“China’s Factory Deflation: Is the Global Tightening Cycle Coming to an End? Bitcoin Soars Above $30K”
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“China’s Factory Deflation: Is the Global Tightening Cycle Coming to an End? Bitcoin Soars Above $30K”

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China’s ongoing decline in factory-gate prices, as indicated by the producer price index (PPI), is exerting deflationary pressure on the global economy, potentially marking the conclusion of the global interest rate increase cycle. The National Bureau of Statistics (NBS) announced on Monday that China’s PPI fell by 5.4% year-on-year in June, marking the ninth consecutive monthly decline and the steepest drop in seven years. Given China’s status as the largest trading partner for many prominent economies worldwide, the impact of deflationary trends on export prices is expected to be significant. Deflation, characterized by a prolonged decrease in the overall price level, occurs when the inflation rate turns negative.

The persistent deflation in one of the world’s primary manufacturing hubs may provide relief for central banks in Western countries. These banks have been aggressively raising interest rates in an effort to control inflation, which has been climbing to multi-year and even multi-decade highs, adversely affecting the broader economy. Since March 2022, the Federal Reserve (Fed) has increased rates by more than 500 basis points, reaching the range of 5% to 5.25%. The Fed faced a banking crisis earlier this year, while Credit Suisse in Europe had to be rescued by its Swiss counterpart, UBS.

David Brickell, director of institutional sales at crypto liquidity network Paradigm, remarked, “China is exporting disinflation across the Western world. We’re witnessing its effects in producer price inputs, although it has not yet fully translated into consumer prices. Ultimately, this trend will benefit risk assets as it signifies the end of the global hiking cycle.” The minimal increase of 1.1% in U.S. producer prices in May was the smallest observed in nearly two and a half years, while the consumer price index (CPI) rose by 4%, the lowest in two years. According to Refnitiv data cited by CNN, the forthcoming data, expected on Wednesday, is projected to show a further slowdown in the CPI growth rate, reaching 3.1% in June.

Despite China’s PPI data release, the response in terms of a risk-on rally has been muted. Bitcoin has maintained its position above $30,000 with limited directional clarity, while futures tied to the S&P 500 traded 0.5% lower on the same day. The dollar index experienced a marginal increase of 0.15%, reaching 102.42. Currently, investors appear to be fixated on the negative aspects of the data, perceiving a stalled economic recovery due to the continuous decline in China’s figures. Earlier this year, analysts widely viewed China’s reopening as a significant driver for global growth and risk assets, which contrasts with the current market sentiment.

The weakness observed in S&P 500 futures and Asian stock markets following the data can be attributed to the strong correlation between global earnings and Chinese producer prices. Jeroen Blokland, founder of True Insights, expressed concerns via Twitter, stating, “The latest PPInumber does not bode well for earnings.” Brickell anticipates that Bitcoin will likely embark on its next upward movement once bond yields reach their peak. He explained, “The initial reaction is to focus on the negative implications of a Chinese growth slowdown. Risk assets are also adjusting to the intense bond sell-off of the previous week. As yields reach their peak, I expect stocks to stabilize. I believe a reversal in yields will trigger the next surge in BTC, particularly considering the underlying weakness in the dollar.”

Over the past week, the U.S. 10-year Treasury yield climbed to a four-month high of 4.09%, while the two-year yield reached its highest level since 2006 following the release of Thursday’s impressive U.S. ADP private payrolls data. Although Friday’s nonfarm payrolls report indicated a slowdown in job creation for June, the unemployment rate declined alongside an unexpected rise in average hourly earnings, sustaining the upward trajectory of yields. Higher bond yields typically discourage capital flow into risk assets. However, if Wednesday’s U.S. CPI data reveals a continued deceleration in the inflation rate, yields may reverse course and move lower.

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