U.S. business activity slowed in March, and new PMI data warned that markets were starting to price in, that growth momentum was fading as price pressures resumed.
This creates a rather difficult backdrop for Bitcoin trading. When inflation remains high and the economy cools, traders expect the Federal Reserve to keep interest rates high for longer, a setting that typically hurts risk assets.
S&P Global’s preliminary composite PMI was 51.4 in March, down from 51.9 in February.
The services industry, which makes up the bulk of the U.S. economy, slowed to 51.1 from 51.7. Manufacturing, on the other hand, rose, rising from 51.6 to 52.4. At the same time, businesses reported the fastest rise in input costs in 10 months and employment fell for the first time in more than a year.
While the headline numbers point to a slowdown in growth, the overarching message from this release is much deeper and more disturbing than that.
While the part of the economy tied to consumer demand has begun to soften, manufacturing continues to move forward as companies seek to secure supply and protect themselves from rising costs from war and soaring energy prices.
This split helps explain why investors reacted so nervously. The report showed the economy is bracing for disruption.
Bitcoin fell slightly after the announcement, losing $70,000 of ground as traders absorbed the news.
The broader market reaction was largely similar. Oil prices continued to rise, Treasury yields rose and DXY remained essentially unchanged as investors adjusted to the possibility that inflation would persist even as growth slowed. The fact that we have yet to see a positive market reaction does not mean this is an easy setup for Bitcoin.
Warnings in PMI reports
The most important piece of information in the report is the widening gap between manufacturing and services.
In theory, increased factory activity sounds encouraging. But it’s a clear sign of tension here, as it shows companies increasing purchases and building inventory to get ahead of supply issues and rising costs. Supplier delivery times have also lengthened, increasing the sense that companies are reacting to stress rather than a new surge in demand.
After that, the situation in the service sector became even worse. New business growth slowed, exports fell, and trust in service providers declined. Businesses cited rising costs of living, rising borrowing costs, and war-related uncertainties as factors weighing on activity.
S&P Global said the survey is consistent with the U.S. economy growing at an annual rate of about 1% in March, while price trends in the report suggest inflation may be heading back towards 4%. It is this combination that has brought stagflation concerns back into the spotlight. In other words, it’s a combination of slow growth and strong inflation.
And that will have an impact on cryptocurrencies.
Bitcoin has historically benefited when traders expected monetary policy to ease and liquidity conditions to strengthen.
But this report points in a different direction. It suggested the Fed may have less room to cut rates than many investors had expected, as inflation pressures are not easing quickly enough even as the economy begins to slow.
The report also comes at a rather tense moment for global markets. Energy prices have skyrocketed as a result of the Iran war, making it difficult to ignore inflation. As oil prices rise and companies start warning of higher costs and supply delays, markets become more sensitive to signs that the Fed may continue to impose restrictions, no matter how small or vague.
This will expose Bitcoin to more severe macro trading. Like it or not, most still view it as a high-risk asset, meaning it could struggle as yields rise and the dollar strengthens.
Some crypto bulls still argue that Bitcoin could ultimately benefit if confidence in the broader policy mix starts to erode, but Tuesday’s PMI data did little to support that case. The immediate message was that the market remains focused on interest rates remaining high for an extended period of time.
The next test will be future inflation and labor statistics. If these reports confirm what the PMIs are starting to show, which is that the economy is cooling while price pressures remain stubborn, Bitcoin could continue to trade under pressure from a macro backdrop that cannot be ignored.
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