Casey Wagner

Ben Strack

Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:



<ul class="wp-block-list">
<li>How markets are reacting to the latest inflation print that was just in line with expectations.&nbsp;</li>



<li>Ben unpacks what’s happening — or not happening — with bitcoin ETF (and other crypto) options.&nbsp;</li>



<li>It was another volatile week for markets, even as data points showed few surprises. We break down what happened.&nbsp;</li>
</ul>



<h2 class="wp-block-heading">Markets react to final PCE before anticipated FOMC</h2>



We are 19 days out from the next policy-setting Fed meeting and the latest inflation numbers are in.&nbsp;



The personal consumer expenditures (PCE) price index dropped this morning, showing that inflation is rising exactly as expected. Prices rose 0.2% between June and July and 2.5% in the 12 months ended July, today’s report showed.&nbsp;



So-called core PCE (excluding volatile food and energy) rose 0.16% month over month.&nbsp;



The PCE is the Fed’s favorite inflation gauge. It’s a better measure than the CPI given it is broader and considers consumer behavior. (As fellow tennis fans in NYC may appreciate, <a href="https://x.com/caseywagnerr/status/1829273787205820595">my</a> preferred measure of inflation is the Honey Deuce cocktail at the US Open — up 4.5% from last year — but I digress.)



Markets reacted well to the news initially before paring gains later in the session. As of 2 pm ET, the S&amp;P 500 was up 0.11% over the day and the Nasdaq Composite had gained 0.2%.&nbsp;



Stocks are poised to end August in the green for the first time in years. The S&amp;P 500 is currently up 2.8% since the first of the month, while the Nasdaq Composite has gained 1.9% over that span. In 2023, the S&amp;P 500 and Nasdaq Composite indexes closed August 1.6% and 2.1% lower, respectively.&nbsp;



Bitcoin and ether, on the other hand, are deep in the red. Bitcoin has lost close to 12% over the past 30 days while ether is down more than 25%, according to data from Coinbase. Bitcoin was down 3.2% and ether was trading 4.2% lower over the past 24 hours at 2 pm ET.&nbsp;



Today’s data bodes well for a September rate cut, which we already knew was coming after Powell’s Jackson Hole remarks last week. But added reassurance is never a bad thing. When exactly risk assets will bounce back, however, remains more of a question.&nbsp;



“With Powell and the Fed signaling the start of a rate-cutting cycle, we anticipate increased global liquidity will eventually lift risk assets,” analysts at Ryze Labs wrote in a Friday note.&nbsp; “There are early signs of this: the People&#8217;s Bank of China injected a substantial RMB 1,042 billion ($150 billion) into Chinese money markets this week, boosting liquidity in global manufacturing, industrial sectors and commodity markets.”



Next week we will get the August employment report, another data point that will be a key piece to the puzzle when trying to determine if central bankers will go for a cut of 25 or 50 basis points.



— Casey Wagner&nbsp;



<h2 class="wp-block-heading">12</h2>



The number of percentage points by which Donald Trump leads Kamala Harris among likely voters who own crypto, according to a <a href="https://www.fdu.edu/news/fdu-poll-finds-trumps-embrace-of-crypto-pays-off/">poll</a> published Friday by Fairleigh Dickinson University.



Fifty percent of crypto-owning likely voters polled sided with Trump, while 38% prefer Harris. The vice president leads by 12 points among those who say they don’t own crypto (53% to 41%).&nbsp;&nbsp;



“Trump has been reaching out to the crypto community, and it seems to have paid off,” FDU professor Dan Cassino said in a statement. “It might be easy to dismiss them as insignificant, but I don’t think people realize exactly how widespread crypto ownership is.”



Ashley Ebersole, general counsel at 0x and a former senior counsel at the SEC, told Blockworks in an interview that he expects that both <a href="https://blockworks.co/news/more-crypto-remarks-likely-coming-from-trump-harris">Trump and Harris will speak</a> more about the topic.  



<h2 class="wp-block-heading">More investor ‘options’</h2>



Though the SEC has not yet allowed options on the US spot bitcoin ETFs, the agency’s decision on that is expected next month.&nbsp;



In the meantime, Nasdaq earlier this week proposed Bitcoin Index Options (XBTX). The final settlement value would be determined by CF Benchmarks’ Bitcoin Reference Rate New York variant (BRRNY).



