On the Margin Newsletter: CPI takeaways and an update from Brian Armstrong

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Welcome to the On the Margin Newsletter, brought to you by Ben Strack, Casey Wagner and Felix Jauvin. Here’s what we unpack today: 

• Inflation is on the decline, hopefully. But some prices are proving stickier than others. Felix unpacks the key figures from yesterday’s CPI print. 
• Cathie Wood made an appearance at Coinbase’s New York event to interview Brian Armstrong. COIN buy signal? 
• Bitcoin ETF demand rebounded after outflows interrupted a record streak.

Three CPI print takeaways 

As noted in yesterday’s newsletter, May CPI came in softer than most forecasted, sending risk assets higher. Beneath the top level numbers, however, lies a treasure trove of interesting insights as to where inflation might be headed. Let’s dig into three takeaways from the report:

1. Shelter inflation continues to dominate

Shelter inflation actually accelerated this month from 0.172 to 0.183 on a month-over-month basis. Shelter makes up 45% of the Core CPI figure, so this component needs to head lower for continued disinflation to occur. 

One of the key drivers of shelter inflation is owners’ equivalent rent. It is trending lower but still very far from its pre-pandemic level due to the lagged nature of how housing prices trickle into rent prices. 

2. Supercore goes negative

For the first time since 2021, we saw so-called supercore (Core CPI ex shelter) deflate on a month-over-month basis. Supercore is a key metric; it digs deep into the less volatile and more structural components of inflation, therefore providing a clearer picture.

Transportation services, after many months of being the biggest contributor to inflation, suddenly flipped deflationary this month!

Digging deeper into the data, we see that this primarily came from a major reversal in motor vehicle insurance, which has been running +2 standard deviations above historical trend.

The continued strength in vehicle insurance was largely caused by the outsized increase in car prices in recent years due to supply chain shortages. As insurances get reset at higher levels due to higher car prices, it has led to a lagged and outsized increase to inflation. 

As noted by Jack Farley, host of Blockworks’ Forward Guidance podcast, motor vehicle insurance has been taking up a disproportionate amount of CPI:

Assuming this deflation in supercore continues, the only thing getting in the way of a soft landing for inflation at the 2% target is the shelter dynamics noted above. 

3. Still all goods disinflation

Despite the positive news on the inflation front, most of the disinflation continues to come from goods. Services continue to remain elevated.

In this great chart, we see how most of the disinflationary tailwinds have come from core goods, in red. 

This goods disinflation can only continue for so long before a mean reversion. Eventually, services will need to take on the mantle and continue lower for CPI in aggregate to continue its march back down to 2%. 

Source: inflationguy.blog

There’s a lot to be excited about in this month’s CPI print. But the thorns of the report continue to prick.

— Felix Jauvin

$500 million

The amount in convertible senior notes that MicroStrategy plans to sell to qualified institutional investors, the company revealed Thursday. 
And surprise, surprise: MicroStrategy intends to use the net proceeds “to acquire additional bitcoin, and for general corporate purposes.”

Led by bitcoin bull Michael Saylor, MicroStrategy owned 214,400 BTC as of April 29. The business intelligence firm is by far the largest publicly-traded holder of bitcoin, though more companies have started to add BTC to their treasuries in recent months.

Bitcoin ETF flows in the macro winds

Though spot bitcoin ETF demand seems to serve as a barometer for crypto market sentiment , daily flow fluctuations could taper as investors wait for more macro clarity.

Flows into such funds rebounded Wednesday after the category saw its largest net outflow day in more than a month.

Roughly $200 million exited US spot bitcoin ETFs on Tuesday — the most bleeding since investors pulled out $564 million from such products on May 1, Farside Investors data shows. It was the second straight negative-flow showing for the funds collectively after a record 19-day net inflow streak. 

But investors then injected $101 million into the BTC ETFs on a day during which BTC ascended toward $70,000 after a cooler-than-expected Consumer Price Index report in the morning. 

Later on Wednesday, the Fed left US interest rates unchanged — even after the European Central Bank and the Bank of Canada lowered rates last week. 

Bitcoin’s price hovered around the $69,000 mark after the meeting before heading downward below $67,000 on Thursday. 

The “hawkish” FOMC statement had a negative short-term impact on crypto, 21Shares research associate Leena ElDeeb told Blockworks. But the CPI numbers proved enough to attract some capital into bitcoin ETFs — for the day at least.

Bitfinex analysts said the Fed’s decision to hold rates yesterday could stabilize ETF flows as investors await a clearer signal on future policy moves. 

“Spot bitcoin ETFs might see steady inflows, but the momentum could be less pronounced compared to a rate-cut scenario,” they added. 

A number of economists expect the Fed to cut rates at its Sept. 18 meeting. ElDeeb told Blockworks she foresees crypto price volatility continuing as we inch toward that date.

But a much closer date to watch is June 27 — when President Joe Biden and former President Donald Trump are slated to spar in the year’s first presidential debate. 

“Crypto is becoming an increasingly inevitable hot topic often name-dropped by politicians,” ElDeeb added. “We expect crypto to be one of the topics on the table, and thus some positive [ETF] inflows would typically follow.”

— Ben Strack

Cathie plays softball 

Ark Invest’s Cathie Wood took the stage with Coinbase CEO Brian Armstrong in New York at the exchange’s annual State of Crypto event Thursday.  

The duo talked share prices, regulation and campaign financing to a packed audience. Here are the highlights: 

Wood mentioned that COIN was having a hard time last year, asking what the exchange is doing differently today. Props to her diplomacy here, as Coinbase shares by June 2023 had plummeted 85% from its direct listing debut price.

But things are looking up these days , with COIN up more than 50% year to date and down just 28% since going public in 2021. 

Armstrong said the team is focused on reducing costs and spending judicially — while still maintaining innovation and expanding internationally. There are 10 large overseas markets , which the team dubs “go deep markets,” he added, without naming specific countries. 

The conversation of course drifted into policy and politics quickly. 

“If we don’t have Congress step in and act, the lack of clarity is just going to be weaponized,” Armstrong said, opting to refrain from commenting on the pending legal matters the exchange faces with the SEC. 

Coinbase has led the charge with campaign donations this election cycle, giving $56 million to crypto-focused super PAC Fairshake since the beginning of last year. The exchange also has its own nonprofit that also launched a PAC : the Stand with Crypto Alliance. 

“I would say crypto is the number one bipartisan issue,” Armstrong said. “It’s kind of like the only thing that they’re coming together to work on right now, so that’s really encouraging.” 

The comments come a day after The Block reported that the Biden campaign is considering accepting cryptocurrency donations through Coinbase. The Coinbase CEO did not comment on particular candidates — presidential or otherwise — although it’s worth noting that Wood never explicitly asked. 

— Casey Wagner

Bulletin Board

• SEC Chair Gary Gensler signaled during a Thursday hearing that he expects final spot ether ETF approvals sometime this summer — a notable, yet totally unsurprising comment.
• BTC was trading at roughly $66,860 at around 2:30 pm ET Thursday — down 2% on the day. ETH saw a similar drop over the span, falling to $3,470 at that time.
• Bitcoin mining executives met with former President Donald Trump earlier this week. We spoke with Marathon Digital executives about what went down at the rendez-vous; stay tuned for details tomorrow.  

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