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Bitfinex Alpha | Markets Rebound on Easing Inflation, But Beware of False Market Exuberance

After a total of 425 basis points of rate hikes over the past year, we are finally seeing a bit of relief. The latest decline in consumer price inflation not only boosted risk assets, but also provided room for the Federal Reserve to ease the pace of future rate hikes. A further 25 basis point rate hike is now expected by the end of January, although key factors in inflation remain to be addressed, including wage inflation.

Consumers are definitely feeling more optimistic, with sentiment forecasting 3% inflation this year, half of what we have now.

It should be noted, however, that even with this bullish indicator still 100 basis points above the Fed's 2% target, and with import prices rising as the dollar depreciates on a trade-weighted basis, the battle with inflation is not over.

The bond market reflects this as well. The yield curve remains resolutely inverted, with the spread between two-year and 10-year Treasuries now at its widest in 40 years.

In the cryptocurrency market, our volatility predictions for late December and early January have come into play, and we believe whales will be the main drivers of price increases. Shorts were heavily liquidated last week, with the short-to-long liquidation ratio for bitcoin and ether reaching its highest level since July 2021.

While the rally looks promising, the reality is that there are still limited traders in the market, and the recent rally has been driven purely by market sentiment, low funding rates and endless short liquidations. The market remains highly illiquid, and with open interest falling sharply over the weekend, a pullback is still possible.

https://blog.bitfinex.com/bitfinex-alpha/bitfinex-alpha-markets-rally-on-inflation-relief-but-beware-of-false-dawns/