Correlation Between Crypto Market and Nasdaq Turns Positive Ahead of US CPI Release

Observers expect Tuesday's U.S. CPI report to show continued disinflation in the world's largest economy.

AccessTimeIconFeb 13, 2023 at 10:27 a.m. UTC
Updated Feb 13, 2023 at 3:37 p.m. UTC

The correlation between the crypto market and the tech-heavy Nasdaq equity index has turned positive, indicating the digital asset investors' renewed focus on risk appetite on Wall Street.

The 90-day correlation coefficient between the crypto market's total capitalization with Nasdaq has risen from -0.12 to 0.74 in four weeks, reaching the highest since early November, according to data sourced from charting platform TradingView.

In other words, the crypto market is again moving in tandem with technology stocks. On days when technology stocks trade higher, cryptocurrencies, including bitcoin (BTC) and ether (ETH), are likely to do the same. Conversely, a decline in technology stocks could drag the crypto market lower.

Speculation that Federal Reserve would resort to rate cuts later this year is perhaps behind the renewed correlation between the liquidity-addicted risk assets. The long-held positive relationship had crumbled in November, thanks to the spectacular collapse of Sam Bankman-Fried's FTX exchange that saw crypto investors dump their tokens despite the risk reset on Wall Street.

Correlation is determined by comparing the returns or general movements of two assets or products over a specific period. A correlation close to 1 suggests the two assets are moving in lockstep, in the same direction. Meanwhile, a negative correlation means the two assets move in opposite directions.

The renewed positive correlation implies increased sensitivity of cryptocurrencies to factors affecting stock markets like the U.S. CPI release. (CoinDesk/TradingView)
The renewed positive correlation implies increased sensitivity of cryptocurrencies to factors affecting stock markets like the U.S. CPI release. (CoinDesk/TradingView)

The renewed positive correlation implies increased sensitivity of cryptocurrencies to macroeconomic data releases like the U.S. consumer price index (CPI), which injects volatility into stock markets. The CPI days were among the most volatile for U.S. stocks last year, according to MarketWatch.

Tuesday's U.S. CPI report from the Bureau of Labor Statistics is likely to show the annualized inflation declined to 6.2% in January from December's 6.5%, according to Reuters estimates sourced from FXStreet. The core CPI, which excludes the volatile food and energy component, is forecast to drop to 5.5% from 5.7%.

A better-than-expected figure could dash hopes for the so-called Fed pivot in favor of easing, pushing technology stocks and cryptocurrencies lower.

"Tuesday's CPI release is going to be a big number. Should CPI come in higher than expected, given the massive [non-farm payroll] surprise recently seen, this could prove quite bearish for risk assets," crypto services provider Amberdata's Gregoire Magadini wrote in the weekly newsletter published Sunday.

Per Andreas Steno Larsen, founder and CEO of Steno Research, the CPI data is likely to come in softer than expected. That would bolster the Fed rate cut hopes.

"Based on our models and indicators – leading as well as lagging – we project the print to come in in the neighbourhood of 6.1% and 5.3% for headline and core, respectively," Larsen said in a note sent to subscribers last week.

"Wages have decelerated in all meaningful forward-looking gauges, while housing is printing at extremes relative to reality in the CPI, meaning that we see a larger downside risk/reward in core relative to headline," Larsen noted, while forecasting positive contributions from energy component, prices for goods, including used cars, and fatigue in good prices.

The total crypto market capitalization recently rose to a six-month high of $1.06 trillion and stood at $948 billion at press time, representing a 25% year-to-date gain. Nasdaq has gained 12% this year.


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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.