A quick refresher on options: They’re contracts representing the right to buy or sell a financial product at a certain price within a specified period.



CF Benchmarks CEO Sui Chung said he can’t comment on discussions with regulators. He did, however, point out: “XBTX is structured like many foreign exchange index options that already trade: options are cash-settled to a spot reference rate.”



To that point, the SEC would have no rational basis to deny this proposal, said Patrick Daugherty, a partner at law firm Foley &amp; Lardner who also teaches about digital assets at Cornell Law School.



“Like foreign currency, bitcoin is liquid and markets for bitcoin demonstrate significant volume and turnover,” he told Blockworks. “The existing markets readily inform the spot market price of bitcoin, and the sufficiency of market surveillance for bitcoin products is now well-established.”



The Nasdaq index options product would give investors another way to hedge, or speculate on, the market risk associated with spot bitcoin exposure, Daugherty added.&nbsp;



“These index options could be used for a wide range of activities such as asset valuation, settlement of financial risk, risk management, NAV calculation, unit creation and unit redemption,” he said.



The proposal came the same week CME Group <a href="https://www.cmegroup.com/media-room/press-releases/2024/8/27/cme_group_to_launchbitcoinfridayfuturesonseptember30.html">plotted</a> other crypto derivatives called Bitcoin Friday futures — set to go live on Sept. 30, “pending regulatory review.”



So if these new offerings are coming, what about options for the spot bitcoin ETFs? After all, there are options available on bitcoin futures ETFs — and even on leveraged crypto funds.&nbsp;



Those too are a matter of time, Bloomberg Intelligence analyst James Seyffart has said:&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">We think the <a href="https://twitter.com/hashtag/Bitcoin?src=hash&amp;ref_src=twsrc%5Etfw">#Bitcoin</a> ETF options happen in 4th quarter this year. Final deadline for SEC decision is ~Sept. 21 but there&#39;s more steps needed after that from OCC &amp; CFTC. Here are some BTC &amp; ETH related ETFs including leveraged that already have options. cc <a href="https://twitter.com/EricBalchunas?ref_src=twsrc%5Etfw">@EricBalchunas</a> <a href="https://t.co/xErD5oPiWb">https://t.co/xErD5oPiWb</a> <a href="https://t.co/USauv6QaFs">pic.twitter.com/USauv6QaFs</a>&mdash; James Seyffart (@JSeyff) <a href="https://twitter.com/JSeyff/status/1821627790065799634?ref_src=twsrc%5Etfw">August 8, 2024</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Spot commodity products are registered under the Securities Act of 1933 and therefore must receive individual review and approval from the SEC, Grayscale Investments <a href="https://www.grayscale.com/blog/legal-topics/investors-deserve-options-on-gbtc">has noted</a>. That is unlike the futures funds registered under the Securities Act of 1940.



Not to mention the CFTC would also need to OK the spot bitcoin ETF options, perhaps further <a href="https://blockworks.co/news/sec-spot-btc-options-delay">explaining the hold-up</a>.



I feel like this patience-is-a-virtue trope is becoming an industry (and newsletter) theme.&nbsp;



— Ben Strack



<h2 class="wp-block-heading">Did You Notice</h2>



Happy Friday! It was a volatile week for markets even as data came in more or less as expected. Here’s what to know heading into the long weekend:&nbsp;



<ul class="wp-block-list">
<li>As Felix wrote about <a href="https://blockworks.co/news/nvidia-earnings-and-the-baked-in-premium">yesterday</a>, investors were unimpressed with NVIDIA’s historic earnings report on Wednesday afternoon. The AI chipmaker once again beat analyst expectations, reporting more than $30 billion in sales (a 122% year-over-year increase) and $16.6 billion in profit (projections called for $15 billion). Still, shares fell as much as 5% after hours Wednesday and are still down about 2.5% from Wednesday’s close. It was enough to bring down Big Tech (XLK is down 2.3% over the week). I’d expect the rotation out of tech into cyclicals to continue for now.&nbsp;</li>



