Erik Swarts | Mar 01, 2015 12:16AM ET
Not surprising - considering the surge in the dollar since last summer, headline CPI for January posted its biggest drop since 2008 last Thursday, falling 0.7% in January. Core CPI, however, exceeded expectations and rose 0.2% last month.
The chart below that we've shared since last fall , shows U.S. 3-Month Treasury yields less headline and core CPI (hashed), which has closely trended with the dollar - except with a lag of several months. Despite the rise in February in core CPI, we expect to see more soft inflation data as the move in the dollar is further absorbed downstream.
That said, we still view the reversal in gold last fall as a leading indicator of the inflation vane shifting north and look back at the more acute 2008/2009 deflationary impulse for reference - which also saw precious metals leading the pivot in the dollar and inflation expectations.
This time around, the cycle has been more gradual, broader and shallower - but unfurling with similar dynamics between markets and asset classes. All things considered, we still very much like the prospects for gold and Silver this year.
The euro, however, appears poised to follow the current uptrend in U.S. 10-year yields and out of a trough low that's been tested over the past month. Similar to the lagged affect on yields from QE in the U.S. in late 2008, we expect the measures introduced by the ECB last month to begin to buttress European yields and the euro in March.
Outstanding of the oil crash in 2008, we have also closely followed the markets in relation to the supply driven decline in oil in late 1985 into 1986, which was primarily driven by a sluggish global economy while non-OPEC North Sea oil countries had increased production. Although there are similarities to what North American shale production has contributed to the global supply of oil, the 1985/1986 time period has been on our radar for years as a prospective mirrored shoulder in the pattern below of the SPX:Oil ratio.
Moreover - and quite dissimilar to 1985/1986, we feel the current move has been primarily driven by the currency markets, although there are similarities in monetary policy that helped fuel the rebound in oil in the back half of 1986.
While it was the Fed that eased aggressively in the first half of 1986, today it's two of the other major players in the balance of the global economy (Europe, China) that are loosening policy that should support a rebound in oil - as well as those markets that have contributed and correlated with its decline. E.g. - the euro and European yields.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.