July CPI Puts Bitcoin and Markets on a Fed Knife Edge

Oil is the wildcard, and July CPI is about to decide whether the market gets some relief or another headache. Crude jumped Tuesday as US-Iran talks over the Strait of Hormuz stalled, pushing the 10-year Treasury yield to 4.682% before falling below $85-$88 resistance area on reports of progress in Oman-Iran negotiations. Meanwhile, Bitcoin traded near $64,300.

July CPI Could Split Markets Down The Middle

The timing is awkward. The July US jobs report showed the economy shed 23,000 jobs, while pessimism remains elevated. Now investors get the July CPI report with September Federal Reserve expectations almost perfectly divided.

CME FedWatch data puts the odds of the Fed holding rates in September at 52.1% against 47.9% for a hike. That’s about as close to a coin flip as markets get.

Soft Inflation Could Give Risk Assets Relief

Wall Street’s base case isn’t particularly alarming. A Wall Street Journal survey of 15 banks expects July headline inflation to rise 0.12% to 3.4%. Core CPI excluding food and energy is expected at 0.22%.

HSBC is also expecting another soft print after June’s headline price fell 0.42%. If that view holds, the bank expects Treasury yields to decline and rate hike bets to fade, potentially giving risk assets a friendlier backdrop.

A Hot Print Could Quickly Change The Setup

The other side is far less comfortable. A hotter-than-expected July CPI reading could strengthen the case for another Fed hike and put renewed pressure on stocks, bonds and crypto.

For Bitcoin, the immediate question is whether inflation provides the catalyst for relief or another reason to sell. With oil still reacting to developments around the Strait of Hormuz and September rate expectations virtually split, Wednesday’s July CPI could leave markets with very little room for error.