BIT Research said Bitcoin started climbing after U.S. debt exceeded $40 trillion, while U.S. Treasury yields nearing the 5.0% psychological threshold have become another major market variable. Since July 24, Bitcoin has risen 22% and gold has gained 9.4%, with hard assets showing stronger performance in the current macro environment.
September Fed meeting is the next key test
The report said the macro cycle is now in the first stage of cyclical reflation, a phase that usually comes with a weaker U.S. dollar and higher commodity prices. Historical data cited by BIT Research shows annualized returns of about 29% for U.S. equities, 47% for gold, and 73% for Bitcoin in that environment. The next question for markets is whether the Federal Reserve will raise rates at its Sept. 16 meeting.
Probability of a September hike remains limited
Although Fed Chair Warsh signaled a willingness to raise rates, the combination of a weaker dollar, bond selling, and rising yields still points to a reflationary setting, according to the report. Current market pricing implies cumulative tightening over the next 24 months equal to about 3.1 hikes of 25 basis points each.
BIT Research said that if the Fed starts hiking in September, historical patterns of consecutive rate adjustments would increase the odds of another move in October, when the U.S. midterm election would be less than a week away.
The report also pointed to divisions inside the Fed. Warsh sees inflation as still too high, while Fed Governor Waller favors keeping rates unchanged. Driven by those remarks and incoming economic data, the implied probability of a September hike fell from 58% to 42% at one point before recovering to around 50%. Historically, the Fed has usually acted only after market-implied odds of a hike climbed to about 85%, so the current likelihood remains relatively limited, the report said.
Inflation remains the biggest variable
BIT Research said its inflation model shows the next reading may come in above the 3.4% expected by Wall Street economists. It also said the ISM non-manufacturing prices index, which usually leads CPI by about six months, has started to turn up again. Even so, a single inflation print above expectations may still not be enough to push the Fed into an immediate rate increase.
If the FOMC ultimately leaves rates unchanged, the report said interest-rate-sensitive assets such as gold, Bitcoin, and equities could see a relief rebound.
Asset repricing in a reflation era
The report argues that the current inflation backdrop is clearly different from the 2008-2020 period. Average annual U.S. inflation was only 1.61% then, compared with 4.11% now. At the same time, money supply growth has stayed around 6%, while U.S. debt growth has remained near 8%. In that setting, the ability to outperform inflation, money supply growth, and debt growth at the same time has become a key consideration in asset allocation.
Looking at historical performance, annualized returns for U.S. stocks were 9.0% from 1975 to 2008, fell to 5.7% from 2008 to 2020, and then rose to 18.3% after 2020. Returns have been concentrated in specific asset classes, however. Technology stocks stood out, gold also posted strong gains, and Bitcoin outperformed every other asset class. BIT Research said SPY alone is no longer enough to capture the structural divergence in this cycle.
Q4 outlook hinges on the policy window
Overall, BIT Research said the September Fed meeting will be a key test for the fourth-quarter market outlook. Current market pricing puts the probability of a hike at about 60%, still below the 80%+ level that has historically tended to precede Fed action. If the Fed keeps rates unchanged and inflation does not move further above expectations, the policy window could last at least until the next meeting on Dec. 9, leaving room for a short-term rise in risk assets.
The report also said seasonal patterns show that pullbacks in September and October often create more attractive entry points, and that risk assets tend to rebuild upside momentum in the fourth quarter.
Part of the views above came from BIT on Target. The original article also included a disclaimer saying markets involve risk, digital asset trading can be highly volatile, and the content does not constitute investment advice.