China Factory Deflation Calls Bitcoin Above $30K: End of Global Tightening Cycle Approaches?
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China Factory Deflation Calls Bitcoin Above $30K: End of Global Tightening Cycle Approaches?


Bitcoin held its ground above the $30,000 mark on Monday, benefiting from the latest data on China’s producer price index (PPI), which suggests that the tightening cycle of global liquidity, which began early last year and significantly impacted risk assets such as cryptocurrencies, is drawing to a close. The National Bureau of Statistics (NBS) announced that China’s PPI, a measure of factory-gate prices, experienced a year-on-year decline of 5.4% in June, marking the ninth consecutive monthly decrease and the most substantial drop in seven years.

The implications of this deflationary trend are likely to manifest in lower export prices and deflationary pressures throughout the global economy. As the world’s largest trading partner for many prominent economies, China’s export of deflation carries considerable weight in international trade dynamics. Deflation, characterized by a sustained decline in the overall price level, occurs when the inflation rate turns negative.

The persistent deflation originating from one of the world’s major manufacturing hubs is expected to provide some respite to central banks in the Western world. These banks have been aggressively raising interest rates to combat rising inflation levels, which have reached multi-year highs and, in certain cases, multi-decade highs, negatively impacting the broader economy. Since March 2022, the U.S. Federal Reserve (Fed) has raised rates by more than 500 basis points, with rates currently ranging from 5% to 5.25%. Earlier this year, the Fed faced a banking crisis, while Credit Suisse in Europe had to be rescued by Swiss rival UBS.

David Brickell, director of institutional sales at crypto liquidity network Paradigm, commented, “China is exporting disinflation across the Western world. We are observing its effects on producer prices, although it has not yet fully translated into consumer prices. Ultimately, this will benefit risk assets as it signifies the end of the global tightening cycle.” In May, the U.S. witnessed the smallest annual increase of 1.1% in producer prices in nearly two and a half years, while the consumer price index (CPI) rose by 4%, the lowest rate in two years. Refinitiv data cited by CNN indicates that the CPI growth rate further slowed to 3.1% in June.

However, the release of China’s PPI data failed to spark a robust risk-on rally. Bitcoin continues to hover above $30,000, lacking a clear sense of direction, while futures tied to the S&P 500 traded 0.5% lower on the day. The dollar index edged up by 0.15%, reaching 102.42. Currently, investors seem to be fixated on the negative aspects of the data, perceiving a stagnant economic recovery as China’s figures continue to decline. Earlier this year, market analysts widely regarded China’s reopening as a significant driver for global growth and risk assets, which contrastswith the current sentiment.

The weakness observed in S&P 500 futures and Asian stock markets following the data release can be attributed to the strong correlation between global earnings and Chinese producer prices. Jeroen Blokland, founder of True Insights, expressed concerns on Twitter, stating, “The latest PPI number does not bode well for earnings.” Brickell predicts that Bitcoin will likely embark on its next upward movement once bond yields reach their peak. He explained, “The knee-jerk reaction is to focus on the negative implications of a Chinese growth slowdown. Risk assets are also adjusting to the sharp bond sell-off of last week. As yields top out, I expect stocks to stabilize. A reversal in yields is expected to trigger the next significant rise in BTC, especially given the underlying weakness in the dollar.”

In the past week, the U.S. 10-year Treasury yield climbed to a four-month high of 4.09%, with the two-year yield reaching its highest level since 2006 following the release of strong U.S. ADP private payrolls data on Thursday. Although the nonfarm payrolls report for June indicated a slowdown in job creation, the unemployment rate declined alongside an unexpected increase in average hourly earnings, keeping yields on an upward trajectory. Higher bond yields tend to discourage capital inflows into risk assets. However, if Wednesday’s U.S. CPI data confirms a continued slowdown in the inflation rate, yields may reverse course and begin to decrease.

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