Economic data released earlier on Friday revealed a larger-than-expected slowdown in the US jobs market in October. This news had significant implications, triggering a downside in US bond yields and a surge in the US stock market and the price of Bitcoin (BTC). At the time of writing, BTC was valued at around $34,600. The latest jobs report showed that the US economy added 150,000 jobs in the previous month, falling short of the expected gain of 180,000. Moreover, it marked the slowest pace of job gains since early 2021.
The unexpected slowdown prompted macro investors to pull back on their bets for an additional rate hike by the US Federal Reserve. The CME’s Fed Watch Tool indicated a decrease in the implied probability of the Fed raising interest rates by another 25 basis points by January 2024. This probability dropped from around 26% on Thursday to just 10% on Friday. Conversely, the probability of the Fed cutting interest rates by at least 100 basis points by the end of 2024 jumped to approximately 65% from just over 40% the previous day.
In addition to the slower job growth, the US unemployment rate rose unexpectedly from 3.8% to 3.9%, and there was a deceleration in the month-on-month pace of wage growth from 0.3% to 0.2%. The Federal Reserve had been aggressively hiking interest rates since early 2022 to combat the surge in US inflation that began in mid-2021. While progress has been made in bringing inflation back towards the Fed’s goal of 2.0%, the strong performance of the US economy and resilience of its labor market in 2023 have complicated the task.
Impact on Monetary Policy and Investor Sentiment
The latest US jobs data confirms a trend of gradual weakening in the labor market. As a result, pressure on the Federal Reserve to implement further rate hikes is reduced, allowing interest rates to remain higher for a longer period. Investors responded to this data by adjusting their bets on the Fed’s actions. They lowered their expectations for a further rate hike and increased their expectations for the timing of interest rate cuts.
A decrease in expectations of higher interest rates tends to result in fading US government bond yields. In turn, this boosts risk appetite in the stock market and increases the prices of non-yielding assets like Bitcoin and Gold. Lower yields on US bonds reduce the incentive to hold them as they are considered low-risk investments.
Consequently, while BTC is up 1.5% from session lows in the $34,000 range, it remains down around 0.75% overall. After reaching yearly highs near $36,000, profit-taking has taken hold, leading to a temporary setback in BTC’s price. This was primarily driven by short-term speculators capitalizing on the more than 30% pump in BTC from its October lows. The bullish sentiment may soon regain control, however, as the broader macro backdrop becomes favorable for BTC.
Future Outlook and Predictions
Several factors support the potential long-term upside for BTC. The ongoing decline in yields on 10-year US government bonds, the weakening of the US Dollar Index (DXY), and the rise in the S&P 500 index indicate a shift towards easier financial conditions. Market participants are betting that the peak in US interest rates has been reached, which could provide a medium-term tailwind for BTC.
Chart analysis suggests a possible dip to retest prior yearly highs in the $31,800 area. However, any pullbacks are expected to be short-lived. Looking ahead, the $40,000 mark is within sight before the end of 2023. In fact, Matrixport, a crypto analysis firm, even predicts the possibility of a Santa Rally propelling Bitcoin as high as $56,000 by the end of the year.
