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Bitcoin and Ether drop as US stagflation fears resurface

Crypto slides amid US stagflation fears spread liquidity panic.

Bitcoin and Ether price symbols falling down graph showing economic decline amid stagflation fears

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The US economy experienced a more significant cooling than anticipated in the first quarter of 2024, with the gross domestic product (GDP) measuring an annualized rate of 1.6%, according to the Commerce Department. This marks the weakest pace of growth since the second quarter of 2022 when the economy contracted, and falls below the 2.2% rate projected by economists in a FactSet poll.

The slowdown in economic growth can be attributed to several factors, including a sharp increase in imports, a decrease in private sector inventory investment, and a notable deceleration in government spending. Consumer spending, which accounts for a significant portion of economic output, also slowed earlier this year but continued to fuel growth in the first quarter.

The weaker-than-expected GDP reading has raised concerns about the possibility of stagflation, a combination of high inflation and low economic growth. This scenario has led to a decline in risk assets, with the Dow tumbling by 500 points at the opening bell, the S&P 500 falling 1.3%, and the Nasdaq Composite declining by 2%.

Despite the economic slowdown, the Federal Reserve appears to be in no rush to cut interest rates. Inflation has slowed considerably over the past year, but the pace of its descent has stalled in recent months. The Fed is likely to begin cutting rates once it is convinced that inflation is under control and on track to reach its 2% target. However, the central bank could reduce rates sooner than expected if the economy suddenly falters.

The latest GDP reading has dealt some damage to the narrative that the US economy might be overheating, which could shift the Fed’s timetable for initiating the rate easing cycle.

Quincy Krosby, chief global strategist at LPL Financial, suggests that the softer first read of Q1 GDP could bring July back into play for the start of rate cuts.

The crypto market, which is sensitive to macroeconomic developments, has been impacted by the renewed fears of U.S. stagflation. Bitcoin, the leading cryptocurrency by market value, traded near $62,400 at press time, down 2.5% on a 24-hour basis. Ether (ETH) traded 3% lower at $3,200.

The market appears to be balancing the threat of stagflation against potential bullish factors, such as a liquidity injection from the Treasury General Account (TGA) and the launch of Hong Kong’s bitcoin ETFs. However, news that mainland Chinese investors won’t be able to trade the ETFs has somewhat tempered the bullishness surrounding the launch.

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