Inflation fears re-emerge
A higher-than-expected producer price index (PPI) this week re-ignited inflation fears. While CPI measures the price of goods and services consumers pay, PPI measures the same for producers. The monthly measure came in at +0.7% month over month in January, significantly higher than the 0.4% estimate. As inflation readings have been coming down throughout the latter part of 2022, markets have shifted focus to recession worries. However, this reading re-ignited fears that inflation is far from over. As a result, interest rates rose, and markets repriced any probability of interest rate cuts by year-end. We have written about inflation being a stickier problem than we are used to, and this reading was certainly a wake-up call to those that thought we were going back to the low/no inflation environment any time soon. With the price of energy down significantly and housing rolling over, the increase in goods this month has grabbed everyone’s attention.
5% risk-free rates
The yield on the 6-month Treasury Bill crossed 5% for the first time since 2006. Related to the above inflation news, interest rates rose across the curve, with the highest rates for 4-month - 1-year treasury bills. It has been a very long time since you can earn 5% a year without taking much risk. As we have written about before, higher rates change the valuation calculation for all assets, and for the time being, this seems to be the new normal.
New crypto regulations
The SEC proposed new regulations for crypto assets by including them as part of the custody rule for registered investment advisors. The SEC already requires that registered investment advisors must maintain proper custody of client assets. Until now, it wasn’t clear if this rule applied to cryptocurrencies. The SEC seems to be playing catch-up after some spectacular collapses of crypto firms in 2022. This rule, while a small step in the right direction, is far from the clarity that is needed. Ironically, Bitcoin rallied to 6-month highs during the week.