BIT Research: Bitcoin up 22%, gold up 9.4%—will the Federal Reserve ignite a Q4 rally?

After the US debt scale surpassed 4 trillion USD, Bitcoin began to rise, while the US Treasury yield approaching the psychological level of 5.0% has also become another important variable attracting market attention. Since July 24, Bitcoin has increased by 22%, gold by 9.4%, and the performance of hard assets in the current macro environment has started to strengthen further.

Meanwhile, the macro cycle is in the first stage of cyclical reflation, usually accompanied by a weakening US dollar and rising commodity prices. Historical data shows that in this environment, the annualized return of US stocks is about 29%, gold about 47%, and Bitcoin reaches 73%. The key variable for the market going forward will be whether the Federal Reserve will raise interest rates at the policy meeting on September 16.

Probability of a rate hike in September remains limited: A pause by the Federal Reserve may create room for a rebound in risk assets

Although Federal Reserve Chairman Walsh expressed a willingness to raise rates, the weakening dollar and simultaneous bond sell-off with rising yields still point to a reflationary environment. Current market pricing shows that over the next 24 months, cumulative rate hikes are equivalent to about 3.1 increases of 25 basis points each. If the Federal Reserve initiates a rate hike in September, following the historical pattern of consecutive rate adjustments, the probability of another hike in October will also rise, and by then, the US midterm elections will be less than a week away.

There are still internal disagreements within the Federal Reserve regarding policy direction. Walsh believes current inflation remains too high, while Federal Reserve Governor Waller favors keeping rates unchanged. Influenced by these statements and economic data, the probability of a September rate hike once fell from 58% to 42%, and then rebounded to around 50%. Historically, the Federal Reserve usually only takes action when market expectations of a hike rise to about 85%, so the current likelihood of a rate increase remains relatively limited.

However, inflation remains the biggest variable. Inflation models indicate that the latest data may exceed Wall Street economists' expectation of 3.4%, and the ISM Non-Manufacturing Price Index, which typically leads CPI by about six months, has also begun to show signs of rising again. Even so, a single inflation reading above expectations may still not be enough to prompt an immediate rate hike by the Federal Reserve. If the FOMC ultimately keeps rates unchanged, rate-sensitive assets such as gold, Bitcoin, and stocks are likely to see a relief rally.

Asset repricing in the era of reflation: Technology stocks, gold, and Bitcoin outperform

The current inflation environment is already significantly different from 2008–2020. At that time, the average annual US inflation rate was only 1.61%, but it has now risen to 4.11%; meanwhile, money supply growth remained around 6%, while US debt growth held at around 8%. In this environment, whether one can outperform inflation, money supply, and debt growth simultaneously has become an important consideration for asset allocation.

From a historical perspective, between 1975–2008, the annualized return of US stocks was 9.0%, dropping to 5.7% from 2008–2020, but has risen to 18.3% since 2020. However, returns are highly concentrated in certain asset classes, with technology stocks performing prominently and gold also posting strong returns, while Bitcoin has outperformed all other asset categories. Merely tracking the S&P 500 (SPY) is no longer sufficient to cover the structural divergence in asset performance during this cycle.

Overall, the Federal Reserve's September policy meeting will be a critical test for determining the market trend in the fourth quarter. The probability of a rate hike priced by the market is about 60%, still lower than the historical level of over 80% when the Federal Reserve usually takes action. If the Fed chooses to keep rates unchanged and inflation does not further exceed expectations, the policy window could be extended at least until the next meeting on December 9, giving risk assets room to move higher in the short term. Meanwhile, from a seasonal perspective, corrections in September and October often provide more attractive entry opportunities, and risk assets typically regain upward momentum in the fourth quarter.