LUCKNOW (CoinChapter.com) — Bond traders swiftly recalibrated their bets on future Fed rate cuts after a key report showed the US manufacturing sector unexpectedly returned to growth last month. The robust data pours cold water on recession fears, signaling the central bank may not need to ease monetary policy as anticipated. 

Factories Fire Up, Dimming Rate Cut Bets

The catalyst? A key report shows the Institute for Supply Management’s manufacturing index expanded for the first time since 2023. This prompted bond traders to slash their expectations for Fed rate cuts in 2024 to fewer than 65 basis points. This significant repricing reflects a stark contrast from the central bank’s own projections, which had penciled in three quarter-point reductions. 

Recent data on personal income and spending revealed robust consumer demand, further diminishing the likelihood of an imminent economic downturn.

Personal Income and Outlays, February 2024. Source: U.S. Bureau of Economic Analysis (BEA),

Federal Reserve Chair Jerome Powell reinforced this narrative, stating that the central bank wants more confidence in the inflation trend before considering rate cuts, given the strength of the labor market.

The ISM report feeds into the narrative that the economy’s resilience enables the Fed to be patient on rates.

said Gregory Faranello, head of US rates trading at AmeriVet Securities.

That means rates stay higher for longer.

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Market Reaction Ripples Across Asset Classes

Indeed, ebbing ed rate cut expectations swiftly rippled through risk assets, betting on an imminent dovish shift. Bitcoin dipped as much as 5% on Monday, while ether and other risk-sensitive cryptocurrencies sold off sharply as traders recalibrated their policy outlooks.

The crypto losses underscore token valuations remain lashed to the perceived path for central bank accommodation. Cryptocurrencies surged in early 2023 as investors positioned for rapidly declining inflation to force the Fed’s hand on rate cuts. The resilient data reality is now crushing such pricing.

Powell and Fed officials don’t sound in any hurry to cut rates based on recent remarks.

said Jack McIntyre, portfolio manager at Brandywine Global Investment Management.

While we could still see economic weakness emerge, the near-term path is clearly for rates to remain higher.

That’s a bitter pill for crypto investors who had already begun pricing in a soft economic landing and Fed easing cycle post-pandemic rate hike campaign. Bitcoin surged some 80% off lows in the first months of 2024 in anticipation of easier policy. But fortunes reversed last week as officials pushed back against market dovishness, with the flagship crypto shedding nearly 10%.  

Monday’s manufacturing renaissance and accompanying market reset doubled down on the Fed’s higher-for-longer policy trajectory—at least for now. While moderating price pressures still offer a potential rate-cutting window later this year, a resilient economy keeps those cuts priced out in coming months.

Bitcoin Plunges Amid Policy Shift

The crypto market had been riding high on expectations of a looming economic slowdown and subsequent monetary policy easing from the Fed. However, the latest manufacturing data and corresponding bond market reaction are a harsh reality check for digital asset investors who had priced in aggressive rate cuts.

Bitcoin plunged 6.32% in intraday trading to $65,415 amid the shifting monetary policy outlook.

Bitcoin’s drop marks a 10.8% retreat from March peaks around $73,800 when the token was rallying on easing hopes. Other risk-sensitive digital tokens like Ether also suffered sharp selloffs as the policy outlook shifted.

As the narrative shifts from recession fears to sustained economic growth, the crypto industry must brace for the impact of a more hawkish Fed stance. With interest rates likely to remain elevated for longer, the sector’s euphoric rally may soon face a sobering test of resilience.

The post No Recession, No Fed Rate Cuts — Manufacturing Data Pummels Crypto appeared first on CoinChapter.

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Filed under: Bitcoin - @ April 3, 2024 7:05 am