The global macroeconomic landscape is experiencing heightened uncertainty, driven by mixed economic signals and evolving trade policies. Given this is the driving force behind crypto’s recent sell-off, I thought it was a good time to share a macro update.
Key Takeaways
- The economic outlook is quite messy at the moment. Data continues to tell contradicting stories and, importantly, is being released before the impact of tariffs will be felt.
- Trump’s tariff plans and the potential for prolonged trade wars are driving market uncertainty. They also explain much of the recent sell-off in crypto.
- China is rolling out several stimulus measures to help it reach its growth targets, a move that should help spur global liquidity.
- Until the macro environment becomes less uncertain, it’s hard to see crypto going on a sustained rally. Tariffs are the most important factor to watch.
Contents
Mixed Macro Madness
The U.S. economy presents a mixed outlook, likely adding to the risk-off environment we’ve recently found ourselves in. The ISM Manufacturing Purchasing Managers’ Index (PMI) declined to 50.3 from 50.9 in January, signalling a slight slowdown in manufacturing growth. In contrast, the ISM Non-Manufacturing PMI increased to 53.5 from 52.8, reflecting continued expansion in the services sector.
Additionally, the ISM survey’s prices paid by manufacturers for inputs surged to 62.4, the highest since June 2022, indicating the risk of inflationary pressures. However, February’s reading of U.S. CPI came in slightly lower than expected at 2.8% (YoY). Further, alternative inflation measures like Truflation have continued sliding, recently hitting four-year lows of 1.35% before bouncing. These conflicting signals create a cautious environment as investors weigh sector-specific trends and macroeconomic uncertainties.
U.S. annual inflation, as measured by Truflation, recently hit a four-year low before rebounding to 1.7% (Source: Truflation)At the same time, financial conditions have eased considerably over the past two months, setting the stage for potential economic momentum. The USD has weakened, bond yields have fallen, and oil prices have declined, all of which contribute to a more favourable economic environment. Historically, easing financial conditions is a leading indicator of economic recovery, as they reduce borrowing costs, improve liquidity, and boost market sentiment.
Economic textbooks will often state that a depreciating currency is good for economies, particularly when exporters to the U.S. face a depreciating local currency because, as the world’s largest consumption economy, the U.S. can buy more from those countries. However, when the world is highly indebted, and the debt is mainly USD-denominated, it’s not so straightforward.
Countries need to access a lower USD to meet their loan obligations. The greater the USD depreciation, the further their currencies will go in servicing the debt. Concurrently, an appreciating USD is typically good for U.S. inflation because import costs fall, so on the surface, the U.S. wants to strengthen its currency. However, this is only a short-term solution. USD can only strengthen by so much. The best solution is to grow the economy, and an obvious way is to weaken the USD to drive U.S. exports. This, in turn, will increase manufacturing and jobs.
For this reason, it is a challenging balance to depreciate without causing inflation. Unsurprisingly, the Trump administration has prioritised lowering oil prices because it can help ease inflationary pressures. Driving down oil prices more than USD depreciation will have a stimulative effect on global markets and allow major economies, namely China, to further stimulate their economies.
The Trump administration has consistently said it is focused on driving down the yield on 10-year Treasuries, which affect most long-term loans in the economy (e.g. mortgages, corporate bonds). By doing so, Trump can deliver on his promises of lowering borrowing costs for Americans. Lower yields also decrease the U.S. government’s debt financing costs, easing fiscal pressures and making debt management more sustainable. Additionally, declining yields can push investors toward risk assets (e.g. stocks, crypto).
While the Fed has yet to fully commit to monetary easing, global liquidity conditions have loosened significantly. When the Fed eventually increases liquidity through lower interest rates, it will further stimulate the U.S. economy by lowering borrowing costs, encouraging investment, and driving consumption.
This, in turn, will boost corporate earnings, elevate stock markets, and improve market sentiment. Higher U.S. liquidity translates into greater capital flows into risk assets for global markets, easing financial conditions worldwide and benefiting emerging markets reliant on dollar funding. Additionally, a weaker USD makes dollar-denominated debt repayment easier for other countries. It increases demand for USD-priced commodities, creating a positive feedback loop that supports global economic expansion.
Trump’s Tariff Wars
U.S. tariffs are the biggest short-term threat to markets. At the time of writing, Trump plans to impose a wave of new tariffs on April 2, a date he has repeatedly flagged in recent weeks.
Had the Trump administration bullied one country at a time, it would have gotten the results faster, and markets would have seen the tactics working. However, when trying to threaten multiple trading partners simultaneously, this emboldens other nations to retaliate.
The more that U.S. stocks suffer, the harder it will presumably be for the Trump administration to maintain its strong approval ratings. This may explain why Trump has suddenly brushed off the importance of stock markets in recent weeks, contradicting his first term in which he frequently celebrated strong market performance.
Trump arguably has a brief window to achieve his desired pro-America policies, which he has acknowledged may bring a “little disturbance” in the short term. It’s still close enough to the start of his term where Trump can blame the previous Biden administration, and it’s still far enough away from the important midterm elections that will take place late next year.
China Ramping Up Stimulus
China recently introduced a series of stimulatory measures, focusing on fiscal expansion, agricultural investment, and monetary policy adjustments. If China is to hit its annual GDP growth target of 5%—which its premier reaffirmed earlier this month—it will need greater public spending, especially with the headwind of increased tariffs. To that end, China recently raised its budget deficit to 4% of GDP, a near-30-year high.
For China, the timing of economic stimulus is crucial. China may have been waiting for USD to weaken before implementing aggressive stimulus measures. If China stimulates too much too early while the USD remains strong, it risks capital outflows, which could put significant downward pressure on the yuan, forcing the People’s Bank of China (PBOC) to intervene in currency markets, depleting foreign exchange reserves and adding financial strain.
A weaker USD would stabilise China’s currency and provide a more conducive environment for domestic stimulus without exacerbating financial imbalances. By carefully timing its policies, China can maximise the effectiveness of its economic stimulus while maintaining financial stability.
Bitcoin: The Chosen One
Bitcoin strongly correlates with global liquidity, thriving in stimulus environments where excess capital seeks high-yielding and scarce assets. Historically, when M2 expands, indicating increased money supply through monetary easing, stimulus, or credit growth, Bitcoin’s price tends to rise. (For more on this correlation, see this research piece commissioned by Lyn Alden.)
Changes in global liquidity, as measured by M2, typically precede corresponding movements in Bitcoin’s price by approximately 8–10 weeks. This lag suggests that expansions or contractions in M2 can serve as leading indicators for Bitcoin, with price adjustments occurring about two months after shifts in liquidity. Global liquidity is projected to increase further, which could lead to further upside for Bitcoin.
Recap
In the short term, both stock and crypto markets are experiencing heightened volatility due to shifting macro conditions largely caused by Trump’s aggressive trade policies. Ultimately, all signs lead to M2 money supply and global liquidity increasing throughout this year and next, which historically has coincided with strong performance for crypto.