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
Chart 1
10-Year Treasury Interest RateI 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 FundIn 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 ETFThis 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
DeereThe 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.
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