US stagflation risks are increasing due to tariffs and weak economic data, which could negatively impact both traditional and cryptocurrency markets.
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The US Services PMI for July dropped to 50.1, signaling slower growth in the services sector and increased inflation.
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Bitcoin and US stock markets declined amid stagflation fears, with analysts adjusting expectations for Federal Reserve rate cuts.
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President Trump’s tariff policies are creating stagflation risks in the US economy.
US stagflation risks are rising as tariffs and weak economic data hurt markets, leading to concerns for both traditional and crypto assets.
Economic Data Shows Warning of US Stagflation
The Institute for Supply Management reported disappointing services data on Tuesday. The US Services PMI for July came in at 50.1, below expectations of 51.5. While still above the 50 expansion mark, it dropped 0.7 points from June’s 50.8.
In short, the US service economy is still growing, but much slower than expected, and it’s dangerously close to shrinking.
The employment index fell to 46.4, down 0.8 points from the previous month. When this goes below 50, it means that businesses are cutting jobs, marking the lowest level since March. Conversely, the price index jumped 2.4 points to 69.9—the highest since October 2022. When this goes above 50, it means that prices are rising fast.
This combination creates stagflation, where fewer jobs exist while prices rise simultaneously. Policymakers face an impossible choice between fighting unemployment and controlling inflation.
For central banks, combating inflation requires rate hikes, while stimulating growth demands rate cuts. Both problems cannot be solved simultaneously. In stagflation, central banks may struggle to lower rates decisively.
More Signs of Stagflation Will Crush the Crypto Market
This backdrop weighed heavily on the US financial markets on Tuesday. The Dow Jones fell 61.90 points (0.14%) to 44,111.74. The S&P 500 dropped 30.75 points (0.49%) to 6,299.19. The Nasdaq declined 137.03 points (0.65%) to close at 20,916.55. Bitcoin also fell by approximately 1%.
After the July jobs report, expectations changed for Federal Reserve policy. Markets now expect two rate cuts this year instead of three. According to CME Group’s FedWatch tool, markets expect 25-basis-point cuts in September and October.
The probability gap between a rate hold and cut in December is just 2%. However, if stagflation signals strengthen, this gap will likely widen.
This issue could significantly impact crypto prices. Since Congress passed the GENIUS Act on July 18, Bitcoin has shown increasing sensitivity to economic data. Most altcoins have been tracking Bitcoin’s movement accordingly.
Frequently Asked Questions
What is stagflation?
Stagflation is an economic condition characterized by stagnant growth, high unemployment, and rising inflation. It presents a challenging scenario for policymakers.
How does stagflation affect cryptocurrency?
Stagflation can lead to decreased investor confidence, resulting in lower prices for cryptocurrencies as they become more sensitive to economic data.
Key Takeaways
- Stagflation risks are rising: Economic data suggests a slowdown in growth and rising inflation.
- Market reactions: Both traditional and crypto markets are showing declines amid these concerns.
- Policy implications: The Federal Reserve faces tough choices between rate hikes and cuts.
Conclusion
In summary, the current economic landscape indicates rising stagflation risks that could adversely affect both traditional and cryptocurrency markets. Investors should remain vigilant and adapt their strategies accordingly.