<li>Initial jobless claims fell by 2,000 the week ended Aug. 24, Thursday’s report showed. It was on par with expectations and should be a positive sign for FOMC members, who are hoping to prevent further tightening in the labor market. Odds of a 25-basis point interest rate cut next month now sit at nearly 70%, according to CME Group <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html">data</a>.&nbsp;</li>



<li>The GDP got an upward <a href="https://www.bea.gov/news/2024/gross-domestic-product-second-estimate-corporate-profits-preliminary-estimate-second">revision</a> to 3% on Thursday after the Commerce Department previously estimated that economic growth increased at a rate of 2.8% during the second quarter. It’s a big acceleration from Q1’s GDP, which was 1.4%, showing that consumers are feeling resilient. Soft landing here we come?&nbsp;</li>
</ul>



— Casey Wagner&nbsp;



<h2 class="wp-block-heading">Bulletin Board&nbsp;</h2>



<ul class="wp-block-list">
<li>The US spot bitcoin ETFs saw a third straight day of net outflows on Thursday, according to Farside Investors <a href="https://farside.co.uk/bitcoin-etf-flow-all-data/">data</a> — totaling roughly $300 million over that span. Net flows for ether funds were nearly non-existent yesterday as seven of the nine US spot products saw zero flows.&nbsp;&nbsp;</li>



<li>Check out Blockworks reporter Donovan Choy’s latest <a href="https://blockworks.co/news/ethereum-foundation-treasury-management-concerns">story</a> about what some have deemed a lack of transparency around the Ethereum Foundation’s spending. The Empire newsletter team most recently <a href="https://blockworks.co/news/circle-paypal-stablecoins-keep-notching-gains">dug into stablecoins</a>.&nbsp;</li>



<li>Despite the holiday weekend, there’ll be an On the Margin newsletter in your inbox on Labor Day. We’ll be discussing September’s possible market movers and the evolving euro-backed stablecoin scene. If you’re reading this on blockworks.co, make sure to subscribe to the OTM newsletter <a href="https://blockworks.co/newsletter/onthemargin">here</a>.</li>
</ul>



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Crypto Options

How markets are reacting to the latest inflation print

The Federal Reserve’s preferred inflation gauge showed higher prices have been more persistent than originally thought, sending stocks and cryptocurrencies into the red Friday.&nbsp;



The core personal consumption expenditures price index (PCE), which the central bank finds more comprehensive than the <a href="https://blockworks.co/news/analysts-weigh-likelihood-of-march-rate-hikes-as-cpi-disappoints-again'">consumer price index</a>, showed inflation rose 0.6% in January.&nbsp;



Year over year, prices are up 4.7%, a far cry from the Fed’s 2% target, according to <a href="https://www.bea.gov/data/personal-consumption-expenditures-price-index-excluding-food-and-energy" target="_blank" rel="noreferrer noopener">data</a> from the US department of commerce. 



The S&amp;P 500 and Nasdaq Composite indexes fell about 1.5% and 2% on the news. Bitcoin (<a href="https://blockworks.co/price/btc" target="_blank" rel="noreferrer noopener">BTC</a>) and ether (<a href="https://blockworks.co/price/eth" target="_blank" rel="noreferrer noopener">ETH</a>) trended downward as well, each shedding around 1%. 



Friday’s PCE reading paints a negative picture for markets, Tom Essaye, founder of Sevens Report Research, said, because it shows disinflation is slowing and inflation pressures are bouncing.&nbsp;



“To be clear, [the report] won’t be enough to change the Fed’s thinking (this is very old data at this point) nor was it enough to move bonds or currencies,” Essaye added. “But for a market that’s concerned about stagflation, this report won’t do anything to ease those concerns.”



Thursday’s revised gross domestic product figures are also not helping to put investors at ease, Essaye said. The updated numbers showed US economic activity only grew modestly, which, coupled with increasing inflation, sets the stage for stagflation.&nbsp;



Markets were less certain about a 25 basis point increase following Friday’s PCE report, which previously was the largely accepted consensus, data from <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html" target="_blank" rel="noreferrer noopener">CME Group</a> shows. Futures markets are now pricing in about a 36% chance of a 50 basis point increase, a scenario markets thought was near impossible only earlier this month. 



