In the ever-evolving world of financial markets, we find ourselves in a new era this week. The U.S. Securities and Exchange Commission (SEC) marked a significant milestone with the historic approval of the first-ever spot Bitcoin ETF. While it was a long process for all involved, with a few hiccups along the way, including the SEC social media account on X (formerly Twitter) getting hacked, it is undeniably big news. Regardless of your take on cryptocurrencies, this decision will likely have a lasting impact on financial markets. And if we needed more than that for one week, we also received December CPI numbers, the last from 2023. It was a busy week, so let’s take a look.
The SEC’s landmark decision to greenlight 11 spot Bitcoin ETFs heralds a new era for cryptocurrency in mainstream finance. These ETFs, from heavy hitters like Blackrock, Fidelity, Invesco, and others, offer investors direct exposure to Bitcoin, distinguishing them from previous products that tracked Bitcoin futures. This move not only simplifies Bitcoin investment but also signals a broader acceptance of digital currencies within traditional financial systems.
The SEC stated that while there are already plenty of ways to buy, sell, or gain exposure to cryptocurrencies, one of their primary reasons for approving the ETFs was to enhance certain investor protections. Some of these include:
- Bitcoin ETF sponsors must provide complete, fair, and truthful product disclosure.
- ETFs will be listed and traded on registered national securities exchanges, which are required to have rules designed to prevent fraud and manipulation.
- The SEC will simultaneously approve 11 spot Bitcoin ETFs, which will help create a level playing field for issuers and promote fairness and competition, benefiting investors and the broader market.
That said, the SEC was very clear that this approval is not an endorsement of Bitcoin or other cryptocurrencies in general. In fact, in just a few quotes, they made their view known in no uncertain terms:
- “Though we’re merit neutral…bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.”
- “Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
It is clear the official SEC opinion is not a positive one, but if you must, proceed with caution.
Moving quickly to inflation, the December CPI data revealed a nuanced picture of the current economic landscape. With a modest 0.3% monthly increase and a 3.4% annual rise, the data reflects the ongoing challenges and complexities in the economy. The increase is primarily driven by the shelter index, underlining the persistent impact of housing costs on overall inflation.
However, we know shelter is an extremely slow and lagging measure of inflation. To make it even more transparent, the most current rental price measures are actually showing deflation. So, while the Fed may have new data to point to if they want to hold rates higher for longer, it would be just as easy to make a case for the other side.
Lastly, the market reaction to the inflation news on Thursday was interesting. With the higher-than-expected numbers, the anticipated reaction would have been increased treasury rates due to a decreased probability of near-term Fed cuts. However, the opposite happened, with one- and two-year treasuries dropping about ten basis points. It will be fascinating to see how this progresses over the next few weeks.
Economy
- Markets rebounded this week, with the S&P 500 up 1.8%, the Nasdaq up 3.1%, and the small-cap Russell 2000 flat at 0.0%.
- The annual Core CPI rate in the U.S. eased to a 2-1/2-year low of 3.9% in December, down from 4.0% the prior month and just above market forecasts of 3.8%.
- The shelter index, accounting for over two-thirds of the total increase in the Core index, softened to 6.2% in December from 6.5% in the prior month.
- The number of Americans filing for unemployment benefits fell by 1K from the previous week’s upwardly revised value to 202K for the period ending January 6, well below market expectations of 210K.
- In the meantime, continuing claims fell by 34K to 1.834M on the earlier week, also below market expectations of 1.871M.
- PPI unexpectedly declined 0.1% in December, the same as in November, compared to forecasts of a 0.1% rise. Year-on-year, the rate edged up to 1% from 0.8%, compared to estimates of 1.3%.
Stocks
- U.S. equities were in positive territory. Technology and Communication Services were the top performers, while Energy and Utilities lagged. Growth stocks led value stocks, and large caps beat small caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased nine basis points to 3.95% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by high-yield bonds and government bonds.
