Market Commentary | 01.10.

Market Commentary provides a recap of the week's key events and offers insights from DeSpread Research on future points of interest. In the January 10th edition of Market Commentary, we will delve into the causes and developments of inflation concerns that have driven market volatility.

1. Markets Struggling with Extreme Volatility, Inflation Concerns Surface

In the second week of January, the cryptocurrency market faced significant challenges due to extreme volatility. On January 6, Bitcoin's price surged approximately 4.7%, climbing from $97.9K to a peak of $102.5K in a single day. However, a sharp downward trend began the following day, leading to a steep drop by January 8. On Wednesday, Bitcoin hit a low of $92.5K, reflecting a nearly 10% decline. This volatility appears to be closely tied to growing inflation concerns regarding the U.S. economy as the Trump administration prepares to take office. Below, we will delve into the key causes of this volatility.

1.1. Indicators and Inflation Concerns

The primary causes of the market crash on January 8 were linked to the release of two key economic indicators:

• ISM Services PMI*: Forecast: 53.5 / Actual: 54.1
• JOLTS Job Openings** : Forecast: 7.73M / Actual: 8.1M

*ISM Services PMI: A measure published by the Institute for Supply Management (ISM) to gauge the economic health of the U.S. service sector.
**JOLTS Job Openings: A monthly report by the U.S. Department of Labor that tracks the number of job openings in the country.

Both indicators, which are critical in assessing the state of the U.S. economy, exceeded market expectations and pointed to an expansionary phase in the economy. However, rather than fueling optimism for continued bullish momentum in asset markets, these results heightened concerns among market participants about inflation, which could escalate further under the Trump administration.

The inflationary fears in the market were ignited by Trump’s proposed policies, which include:

• Tariffs: Imposing a 10%–20% tariff on foreign goods to protect U.S. industries.
• Tax Reform: Cutting corporate tax rates from the current 21% to 15% and reducing taxes for high-income earners.

These policies gained further attention following comments made by Federal Reserve Chair Jerome Powell during the December FOMC meeting.

"When forecasting interest rates, Fed members took into account President-elect Trump’s policies. Some members noted that policy uncertainties (under Trump's second term) add to inflation uncertainties."
— Chosun Ilbo, excerpt from "Powell Clashes Twice Over Trump's Second-Term Policies"

Powell's remarks, coupled with the FOMC’s hawkish stance on interest rates, triggered a significant market reaction, resulting in Bitcoin’s sharp decline of over 10%, leaving a notable impact on the market. For a detailed analysis, refer to “Market Commentary | 12.21.”

1.2. Realization of Inflation Concerns: Bond Yield Shock

Concerns about inflation materialized during the U.S. 10-year Treasury bond auction, which took place at 3 a.m. (KST) on the same day. The auction involved the issuance of $39 billion worth of 10-year Treasury bonds, with a bid-to-cover ratio of 2.53x, a decline from the previous month’s 2.70x. The issuance yield reached 4.68%, marking the highest level since August 2007 (source).

This indicates a decline in the price of long-term U.S. Treasury bonds, reflecting reduced demand for such bonds. In other words, it can be interpreted as a signal that the market holds a negative outlook on the future value of the dollar due to rising inflation.

The disappointing results of the U.S. 10-year Treasury bond auction were immediately reflected in the market, causing a significant increase in the 10-year Treasury yield. On January 8, the yield briefly surged to as high as 4.72%.

The rise in long-term Treasury yields increases the returns on risk-free assets, which acts as a negative factor for the risk asset market. This development led to a sharp market decline and served as a key backdrop for the aforementioned market volatility.

Currently, the U.S. 10-year Treasury yield stands at approximately 4.7%, a level similar to that seen in April 2024. Additionally, there is ongoing market speculation about the possibility of yields rising to the 5% level recorded in October 2023.

1.3. Current Status and Future Outlook

The cryptocurrency market has enjoyed a positive outlook, buoyed by the pro-crypto stance of President-elect Trump. Following the U.S. presidential election, Bitcoin's price surged by 50% in a short period, reflecting the market's optimism.

However, as of January 2025, with Trump's inauguration imminent, the economic environment surrounding the incoming administration is becoming increasingly uncertain. This growing uncertainty is contributing to heightened market volatility.

The reasons why the cryptocurrency market cannot be viewed with unbridled optimism following the launch of the Trump administration include:

• Inflation concerns and limited justification for stimulus measures.
  • The current U.S. GDP growth rate is around 3%, indicating a robust economic environment that provides little justification for further stimulus.

• The U.S. national debt has reached an all-time high, and the proposal to abolish the debt ceiling, which Trump advocated during the drafting of the 2025 temporary budget, was rejected.

• The S&P 500, representing the U.S. stock market, has risen by nearly 60% since January 2023, leading to interpretations that the market is overvalued.
  • Current S&P 500 PE Ratio: 30.2
  • Previous Peak: 35.96, recorded in January 2021

• Trump has been showing a strong commitment to implementing his tariff policies, which are expected to have a direct impact on inflation.
  • While The Washington Post reported that these policies might apply to a narrower scope than initially anticipated, Trump has personally dismissed such possibilities (source).
  • Meanwhile, there are reports that the administration is considering declaring a "national economic emergency" to implement universal tariffs (source).

These factors, combined with positive expectations for the economy and asset markets following Trump's inauguration, are amplifying uncertainties within the market. Notably, the scheduled release of economic indicators prior to Trump’s inauguration is likely to act as a key trigger for market volatility.

As seen in the economic data released on January 8, favorable indicators are paradoxically fueling inflation concerns and negatively impacting asset markets—a phenomenon often referred to as "The good is bad" This trend is expected to persist in the short term, adding to the unease among market participants and making it increasingly difficult to predict the direction of asset prices.