US Inflation Re-Accelerates to 3.7%: The Bond Market Is the Real Threat to Crypto

The strong September CPI has pushed the 10-year Treasury yield over 5.2% and increased the likelihood of a second Fed move.

Following its decline below $82,000, the Federal Reserve and oil prices have emerged as critical variables influencing the further appreciation of Bitcoin.

The September CPI, the last inflation report before the midterms, was disappointing.

Gasoline prices accounted for nearly half of the monthly gain, up 9.1%, contributing to a total increase of 3.4% in consumer prices for the month and 3.7% for the year.

Initial expectations were for a 3.6% headline and a 2.5% core. The headline was a little off, but the markets were moved by the core miss.

The Core Miss Changes the Fed Conversation

The headline figure for the consumer price index jumped 0.649%, beyond forecasts of 0.58%, and the core figure increased by 0.335% for the month, exceeding expectations of 0.21%.

The fact that annual core inflation is now 2.6% rather than 2.4% shows that price pressures are not limited to the energy industry.

Over the month, there was a 0.4% increase in shelter, which includes hotel accommodations.

An overemphasis on reading and analyzing printed materials is counterproductive.

A strong owners' equivalent rent figure might be an aberration, according to Bloomberg Economics, which said that the composition challenges the argument for an increase.

There has not been indication of widespread pass-through effects yet, even with a 9% increase in gasoline prices and a 0.3% core reading.

On the other hand, the Federal Reserve is most worried about the second round's attendant risk.

Kevin Warsh, the chair, has stated his intention to prevent the impact of the gasoline price increase on other parts of the economy.

Real Wages Are Falling

The data now reflects the affordability pressure. An annual pay growth rate of 3% was recorded in September, the lowest level since May 2021, as average hourly wages saw a slight increase of 0.1%.

Real incomes are falling about 0.7% yearly due to inflation at 3.7%. Since March, wage growth has lagged behind inflationary pressures.

Polls show that people from all parties are worried about inflation and the rising cost of living as the election draws near.

It would be great if energy costs were more reasonable, but the war that has driven up prices isn't going away anytime soon.

Reports of Iranian strikes on tankers in the Strait of Hormuz caused Brent prices to jump beyond $107 a barrel on Wednesday.

Stagflation Problem: The Labor Market Has Softened

At the same time that the job market is getting worse, inflation is also getting worse.

Despite expectations of an 84,000 increase, payrolls only rose by 29,000 in September. There was a 60,000-job reduction from the overall count due to revisions to earlier months, and the unemployment rate also rose to 4.2%.

That is why the Federal Reserve is so divided.

It is necessary to proceed cautiously due to the poor employment situation and moderate pay growth. There should be serious thought given to the possibility of inflation caused by energy-related variables.

The Fed's predictions show how the tension is underlying. By the end of 2026, 16 out of 18 authorities expect an additional increase, with a median rate of 4.1% anticipated for both 2026 and 2027.

As a result of September's 25 basis point hike, the current funds rate ranges between 3.75% and 4%.

What the Fed Will Do

The committee made an effort to discourage market action in October two weeks ago.

Both John Williams, president of the New York Federal Reserve, and Philip Jefferson, chair of the Federal Open Market Committee, said in their addresses that the Fed can assess the economy before imposing another rate hike.

Williams said he doesn't see any reason for rises in 2027, but he does expect one more before year's end.

The CPI print assessed that recommendation.

In the wake of the announcement, estimates on the probability of an October hike differ substantially across sources.

32.7% of CME FedWatch was a change from 21.6%. It was 55% according to one Kalshi reading. After soaring to 55%, futures have since leveled down around 40%.

The story is crystal clear, as seen in the spread: the participants are clearly lacking in confidence. The market is expecting the Federal Reserve to wait until December to make any changes, and they expect no changes in October.

At the current price point, we should expect at least two more rate hikes by the year 2027.

There is a more aggressive trend than what Williams has projected, as seen by the 93% probability that rates will conclude 2027 at least 50 basis points higher, according to futures.

Currently, the bond market is reacting to this disparity between market price and central bank direction.

Any shift in Warsh's tone, which has been cautious in providing forward direction, might cause prices to fluctuate quickly.

Bonds Are the Transmission Channel

Reactions in the Treasury market were more noticeable than in response to Fed-set prices. The 30-year yield hit 5.59%, while the 10-year yield jumped 6 basis points to 5.278%.

The Nasdaq and the Russell 2000 both fell about 2% at the same time. This model has been around for a while. A 22-year high was hit three weeks ago by the 30-year at 5.47%, and the 10-year reached its highest level since 2007.

Interest rates for 30-year mortgages increased to 7.37%.

Instead of a decline, the report said that rates had gone up due to the Treasury's bond buyback program.

A fundamental problem arises for risk assets when the risk-free rate exceeds 5%.

This is because the opportunity cost of holding holdings that do not generate cash flow grows.

In this setting, the long end is important because it adjusts not just according to the policy trajectory but also to the credibility of inflation.

Crypto: Contained Reaction, But Fragile Positioning

The effect was small at first. The story caused Bitcoin's price to fall to around $81,926 and gold's to fall to around $4,079 per ounce. Along with $331 million in liquidations, it hit an intraday low of about $81,500; long positions accounted for 82% of those. Ethereum fell below $2,500.

The decline is less important than three other indicators.

To begin with, Bitcoin is not protecting consumers from price increases. Yields went up while Bitcoin and gold went down at the same time after the inflation data.

Instead of viewing them as stable investments, the market is treating them as liquid assets. Real yields take center stage, and the hedge story falls flat. Trades in exchange-traded funds have changed.

The US spot Bitcoin ETFs saw their biggest weekly withdrawal since June and the end of a three-week stretch of inflows during the week of October 5–9. The outflow was around $681 million. There was an extra loss of $542 million in Ethereum exchange-traded funds.

With around $175.6 million poured into Bitcoin ETFs on October 13, a significant comeback was witnessed. Having said that, it was before the surprise increase in the CPI.

The technical map has limitations. The price of Bitcoin has been very volatile, ranging from $82,500 to $83,400. About $79,664 is the present daily Supertrend support level. If the price drops below $80,000, the range that has been maintained all month long would be broken.

In his statement made the day before the CPI, Strategy chairman Michael Saylor said that Bitcoin hit a bottom of little under $60,000 and that a new bullish trend has begun.

But the pattern has failed to confirm anything on that.

Furthermore, there is a regulatory worry: substantial ETF outflows occurred in mid-September as a result of the Senate's failed cloture vote on the Clarity Act.

Scenarios Into the November 3 Election and Beyond

Base case: Consolidate in October and ramp up in December. Even if yields are high, Bitcoin's value ranges from $80,000 to $87,000, and ETF flows follow the 10-year.

Hawkish case: Either a Fed hike in October or a message from Warsh and the 10-year surges close to 5.5%. That will result in a saturation of long holdings and increase the likelihood of liquidation as a fall below $80,000 becomes more likely.

Relief case: With falling oil prices, core inflation levels down.

An easing of tensions in the Hormuz region will initially affect longer-term rates, which in turn will lead to a decrease in energy prices.

An October core figure that is below expectations, followed by the next CPI release on November 10, would provide the best chance for a relief bounce.

The central bank's decision to raise interest rates is not likely to alleviate the supply interruptions caused by the conflict.

Its capacity to shield rents and profits from the shock's long-term effects is its possible strength.

The bond market projected a 5%+ leeway, but the labor market fall suggests the committee has less room to maneuver.

The direction that Bitcoin prices take will be determined by the outcome of that discussion.