Bitcoin steady above $30k as China factory deflation suggests end of global tightening cycle is near

Bitcoin held steady above $30,000 early Monday as producer price index (PPI) data from China suggested the global liquidity-tightening cycle that kicked off early last year and roiled risk assets including cryptocurrencies is nearing its end.

China's PPI, a measure of factory-gate prices, fell 5.4% year-on-year in June, the ninth consecutive monthly decline and the steepest drop in seven years, the National Bureau of Statistics (NBS) said Monday.

That is likely to lead to lower export prices and deflationary pressures in the global economy. China is the largest trading partner of the world's prominent economies. Deflation, a sustained decline in the general price level, occurs when the inflation rate is negative.

Persistent deflation in one of the world's largest sources of manufactured products will help Western central banks, whose aggressive interest-rate increases aimed taming inflation that's at the highest levels for years, and in some cases decades, is hurting the wider economy.

The Fed has raised rates by more than 500 basis points to the 5%-5.25% range since March 2022 and ran into a banking crisis early this year. In Europe, Credit Suisse had to be rescued by Swiss rival UBS.

"China is exporting disinflation across the Western world," David Brickell, director of institutional sales at crypto liquidity network Paradigm, told CoinDesk. "We’re seeing it reflected in producer price inputs, but not yet fully feeding into consumer prices. Ultimately this will be good for risk as it relates to the end of the global hiking cycle."

May's annual increase of 1.1% in U.S. producer prices was the smallest in almost 2 1/2 years. The consumer price index (CPI) rose 4%, the lowest in two years. Data due on Wednesday is expected to show the CPI growth rate slowed further to 3.1% in June, according to Refnitiv data cited by CNN.

Dull reaction to China PPI

So far, however, China's PPI data has failed to spark a risk-on rally, with bitcoin seeing little directional clarity above $30,000 and futures tied to the S&P 500 trading 0.5% lower on the day. The dollar index inched higher by 0.15% to 102.42.

It appears investors are currently focusing on the negatives of the data: A continued decline in the Chinese figure points to a stalled economic recovery. Early this year, analysts widely cited China's reopening as a major bullish tailwind for global growth and risk assets.

The post-data weakness in the S&P 500 futures and Asian stock markets can be attributed to the strong relationship between global earnings and Chinese producer prices. "The latest PPI number does not bode well for earnings," Jeroen Blokland, founder of True Insights, said in a tweet.

According Brickell, bitcoin will probably begin the next leg higher once bond yields peak.

"The knee-jerk reaction is to focus on the negative implications of a Chinese growth slowdown," he said. "Risk assets are also adjusting to the last week's vicious bond sell-off. As yields top out, I suspect stocks will stabilize. I expect a reversal in yields to trigger the next leg higher for BTC, especially given the underlying weakness in the dollar."

The U.S. 10-year Treasury yield rose to a four-month high of 4.09% last week, with the two-year yield hitting the highest since 2006 following Thursday's blowout U.S. ADP private payrolls data.

While Friday's nonfarm payrolls report showed a slowdown in job creation in June, the jobless rate dropped alongside an unexpected increase in average hourly earnings, keeping yields on a higher path.

Higher bond yields tend to reduce the flow of money into risk assets. Yields may turn lower if Wednesday's U.S. CPI data shows a continued slowdown in the inflation rate.