Fears of US stagflation will rekindle as Bitcoin and Ether fall

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The U.S. economy experienced a sharper-than-expected slowdown in the first quarter of 2024, with gross domestic product (GDP) contracting at an annual rate of 1.6 percent, according to the Commerce Department. That would mark the weakest pace of growth since the economy contracted in the second quarter of 2022 and fell short of the 2.2% forecast by economists in a FactSet poll.

The slowdown in economic growth can be attributed to a number of factors, including a sharp increase in imports, a decline in private sector inventory investment, and a reduction in government spending. Consumer spending, which accounts for the largest share of economic output, slowed earlier this year but continued to grow in the first quarter.

The weaker-than-expected GDP reading raised fears of higher inflation and lower economic growth. This led to a decline in risk assets, with the Dow down 500 points at the opening bell, the S&P 500 down 1.3%, and the Nasdaq Composite down 2%.

Despite the economic slowdown, the Federal Reserve appears to be in no rush to cut interest rates. Inflation slowed significantly last year, but the rate of decline has stalled in recent months. Once the Fed confirms that inflation is under control and on track to reach its 2% target, it will start cutting rates. However, if the economy suddenly collapses, the central bank may slow down faster than expected.

The latest GDP reading did some damage to the narrative that the U.S. economy may be overheating, which could change the Fed's timetable for starting its rate easing cycle.

Quincy Crosby, chief global strategist at LPL Financial, says the first reading of Q1 GDP suggests July could bring the start of a modest contraction.

The crypto market, which is sensitive to macroeconomic developments, has been influenced by renewed US inflation concerns. Bitcoin, the leading cryptocurrency by market value, was trading around $62,400 at press time, down 2.5% in 24-hours. Ether (ETH) traded 3% lower at $3,200.

The market appears to be balancing the risk of a slowdown against downside factors such as the Treasury General Account (TGA) and the launch of the Hong Kong Bitcoin ETF. However, the news that mainland Chinese investors will no longer be able to trade ETFs has dampened some of the hype around its launch.

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