After CPI turns favorable, WTI steps in to cool things down—can the rebound continue?

Author: Blockchain Knight; Source: X, @Knight_in_Block

In the days when inflation data was released, the market was once quite optimistic. June CPI month-on-month fell, marking the largest single-month drop since April 2020; Bitcoin also jumped in tandem to around 65k.

But the excitement didn’t last long.

The biggest driver behind June CPI coming down was energy—after all, energy prices fell by 5.7% that month. The issue is that this is data seen in retrospect.

The report’s figures reflect conditions from a few weeks ago, capturing the price trend during the ceasefire between the US and Iran, while now tensions have risen again.

Some market participants pointed out that while June inflation cooled somewhat, the 10-year real Treasury yield only fell slightly by 1 basis point. This reflects that the market’s pricing of recent monetary-policy risks is easing, but it hasn’t changed its fundamental judgment about the interest-rate environment.

So interpreting a single month’s data as a trend turning point is inherently a bit risky.

This mirrors the views Worsh expressed when he testified before Congress for the first time after taking office. He said the Federal Reserve has zero tolerance for persistently high inflation, and all committee members are firmly committed to restoring price stability.

His wording was even more direct: “Someone may look at today’s data and say the job is done, but that’s not my view.”

On interest rates, he gave no hints about any path. He neither committed to a rate hike in July nor ruled one out. He only said that interest rates are the main driver of monetary policy, implying that rate-hike options are already on the table.

Worsh also emphasized his independence. He said that even if the president tries to influence monetary policy, he would “continue to carry out his duty.”

Another notable point from Worsh’s hearing is that he incorporated AI into the inflation analysis framework. He said corporate investment is accelerating, with the core drivers coming from the construction of data centers, and the massive demand for AI software and hardware.

But he also warned that while AI is driving investment, it brings uncertainty to the economy, and the Federal Reserve is closely monitoring AI’s impact on inflation and the labor market.

That stance is quite interesting. In the past, discussions about inflation mainly focused on wages, rents, and energy; now AI investment has also become a variable.

Bloomberg commented that Worsh’s phrasing is hawkish, showing that he is unwilling to easily release easing signals until he confirms inflation has returned to target.

After the CPI data was released, fed funds futures raised the probability of staying put in July to 84.5%, while cutting the probability of a rate hike to 15.5%.

But at the same time, the market still expects the Federal Reserve may hike once before year-end. That expectation alone shows that one or two data prints are not enough to reverse the policy direction.

Even though Bitcoin’s rise has climbed to around the previously mentioned key level of 66k, the rebound in oil prices and Worsh’s tough stance are weakening that thrust. The market wants to hear rate-cut signals, but Worsh didn’t provide them.

One point worth noting is that on-chain data shows that over the past week, wallets holding between 10 and 10,000 BTC added about 11,000 BTC. This means this rebound is not driven entirely by the derivatives market, but by real spot buying.

So next, we can continue to watch energy prices, which will determine whether July CPI will keep falling. Another is the inflow situation for ETFs, which still represents market inclination.

Of course, don’t forget the Jackson Hole meeting at the end of August—after all, last year it sparked a big wave.