Bitcoin, Asian Stocks Drop as Traders Pare March Fed Rate Cut Bets

Bitcoin [BTC] registered moderate losses early Monday, with Asian stocks taking a bigger hit as Friday’s upbeat U.S. nonfarm payrolls (NFP) data dented expectations for early rate cuts by the Federal Reserve.

At 4:32 UTC, the leading cryptocurrency by market value changed hands at $43,600, representing a 0.8% drop on the day, CoinDesk data show. Most Asian equity indices traded in the red, with Hong Kong’s Hang Seng trading 2% lower amid a regulatory crackdown on gaming.

The NFP data released Friday showed the U.S. economy created 216,000 jobs in December, beating expectations for 170,000 and above November’s downwardly revised 173,000. The jobless rate held steady at 3.7%, while average hourly earnings increased 4.1% year-on-year against a consensus estimate of 3.9%.

Since the payrolls data, doubts have increased that the Fed will cut the Fed funds rate, the benchmark borrowing cost, as early as March. The CME Fed Watch tool shows traders now price a 60% chance of a rate cut in March, having fully baked in such a move in late December. The odds stood above 75% ahead of the payrolls report.

Traders in the swap market now foresee roughly five 25 basis point rate cuts this year instead of six or seven similar-sized rate cuts priced before the payrolls data, per FT.

The 10-year Treasury yield, the so-called risk-free rate, has risen by 15 basis points to 4.05% since Friday, also a sign of traders reassessing dovish Fed expectations or the possibility of the central bank delaying the rate cut. The benchmark yield fell by nearly 80 basis points to 3.86% in the final three months of 2023, offering a tailwind to risk assets, including bitcoin, thanks to expectations for aggressive Fed rate cuts and lesser-than-expected bond issuance by the U.S. Treasury.

“The most intriguing aspect was the rise in wage gains, which stood at +4.1% year-over-year (Y/Y). This figure significantly exceeds the current inflation rates. Historically, wage-price spirals tend to be persistent elements of inflation psychology, which will likely compel the Fed to maintain flexibility in its policy decisions going forward," Greg Magadini, director of derivatives at Amberdata, said in the weekly newsletter.

A continued rise in yields presents downside risk to risk assets, although anticipation of the spot ETF launch in the U.S. may cushion bitcoin against adverse moves in the bond market.

The U.S. Securities and Exchange Commission is widely expected to approve one or more spot ETFs by Jan. 10. Per some analysts, the move has been priced in over the past three months, and the cryptocurrency could see a "sell the fact” price drop following the approval.