Getting Technical

Commodity Charts Suggest Inflation Is Nonexistent

Prices are still weak, suggesting interest rates are not going anywhere for a while.

By Michael Kahn

One look at the yield on the benchmark 10-year Treasury note tells us all we need to know about interest rates (see Chart 1). The trend is down, and so inflation is still just a memory from a long time ago.

Chart 1

10-Year Treasury Interest Rate

With Tuesday’s jump down, the 10-year yield seems to be on track to test its recent technical support at 1.65 (it traded at 1.758 Wednesday).

I admit I was in the scary inflation camp as the Federal Reserve carried out its quantitative easing plan, essentially printing money out of thin air. But the market rules, and the market was not worried. Perhaps demand for money from the economy was weak enough to offset inflationary pressures from the Fed’s efforts.

But that is for economists to ponder. On the charts of most commodities I see continuing declines.

Let’s start with the big two – oil and gold. I have written here that I thought oil had bottomed but was not ready for a bull market. Gold, while stronger than it had been, still has not confirmed a major bullish reversal. My opinions here have not changed.

What is surprising is that of the traded commodities I follow, only three – sugar, lumber and soybean oil – show any sort of bullish trend. Indeed, the trend in the PowerShares DB Agriculture fund remains stubbornly to the downside (see Chart 2).

Chart 2

PowerShares DB Agriculture Fund

The agriculture fund does not include lumber or soybean oil, but it does have nearly a 14% weight in sugar. Overall, it is more than 51% corn, live cattle, soybeans and sugar, with lesser amounts in wheat, hogs, cocoa, and coffee.

In other words, it tracks commodities without the heavy weighting of precious metals and energy found in other measures, such as the CRB Index. And the negative components far outweigh the positive. If we could track breadth statistics in commodities, the advance-decline line would point lower.

Agriculture-related stocks are not faring much better. While the Market Vectors Agribusiness exchange-traded fund rallied with the market this year, it started to lag in early March (see Chart 3).

Chart 3

Market Vectors Agribusiness ETF

Arguably, it has already broken down below the small rising trendline from February. Its relative performance line versus the Standard & Poor’s 500 definitely set a new low, and, in fact, is at a new lifetime low since it was first traded in 2007.

This is bad news for a broad swath of the market from fertilizer producers to big food growers. One stock that seems to be a tell on the group is Deere & Co, a maker of farm machinery and equipment. Unlike Caterpillar, which produces more of a mining and earth moving line, Deere shows its 2016 rally abruptly cut short as agricultural commodities started to fall (see Chart 4). Contrast that to Caterpillar, which is still near its 2016 highs as precious metals have improved.

Chart 4

Deere

The bright lights in the group are chicken producers Tyson Foods and Pilgrim’s Pride. The larger Tyson is up 20% since February and 50% since last November, so it is a bit overbought as an investment. Technicals show a tiring stock.

The bottom line is that commodities and commodity-related stocks continue to hurt, and we can infer that there will be no inflationary pressures for quite some time, at least from this part of the economy. That alone can keep downward pressure on interest rates. Right now it is hard to attribute the trend to demand for the safety of Treasury securities, because the stock market is holding on to its recent gains.

 

0 comentarios:

Publicar un comentario en la entrada