If the Fed won’t stop its chronic ZIRP’ing, maybe the market will do it for them. Today the CPI (what most people think of as inflation) is indicated to have jumped per this Bloomberg report.
Equities fell earlier today as data showed the cost of living in the U.S. rose more than forecast, reflecting broad-based gains that signal inflation will move closer to the Fed’s goal. The consumer price index increased 0.4 percent, the biggest advance since February 2013, after climbing 0.3 percent the prior month.
“Probably the most troubling number for investors is the CPI number,” Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which oversees $65 billion in assets, said by phone. “Both numbers put those inflation readings around the Fed’s target policy of 2 percent. That to me suggests that the Fed, in looking at that, could say we run the risk of inflation being hot and could suggest pulling forward an increase of rates.”
Of course we have been viewing the ISM data (when ISM not screwing it up) every month and noting the pesky ‘prices’ component. Of course CPI was going to get a bump. The 2 year yield vs. the 10 year has made a 1.5 year high at least partially in response to price pressures.
This is by the way not a configuration that is friendly for gold. At least that used to be the case before policy makers became so aggressive in meddling with the system. Now, I wonder how many indicators are going to act exactly as they did before the steady diet of ZIRP, QE’s 1, 2 & 3 and all the other stunts being pulled in the US and around the globe. But stand alone and at face value, short rates rising faster than long rates is not usually friendly for gold.
It may or may not be unfriendly to the stock market. I think the market is going to stand or fall more on its own merits for a while, because it usually does not start to decline at the beginning of a rate hike cycles. But again there too, what is “usually” about the current environment?
Guest Post by Michael Ashton
The recent, aggressive ECB ease, combined with some mild Fed growls about increasing rates “at some point,” ought to be good news for the dollar against the Euro. And so it has been, although as you see in this weekly chart (source: Bloomberg) the weakening of the Euro has been (a) mild and (b) started more than a month before the ECB actually took action. (Note that the units here are dollars per Euro).
Nominal TIP bottomed in September and has gently risen (in stops and starts) since. TIP’s ratio to TLT is a better indicator of when inflation expectations are becoming acute in my opinion because it backs out the overall up move in T bonds.
TIP-TLT by daily view is in a ‘W’ bottom stance with positive divergence. Hey, it’s a start for the inflationistas.
Per just a few of the many charts included in this morning’s ETF update for subscribers… Inflation?
Not according to TIP-TLT (inflation protected vs. unprotected T bonds)…
Not so much, according to the commodity fund DBC, which may be breaking down from a little bear flag (which was noted in this morning’s update, pre-breakdown…
Another NFTRH 287 excerpt…
It’s a busy I chart, I grant you. But these are my favorite charts because in their busy way they try to tell stories. The story told by TIP (Inflation protected Treasury bonds) vs. TLT (regular long-term T bonds) is not one of inflationary concerns. Quite the contrary, TIP-TLT shows a break down in inflation expectations.
The gold ‘community’ does not publicize this because it is antithetical to the fundamental they most often tout for gold (inflation). In the short-term, a deflationary bout may indeed be a negative. But in the longer-term, a failing ‘inflation trade’ would be what eventually builds stronger fundamentals for the sector. Again, economic contraction (with gold rising not necessarily in nominal terms but in relation to most everything else) is what the sector needs. Moderate the inflation hysterics.
The above picture would be positive for US stocks if it results in a continued Goldilocks atmosphere, but last year Goldilocks held sway with TIP-TLT gently rising but muted. It is debatable how well she would do if this indicator of deflationary pressure keeps dropping.
Guest Post by Steve Saville
Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 13th April 2014.
On the US monetary inflation front, the news is that there isn’t much in the way of news. As depicted below, the year-over-year rate of TMS (True Money Supply) growth hit a 5-year low of around 7% at the end of last year and has since edged a little higher.
There are only two ways that money can be added to the US money supply. The first is via Fed asset monetisation, which is how most new US dollars have come into existence since September of 2008 and how almost all new US dollars came into existence last year. The second is via commercial-bank credit expansion. This is how almost all new US dollars came into existence for decades prior to September of 2008.
Much like the ISM manufacturing data, ISM services shows a creep going on in prices. With the economy continuing on what I view as strong footing (I know, I know… it’s gonna fall apart any day now… well tell that to the Semiconductors) for the near term, it continues to look like 2014 could feature an increasing ‘inflation concerns’ element as people start to get anxious about some persistently rising prices. Employment is up significantly as well.
ISM non manufacturing data
The TIP-TLT ratio has been in decline from a resistance point since late last year. The ratio tends to generally rise and fall with inflationary and deflationary concerns, respectively.
That little bump up (that ended up failing at the trend line) was probably in line with the explosion in certain outlier commodities like Agriculturals. People need to eat food after all. But the Fed’s introduction to the discussion of a Fed Funds rate hike out in the 2015 distance (“you know, that sort of thing”) has wrung any inflation concerns right out of this market.
A great gig they have going; with ZIRP intact indefinitely they continue to inflate, but with a few words, the market gets right back in line and in full servitude mode.
This morning’s article at MarketWatch, How Yellen’s gamble screwed up gold has some content that is right on the money. Specifically about rising ‘real’ interest rates being bad for gold. They are, no ifs ands or buts.
But then it goes off course, just like so many people who manage gold’s price for the wrong reasons. The whole concept that Yellen did something ‘wrong’ as applies to gold is off base. The old Velocity of Money and Deflation arguments come into play as well…
- We want more inflation; it’s better for the economy
- Taper continues as expected, it’s a non issue [my view]
- We don’t dare mess with ZIRP…
The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Full statement from FOMC
The HUI Gold Bugs index got Ukrained to the extent that global crisis hype seeped into this market leading into the weekend. The S&P 500 got Ukrained the other way as people actually acted as if the Crimea question is a macro fundamental.
I think after today the books are square on Ukraine but not yet the FOMC meeting, which will provide another hype opportunity. Will they or won’t they ruminate about an eventual hike to the anti-Grandma Fed Funds rate, AKA ZIRP?