoin appears to be increasingly undervalued in the cryptocurrency market compared to the S&P 500, according to a revealing ordinary least squares regression analysis conducted over the past 200 days. Bitcoin is trading around $25-26,000, well below its estimated fair value of $27,550, a discount of more than 8%, despite artificial intelligence fueling gains in U.S. stocks.
However, while Bitcoin’s correlation with the S&P 500 has cooled, historical trends suggest this won’t last for long. Historically, it has only been this low a few times, and that happened as BTC's correlation to gold continued to increase. Historically, a move higher in the BTC-Gold correlation has preceded a similar move in the BTC-S&P 500 correlation, heralding hopes of a reconciliation between Bitcoin and the S&P 500 and possibly sparking a “catch-up” rally in the coming months.
That said, last week’s sharp drop in BTC sparked the largest liquidation of dollar longs so far this year, totaling $348 million, following the SEC’s legal action against Binance and Coinbase. The news flow clearly roiled the market, but it didn't have a lasting impact in terms of the behavior of options traders. Analyzing changes in historical volatility relative to implied volatility shows that there have been no significant changes in the positions of options traders, who do not expect much movement in the price of short-dated options.
Last week’s crypto news flow was certainly fascinating as U.S. law enforcement and regulators took action against several centralized exchanges.
In addition to the SEC's attacks on Binance and Coinbase (which we detail in), we also saw the US Department of Justice oppose a request by now-bankrupt exchange Bittrex to allow its customers to withdraw locked funds, citing preference for some creditors. Bittrex hearings about its bankruptcy plan, due this week, will be an important signal for how customer assets should be handled in the event of bankruptcy.
