Bitcoin Market Consolidates Amidst Weakening Expectations for Interest Rate Hikes

The Bitcoin market consolidated this week as expectations for a near-term interest rate hike decreased sharply. New York Fed President John Williams stated that the September 25bp hike reduced the urgency for further tightening, and the Fed now has time to assess incoming data. The implied probability of an October hike fell from 75% to around 50%, and subsequent data pushed it lower still, to roughly 37%.

The US economy's data was mixed, with some indicators showing resilience and others weakness. The August JOLTS openings fell to 7.079M, below expectations and the lowest in five months. September consumer confidence dropped to 81.9 from 88.6, its weakest reading since 2014. Core PCE came in below expectations at 0.2% month-on-month and 3.0% year-on-year, reinforcing the case for patience.

However, other indicators showed relatively resilient underlying activity. Second-quarter GDP was revised to 2.2% annualised, consumer spending rose 0.9% in August, and initial jobless claims have fallen to their lowest since July. The Fed is weighing softer forward-looking employment and sentiment indicators against these relatively resilient underlying activity.

The divergence between short-term and long-term yields is significant for portfolio construction. Lower expected policy rates reduce the relative attractiveness of cash and short-duration Treasuries, which typically improves the backdrop for liquidity-sensitive assets. However, the 10-year Treasury briefly reached around 5.3%, its highest level since 2002, reflecting concern about US fiscal sustainability rather than tighter monetary policy alone.