Derivatives markets also show a 40% probability of rates eventually going greater than 5.5%, another possibility traders hadn’t considered at the beginning of February. The current target is between 4.5% and 4.75%. 



The Fed’s next policy-setting Federal Open Market Committee meeting is scheduled for March 15 and 16. A summary of economic projections will also be released following the meeting along with comments from Chair Jerome Powell.



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Get the news in your inbox. Explore Blockworks newsletters:



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<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
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Inflation

Risk-Off Is Back: Crypto, Equities Slide on Persistent Inflation

<div id="highlights-block_60d5df523b1c7" class="highlights">
 <ul>
 <li>The latest core PCE reading showed the biggest increase since 1992, but was in line with estimates </li>
 <li>Used car prices, which rose nearly 30% between May 2020 and May 2021, may be topping out </li>
 </ul>
 
</div>



The latest personal consumption expenditures (PCE) data released Friday shows that the Federal Reserve is unlikely to make any major policy changes in the near future.&nbsp;



In the biggest increase since 1992, core PCE rose 3.4% year-over-year, exceeding the 2% flexible target set by the Fed, but in line with economists&#8217; estimates. The core index rose 0.5% from last month in May, lower than the expected 0.6%, according to data from the Commerce Department.



<figure class="wp-block-image size-large"><img decoding="async" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/06/fredgraph-1024x395-1.jpg" alt="PCE chart" class="wp-image-5136"/></figure>



Equity futures rose at the open and government bond yields stayed flat on the news. As Fed officials have continued to <a href="https://cms.blockworks.co/powell-turns-to-lumber-to-prove-inflation-is-transitory/">downplay inflation</a> concerns, this reading is unlikely to shift current policy significantly.&nbsp;



<h3 class="wp-block-heading">Used car pricing reveals inflationary patterns</h3>



Eyes are also on used cars, a market that can reveal broader inflationary patterns. Prices for used cars and trucks rose nearly 30% between May 2020 and May 2021.



Surging prices in the second-hand vehicle market have helped US inflation soar to the highest levels in more than a decade. Used car prices rose 10% in April and an additional 7.3% in May. In May, used cars made up one-third of the overall rise in consumer prices.&nbsp;



“The latest Manheim Used Vehicle Value Index shows used car/truck inflation is in the process of topping out,” said Nicholas Colas, co-founder of DataTrek Research. “That’s important to broad measures of US inflation; May’s core CPI inflation reading of 3.8% was just 2.7% without used vehicle inflation.”



In June, Manheim’s wholesale index of used-vehicle value was 36% higher than a year earlier. This was down from an annual rate above 50% in April. If used car prices are peaking, it may be a sign that the current spike in inflation will also run its course shortly.&nbsp;



“Used car inflation should be less of an issue in the second half of 2021, lowering the chance of big upside surprises in upcoming CPI reports,” said Colas.



<h3 class="wp-block-heading">Bank stress test results</h3>



Bank shares were also on the rise Friday following the Fed’s statement that the biggest US lenders would be able to easily withstand a severe recession. The 23 financial institutions that participated in the stress test, including Bank of America, Citigroup and Goldman Sachs, “would experience substantial losses under the severely adverse scenario but would remain well above their minimum risk-based requirements and could continue lending to businesses and households,” according to the Fed’s <a href="https://www.federalreserve.gov/publications/files/2021-dfast-results-20210624.pdf">Dodd-Frank Act Stress Test</a> released Thursday.&nbsp;



<h3 class="wp-block-heading">The pandemic impact</h3>



As the Fed continues to watch inflation and employment numbers, the pandemic continues. Even as unemployment numbers remain high, there is a record number of job openings in the US. Officials are urging Americans to continue to exercise caution and get vaccinated as the new Delta variant poses a threat.&nbsp;



&#8220;Six hundred thousand-plus Americans have died, and with this Delta variant you know there’s going to be others as well. You know it&#8217;s going to happen. We&#8217;ve got to get young people vaccinated,&#8221; Biden said during a trip to North Carolina Thursday.&nbsp;