Casey Wagner

Crypto and equities markets whipsawed during Thursday’s session as traders leaned more risk-off and speculated what strong GDP numbers might mean for interest rates going forward.&nbsp;



Preliminary data shows economic growth remained stable during the last quarter of 2022, beating expectations and posting only a moderate decline from the previous period.



The US Commerce Department just reported <a href="https://www.bea.gov/data/gdp/gross-domestic-product">initial gross domestic product</a> (GDP) numbers, which showed a 2.9% annual rate of economic growth, adjusted for inflation. Several revisions to the data are expected in the coming months.&nbsp;



The Federal Reserve is expected to continue raising interest rates, although at a slower pace, delaying the shift in policy traders have been eyeing. As of Thursday afternoon in New York, markets were pricing in a 99% chance of a 25 basis point increase next month.&nbsp;



“The market&#8217;s obsession with rates and inflation, and their implications for the dollar, leads me to believe that this ultimately ends up bearish for asset prices,” Darius Tabatabai, CEO of decentralized exchange Vertex Protocol, told Blockworks. “A strong GDP print will serve as a warning around potential inflation risks, and most likely embolden hawks on the FOMC.”



Tom Siomades, chief investment officer of AE Wealth Management, agreed, noting that continued lagging unemployment is not helping the case for the Fed to pause interest rate increases anytime soon. The trend means investors will be more likely to allocate to safer investments, he added.&nbsp;



“Expect fixed income, quality and dividend paying stocks to do well as this tug of war between when the Fed stops and how high it may raise rates continues for the next few months,” Siomades said.&nbsp;



<h3 class="wp-block-heading">Downward trend for crypto still on the cards</h3>



Markets traded mixed on the GDP news, with the S&amp;P 500 and Nasdaq Composite indexes initially falling before rallying around 0.5% and 1%, respectively, later in the session.&nbsp;



<a href="https://blockworks.co/price/btc">Bitcoin</a> remained mostly flat, trading about 0.2% lower Thursday afternoon in New York, while <a href="https://blockworks.co/price/eth">ether</a> lost around 1%. A downward trend for cryptos would not be surprising, analysts said.&nbsp;



“Given recent price action, we could see some reversal in the movements of the last few weeks — which would likely lead to crypto prices heading lower,” Tabatabai said. 



“Indeed, this is already happening, and I’d expect rate sentiment to be hawkish for longer than the market expects; especially with the FOMC likely to favor inflation fears over recessionary concerns.”



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Strong GDP Numbers May Be Bearish for Crypto – Here’s Why

<div id="highlights-block_6217ed102d12c" class="highlights">
 <ul>
 <li>Economists warn 2022 will not see the same economic growth as 2021</li>
 <li>US GDP increased at a 7% annualized rate in the fourth quarter</li>
 </ul>
 
</div>



Though the US economy grew slightly faster in 2021 than previously estimated, the surge has not spilled over into 2022 as risk assets, including cryptocurrencies, have faltered.



The uncertainty, coupled with rising concerns over <a href="https://cms.blockworks.co/bitcoins-plunge-on-ukraine-invasion-undermines-status-as-digital-gold/" target="_blank" rel="noreferrer noopener">conflict in Eastern Europe</a>, has sent risk assets into a spiral.



“As far as the dollar goes, it is showing itself as the safe haven that it is,” Steve Van Metre, founder of Steve Van Metre Financial, said. “Whereas bitcoin is not a safe haven, which is why it is showing signs of weakness against the dollar and is likely to decline further should the dollar continue to rally.”



<a href="https://www.bea.gov/news/2022/gross-domestic-product-fourth-quarter-and-year-2021-second-estimate" target="_blank" rel="noreferrer noopener">Updated figures</a> released Thursday show US gross domestic product increased at a 7% annualized rate during the last quarter of 2021, a slight increase from the 6.9% annualized rate reported in January.



“The GDP numbers are the second revision and reflect massive amounts of fiscal and monetary stimulus,” Van Metre said. “What matters now is going forward.”



The Atlanta Federal Reserve’s <a href="https://www.bea.gov/news/2022/gross-domestic-product-fourth-quarter-and-year-2021-second-estimate" target="_blank" rel="noreferrer noopener">GDPNow</a> model, an algorithmic assessment of domestic growth based on economic reports, predicts the economy will grow 1.3% this quarter. Human economists have a rosier outlook, calling for a 2% bump.



