Remain Sahm

What is Causing the Bitcoin Downturn?

After being driven up to almost $73,000 on optimism from the spot ETF approvals, Bitcoin has fallen over 25% in a month. We could posit that the drop in crypto is a sign of a Federal Reserve tightening liquidity too much by keeping interest rates too high. That is certainly a possibility, but Bitcoin and Nasdaq were highly correlated, and the Nasdaq 100, along with the S&P 500 Index, just made a record high. Is the Nasdaq ignoring a key signal and about to sell off sharply?

Bulls argue that the crypto market may be just on the receiving end of some unwelcome news and about to reverse higher. First, a crypto exchange called Mt. Gox, which closed 10 years ago after being the target of a hack, is going to release $8 billion to its clients. Investors are concerned that this huge supply will go straight to the market to get sold. Second, many who got involved with spot ETFs bought at high prices and are dumping as they get hit with losses. Third, Germany, which holds a $2.5 billion Bitcoin wallet, released about $150 million onto the market recently, which may be creating a disproportionate move on fear they will sell more. Finally, the 4-year cycle in Bitcoin Halving occurred on April 20, which cuts supply additions by cutting the mining reward. Miners normally look for an increase in price to compensate them but may have added to the selling as price has gone down.

Perhaps we have already seen price reach equilibrium support in the low $50,000 region. One problem is that after the Halving evert, Bitcoin has tended to stay soft for four months, so that would mean it could take until late August for a base to form.

Employment Data Signaling Recession?

The Sahm Rule has been an excellent recession indicator. Claudia Sahm produced the rule while she worked as an economist at the Federal Reserve. The rule states that a recession is likely on a 0.5% rise in the 3-month average of the unemployment rate. The last three unemployment rates were 3.9% in April, 4.0% in May, and 4.1% in June, released Friday. The low point in the 3-month average was 3.5%, first hit in January 2023. Going out two decimals falls just short of triggering the rule at a 0.43% increase in unemployment. We believe it is a lock the recession indicator flips on when the July employment report is released on August 2 because April’s 3.9% reading April falls out of the calculation.

The indicator is not a perfect timing instrument: the Sahm Rule Recession Indicator was also at .43% in February 2008, after the recession had already started. Back then, many consumers did not realize we were in one, and certainly very few market strategists. Shortly afterward, the wheels started to fall off the economy. Claudia Sahm herself is worried the Fed is risking recession by not cutting rates now. That discussion could intensify on August 2, just days after the July 30-31 FOMC meeting, where no one expects a rate cut.

You Say You Want a Revolution

Well, not so fast…at least in France. The far-right National Rally party came in third after fears they would win a majority of France’s 577 Parliament seats. However, the National Rally was the biggest single party winner with 120-136 seats, and they have said they do not intend to form any coalition. The winner with the most seats but short of a majority was the socialist alliance New Popular Front party led by Melenchon, who many view as so far left to consider him allied with Communist principles. Suffice it to say he is anti-business. He aligned himself with a socialist group to get the largest block of votes. While financial markets and globalists are feeling relieved, the budget outlook is very problematic. The left is saying the vote reflects a mandate to push through their program including a lower retirement age and higher minimum wages. Macron’s centrist party is saying the results merely reflect a rejection of the far right, not an embrace of the left. Any reflexive rally should be short-lived because the socialist program represents an enormous uptick in spending with France’s budget deficit already above the 3% of GDP trigger.

The French government is entering into unchartered waters: a chaotic grouping of three groups with very little in policy overlap but each having significant representation. There could even be a rift between the largest party since it is almost evenly split. The only thing anyone should be saying with confidence is that this is a developing story.

What to Look for This Week

1. Tuesday, July 9 at 10 am E.S.T. Chairman Powell gives his semiannual Monetary Policy Report to the Senate Banking Committee. We will be on the lookout for how he shades his view about weak labor and whether it is entering into the rate cutting discussion.

2. Initial and Continuing Claims Thursday July 11 at 8:30 am E.S.T. The closely watched 4-week moving Initial Claims made a yearly high last week as Continuing Claims’ monthly average hit a one-year high. A high print of 243,000 is falling out of the Initial Claims calculation, and the consensus is 236,000, so the 4-week calculation may fall. The  Continuing Claims data will continue to rise unless there is an unexpected sharp reversal.

3. Also on Thursday at 8:30 is the Consumer Price Index inflation data for June. The annual core inflation rate has fallen from 3.8% in March to 3.6% in April and May was 3.4%, a low not seen since April 2021 when core CPI was 2.9%. The Cleveland Fed’s Inflation Nowcasting estimate is for an uptick to 3.5%. 

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PS Earnings season kicks off on Friday premarket with JP Morgan, Citibank, and Wells Fargo.