Inflation Indicator Breaks Support, Continues To Fall
Chris Kimble | May 31, 2017 10:08AM ET
The economy continues to do well, along with the stock market, prompting many to worry about inflationary pressures picking up speed. Below looks at the TIP—TLT ratio and the message it is sending about inflationary pressures, or lack of.
Since 2011, this inflationary indicator has continued to create a series of lower highs, inside of the red shaded channel above. As noted in the chart, the indicator actually hit a low last July and started pushing higher. At the time of the low in this indicator at (1), nearly 90% of bond investors were bullish and few thought the Fed would raise rates. That was a crowded trade that did not go well for bond bulls, as bonds fell hard and rates pushed sharply higher.
Fast forward 10 months, and the majority feel like the Fed will raise rates in June. Does the indicator agree with the crowd at this time? The TIP:TLT ratio hit 6-year falling channel resistance at (2) in March of this year and the ratio has continued to slip lower. The weakness of the past 6 weeks has the ratio breaking below rising support at (3).
Was the rally in this ratio at (1) a signal that inflation is back or was it nothing more than a counter-trend rally in a continuing downtrend? If inflation is really back, one would need to see this ratio reflecting strength and breaking out of its 6 year falling channel.
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