Inflation Pressures Falling
A composite indicator constructed from the trends in yields on the 10 year Treasury bond, gold and the CRB Index suggests that inflationary pressures have decreased. The indicator is shown in figure 1, a weekly chart of the SP500. I last discussed this indicator and its significance in this recent article.
Figure 1 SP500/ weekly
This indicator is not meant to be an oscillator type of indicator that rises and falls with prices. However, since 2010 or rather in this era of central bank intervention, inflation pressures (when the indicator is above the upper blue line) tend to coincide with intermediate term tops in the equity markets. See the gray vertical lines on the chart. Inflation pressures preceded the 2010 and 2011 market tops, and I have no reason to doubt that the current dynamics will be any different.
Furthermore, with the markets being highly correlated (thanks to central banker intervention), the indicator is falling rather precipitously and will likely end up at the low extreme level. Using nomenclature from the recent past, it appears the markets have entered a “risk off” phase.
Category: inflation
Hi Guy,
What about the indicator would suggest we’ve entered, rather than completed, a risk-off phase? Looking at prior dips, it looks more coincident than leading. Just curious – the market has barely budged on the revenue forecasts that have been coming in, making me think it’s just as likely to be short-term oversold and that we may see new highs. Just playing devil’s advocate here, because it doesn’t seem to want to break lower and overseas markets have shown some strength (typically risk-off has been correlated). I mean, I don’t want to own it here but there are plenty of bulls that do – and they have been right more than I have over the past year.
Thanks again for all the great perspectives you share.
Phil