After the scale of U.S. debt exceeded $40 trillion, Bitcoin immediately began to rise, while U.S. Treasury yields approached the potential psychological barrier of 5.0%, which is becoming another important variable of market attention. Since July 24, Bitcoin has risen a cumulative 22%, gold has increased 9.4%, and hard assets are starting to perform even stronger in the current macro environment.

At the same time, the macro cycle is in the first stage of cyclical re-inflation, typically accompanied by a weaker dollar and rising commodity prices. Historical data shows that in this environment, the annualized return of U.S. stocks is about 29%, gold is approximately 47%, and Bitcoin reaches 73%. The key variable for the market going forward will be whether the Federal Reserve will raise interest rates at the meeting on September 16.

The Probability of a September Rate Hike Remains Limited: The Federal Reserve Pausing Rate Hikes May Release Space for a Rebound in Risk Assets

Although Federal Reserve Chairman Waller has expressed a willingness to raise rates, a weaker dollar combined with bond sell-offs and rising yields still points to a re-inflation environment. Current market pricing indicates an expected cumulative rate hike of about 3.1 times 25 basis points over the next 24 months. If the Federal Reserve starts raising rates in September, based on historical patterns of consecutive rate adjustments, the likelihood of another rate hike in October will also increase, with less than a week remaining before the U.S. midterm elections.

There remains a divergence within the Federal Reserve regarding the policy path. Waller believes current inflation is still too high, while Fed Governor Waller tends to favor keeping rates unchanged. Influenced by related statements and economic data, the probability of a rate hike in September fluctuated from 58% down to 42%, and then rebounded to around 50%. Historically, the Fed typically takes action only after market expectations for a rate hike have risen to about 85%, so the likelihood of a rate hike currently remains relatively limited.

However, inflation remains the biggest variable. Inflation models suggest that current data may exceed Wall Street economists' expectations of 3.4%, and the ISM Non-Manufacturing Prices Index, which typically leads CPI by about six months, has also shown signs of upward movement. Even so, a single inflation reading above expectations may still not be sufficient to prompt an immediate rate hike from the Federal Reserve. If the FOMC ultimately keeps rates unchanged, interest-sensitive assets such as gold, Bitcoin, and stocks are expected to experience a relieving rebound.

Asset Repricing in the Re-Inflation Era: Technology Stocks, Gold, and Bitcoin Perform Well

The current inflation environment is clearly different from that of 2008-2020. At that time, the average annual inflation rate in the U.S. was only 1.61%, which has now risen to 4.11%; at the same time, the growth rate of money supply has remained around 6%, while U.S. debt growth has stayed around 8%. In this environment, the ability to outpace inflation, money supply growth, and debt growth has become an important consideration for asset allocation.

Historically, the annualized return of U.S. stocks from 1975 to 2008 was 9.0%, dropping to 5.7% from 2008 to 2020, but has risen to 18.3% since 2020. However, returns are highly concentrated in specific asset classes, with technology stocks performing particularly well, gold also recording strong returns, while Bitcoin has outperformed all other asset classes. Tracking the SPY that follows the S&P 500 has proven inadequate to capture this round of structural differentiation in asset performance.

Overall, the September Federal Reserve meeting will serve as a critical test for judging market trends in the fourth quarter. Current market pricing suggests a rate hike probability of about 60%, still below the 80% or more level usually seen when the Federal Reserve takes action historically. If the Federal Reserve chooses to keep rates unchanged, and inflation does not exceed expectations further, the policy window may extend at least until the next meeting on December 9, allowing space for a short-term rise in risk assets. Meanwhile, based on seasonal patterns, the pullback in September-October often provides more attractive entry opportunities, and risk assets typically accumulate upward momentum again in the fourth quarter.

Some of the above views are from BIT on Target, Contact us to obtain the complete report from BIT on Target.

Disclaimer: The market has risks, and investment requires caution. This article does not constitute investment advice. Trading in digital assets may carry significant risks and volatility. Investment decisions should be made after careful consideration of personal circumstances and consulting a financial professional. BIT is not responsible for any investment decisions made based on the information provided in this content.

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