Big Picture Thinking: Not All Doom and Gloom
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Big Picture Thinking: Not All Doom and Gloom
This article examines the impact of stagflation on growth assets such as cryptocurrencies.
Navigating Web3 tides with focused insightsAuthor: JieXuan Chua, Binance Research
Translation: Kate, Mars Finance
Key Takeaways
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In the first edition of our "Macro Thinking" series, we examine concerns related to stagflation and their implications for growth assets such as cryptocurrencies.
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While there are signs of slowing economic growth and persistent inflation, we believe concerns over stagflation may be overstated given strong domestic demand and moderating wage growth.
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The possibility of rate hikes or the Federal Reserve (Fed) not cutting rates this year is not zero, but such scenarios seem unlikely.
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Recent corrections in the crypto market may not be entirely negative, as they allow for more sustainable market growth. Moreover, despite the pullback, markets are still up 38% year-to-date.
Markets have been brewing concerns over potential stagflation risks in the United States. Investors view persistent inflation alongside relatively disappointing economic growth as evidence that stagflation risks are real. Is this a valid concern?
In the inaugural edition of the "Macro Thoughts" series, we delve into the drivers of economic growth and inflation and elaborate on our views regarding their implications for growth assets such as cryptocurrencies.
Stagflation: A Policymaker's Nightmare
Stagflation refers to an economic condition marked by slow growth, high unemployment, and sustained inflation. This situation is difficult to manage because conventional monetary policy struggles to address both inflation and unemployment simultaneously. For example, lowering interest rates to stimulate consumer spending and investment typically boosts the economy and creates more jobs, but it may also produce the unintended consequence of further fueling inflation.
Recent Economic Data Fuels Stagflation Fears
Latest data shows U.S. first-quarter GDP grew at 1.6%, significantly below analysts' expectations and near its lowest level in nearly two years.
Figure 1: U.S. economy grew 1.6% in Q1, Source: Bureau of Economic Analysis, data as of April 25, 2024
Additionally, the core Personal Consumption Expenditures (PCE) price index—the Federal Reserve’s preferred inflation gauge—rose 3.7% in the first quarter. This represents an acceleration from the previous quarter’s 2% increase and exceeds the Fed’s 2% target.
Figure 2: Inflation accelerated in Q1, Source: Bureau of Economic Analysis, data as of April 26, 2024
Concerns Over Stagflation May Be Overblown
Although recent economic data show signs of slowing growth and persistent inflation, these figures do not tell the whole story.
The weaker-than-expected first-quarter GDP was largely driven by volatile factors related to inventory accumulation and a surge in imports. Trade and inventories are often unstable components of GDP and subject to revisions. However, domestic demand remains resilient—excluding inventories, trade, and government spending, private domestic economic growth reached 3.1%.
Figure 3: Domestic demand remained resilient in Q1, Source: Bureau of Economic Analysis, data as of April 25, 2024
There are also signs that the labor market is cooling. Specifically, the latest employment report showed average hourly earnings increased 3.9% over the 12 months through April—the lowest wage gain in nearly three years and the first time below 4.0% since June 2021. Although the unemployment rate edged up slightly from 3.8% in March to 3.9% in April, it has now remained below 4% for 27 consecutive months. Overall, the slowing pace of hiring and moderate wage growth help alleviate inflationary pressures and concerns about a potential wage-price spiral.
Figure 4: Wage growth slowed below 4% for the first time since June 2021, Source: U.S. Bureau of Labor Statistics, data as of May 3, 2024
These early signals of a softening job market raise hopes that the Fed may successfully engineer a "soft landing" and reduce the likelihood of stagflation.
At a recent Fed press conference, Chair Jerome Powell pushed back against stagflation narratives. Powell stated he does not “really see where [stagflation] is coming from” and does not “really see stagflation or inflation.”
So What Comes Next?
Recent economic data on growth and inflation have fallen short of initial market expectations, leading some participants to question whether the Fed might not cut rates at all this year—or even be forced to consider hiking rates.
Spoiler alert: While neither scenario has zero probability, we believe both are currently implausible.
Let’s start with the low-hanging fruit—is a rate hike already on the table?
Unlikely. Most Fed members maintain that current rates are already sufficiently restrictive and expect the next move to be a rate cut. Jerome Powell further reiterated at his most recent press conference in May: “The next policy rate change is unlikely to be a hike.”
Figure 5: The FOMC dot plot shows most Fed members expect a decline in the federal funds rate this year, Source: Encyclopedia Britannica, Federal Reserve, data as of March 20, 2024
What If Rate Cuts Are Further Delayed or Not Halted This Year?
Indeed, traders are growing increasingly pessimistic about rate cut prospects. Markets currently anticipate two rate cuts this year (assuming 0.25% each), with the first expected in September. This marks a significant shift from earlier this year, when markets priced in as many as six rate cuts starting in March.
Figure 6: Traders expect around two rate cuts in 2024, Source: CME Group, Binance Research, data as of May 8, 2024
However, this also means the bar has been lowered, and the market has already partially priced in the risk of delayed rate cuts.
Crucially, if the Fed ultimately delays rate cuts further, we believe understanding the "why" behind their decision matters more than the policy action itself. In our view, two distinct scenarios could drive such an outcome, each having very different implications for growth assets like equities and cryptocurrencies:
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If the Fed delays cuts due to persistently strong economic growth and inflation simply needing more time to return to 2%, the overall backdrop would remain favorable for growth assets such as cryptocurrencies.
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However, if economic growth continues to weaken while inflation accelerates and wage growth rises, the Fed might even need to consider hiking rates again—potentially negatively impacting growth assets like cryptocurrencies.
How Is the Crypto Market Reacting?
Following a strong performance in the first quarter, when crypto market capitalization rose approximately 60%, the market pulled back in April amid growing concerns over interest rate trajectories and geopolitical tensions. First-quarter economic data released on April 25 further weighed on performance—crypto market cap declined about 7% in the remaining days of April.
Figure 7: Crypto market cap has retreated from March peaks, Source: CoinMarketCap, data as of May 10, 2024
Investor sentiment has also reversed over the past month, turning less optimistic. The Fear & Greed Index is currently in the "neutral" range, a stark contrast to March's peak when animal spirits were high and the index sat in the "extreme greed" zone.
Figure 8: The Fear & Greed Index is now in the "neutral" zone, Source: CoinMarketCap, data as of May 10, 2024
Overall, This Could Be a Healthy Reset
At first glance, growth appears stalled and market sentiment clearly less exuberant. However, one-way "only-up" markets are neither realistic nor sustainable in the long run.
Pullbacks and range-bound markets give investors an opportunity to pause and assess fundamentals and valuations rather than blindly chasing parabolic rallies. For project teams, the current environment may help relieve fundraising or token issuance pressure, allowing them instead to focus on building tangible products.
Amid all the negativity, we remind readers that the industry continues to make significant progress. Just in the past month, we’ve seen:
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The Bitcoin network processed its one billionth transaction
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Liquidity within the ecosystem expanded as stablecoin supply reached a nearly two-year high
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New design paradigms unlocked with Eigenlayer’s re-staking going live in April
With the above in mind, despite the pullback, markets are still up 38% year-to-date—suggesting the outlook may not be entirely bleak.
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