While growth may be on the rise, inflation persists. The consumer price index rose <a href="https://cms.blockworks.co/market-recap-inflation-keeps-rising-stocks-and-cryptos-slide/" target="_blank" rel="noreferrer noopener">0.6% in January</a>, bumping the year-over-year figure to 7.5% — the quickest rise in four decades. It could mark a sign of a pending economic slowdown, some analysts say.



“There have been eight recessions in the United States over the last 60 years, and in every case, inflation declined noticeably,” said Nicholas Colas, co-founder of DataTrek Research. “US inflation has never declined from +5 percent back to the Fed’s target of 2 percent without a recession. Since CPI inflation is currently 7.5 percent, that’s an important, if unwelcomed, fact.”



Deflationary periods typically occur in tandem with sudden drops in energy prices, though that’s not happening now, Colas added.



​​”We are sure every Fed economist and [Federal Open Market Committee] member, including Chair Powell, knows this historical relationship between recessions and inflation,” Colas said. “They would very much like to avoid the former even as they bring the latter under control. The trouble is there is no playbook for that outcome.”



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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Bitcoin, Risk Assets Falter Even as US GDP Rises

<div id="highlights-block_612ceed43cc75" class="highlights">
 <ul>
 <li>When thinking about inflation, Lyn Alden said it is important to separate deep and shallow supply chain issues </li>
 <li>Real rates are likely to stay low or dip further as the debt-to-GDP ratio increases </li>
 </ul>
 
</div>



Lyn Alden, founder of Lyn Alden Investment Strategies, sat down with Blockworks during the Bretton Woods: The Realignment conference to discuss inflation, the housing market and what to expect from the Federal Reserve in the coming months.&nbsp;



The higher prices that Americans are currently experiencing will not continue forever, she said, pointing to the rate of change we have seen in inflation readings recently.&nbsp;



“People that lost purchasing power for the most part are not going to get that back, it was a stepwise increase in prices, but the rate of change of that inflation can cool off eventually,” Alden said.&nbsp;



While we appear to be in a stagnant period for inflation numbers, there are some industries that have started to level out in terms of higher prices, Alden said, pointing to lumber and used cars. Rent prices will be a key area to watch in the next few months, she said.&nbsp;



In terms of what to expect from the Fed, Alden said that it is important to keep an eye on the debt ceiling. As the Fed issues fewer treasury bills than they are spending, real yield rates are likely to remain low for the foreseeable future.&nbsp;



Watch the full interview below. 



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<iframe loading="lazy" title="Bretton Woods: Lyn Alden Discusses Why Deep Supply Chain Issues Will Deepen Inflation" width="1024" height="576" src="https://www.youtube.com/embed/zqmj3kdON_E?feature=oembed" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe>
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Lyn Alden: Deep Supply Chain Issues Will Deepen Inflation

<div id="highlights-block_612ceed43cc75" class="highlights">
 <ul>
 <li>The economy is not growing quickly enough to keep up with inflation, said Gromen.</li>
 <li>Negative real rates, which occur when inflation outpaces interest rates, are likely to dip lower and continue for some time</li>
 </ul>
 
</div>



Luke Gromen, founder of Forest for the Trees LLC, sat down with Blockworks at the Bretton Woods: The Realignment conference to discuss debt to gross domestic product ratio and the ongoing threat of inflation.&nbsp;



“We’re now getting into levels that historically, when you talk about the US in particular with debt to GDP at 130%, from which it is very difficult to recover without a weakening of the currency,” said Gromen.&nbsp;&nbsp;



The economy is not growing quickly enough to keep up with inflation, he explained. Negative real rates, which occur when inflation outpaces interest rates, are likely to dip lower and continue for some time.&nbsp;



Watch my full interview with Gromen below.



<figure class="wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio"><div class="wp-block-embed__wrapper">
<iframe loading="lazy" title="Bretton Woods: Luke Gromen on the Debt to GDP Ratio" width="1024" height="576" src="https://www.youtube.com/embed/HgHDiLxmZlc?feature=oembed" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe>
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