Inflation pressures are easing and Elliot Clarke summarizes Westpac’s outlook for US inflation as follows:
This week we decompose the Personal Consumption Expenditure (PCE) deflator to assess what inflation pressures currently exist and how they are likely to develop. The conclusion is that the inflation picture argues for an extended period of extremely accommodative policy settings and it may even serve to delay the timing of the initial interest rate increase well beyond the timeframe currently envisaged by markets.
Soft treasury yields, a weak dollar and weaker gold price tend to support this view.
Interest Rates and the Dollar
The yield on ten-year Treasury Notes is ranging in a narrow band between 2.60 percent and 2.80 percent. Breakout above 2.80 would indicate an advance to 3.50 percent* — confirmed if there is follow-through above 3.00 percent — but declining 13-week Twiggs Momentum continues to warn of weakness. Breach of primary support at 2.50 percent is as likely and would signal a primary down-trend.
* Target calculation: 3.00 + ( 3.00 – 2.50 ) = 3.50
The Dollar Index is testing medium-term resistance at 80.50. Breakout would suggest that a bottom is forming, but only recovery above 81.50 would signal a trend change. 13-Week Twiggs Momentum oscillating below zero, however, is typical of a primary down-trend. Breach of primary support at 79.00 would signal a decline to 76.50*.
* Target calculation: 79.0 – ( 81.5 – 79.0 ) = 76.5
Gold and Silver
Silver failed to imitate gold’s performance in the first quarter and is headed for a test of primary support at $19/ounce. 13-Week Twiggs Momentum likewise failed to cross to above zero, suggesting continuation of the primary down-trend. Breach of primary support would offer a target of $16, while respect of support would test resistance at $22/ounce.
Spot gold is undergoing a strong correction, having breached the rising trendline and support at $1320/ounce. The outlook remains bullish, but breach of primary support by Silver or continued decline of 13-week Twiggs Momentum below zero would negate this. Failure of primary support at $1200 is unlikely, but would offer a target of $1000/ounce*.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
Copper
Copper is a commodity rather than a precious metal, but is also used as a store of value. At present, copper is testing long-term support at $6800/tonne. Follow-through below $6600 would signal continuation of the primary down-trend to $6000/tonne*. Recovery above the descending trendline (at $7000) is unlikely, but would suggest that a bottom is forming.
* Target calculation: 6750 – ( 7500 – 6750 ) = 6000
Dear Colin,
Soft Treasury ( No treasure there,and has not been for quite some time) Yields,….A weak dollar ( One of average economic acumen could only assume a longer term weaker US dollar)…and a weaker gold price (maybe short term,although if the first two are right,this is surely an anomaly)…all three are surely a contradiction in terms,economically or just plain not so common sense.
Regards,Jay Towner.
Your point being that weak gold and treasury yields are normally synonymous with a stronger dollar?
Yes this is true,although my belief is the opposite is true,weak yeild + weak dollar should equal robust gold price,yes sometimes everything is out of kilter as in 2007 and beggars belief…Weak gold,weak dollar and weak treasuries is an anomaly and quite likely is a forebearance of global depression,if that is the case gold will be weak initially,then rebound ??
Or the Dollar could strengthen, leaving weak yield and weak gold, but there are many other factors that can influence demand for the three.
Yes,a strong dollar is a possibility if a global slow down occurs,this does happen in a panic…maybe the three stagnate ?
Colin,there is a lot of discussion on the great armwrestle going on bewtween inflation and deflation..the feds are printing..the private sector is deleveraging,well the greybeards are at least…What of a scenario of protracted stagnation ? The arguement for strong US dollar in A) – Safe cove in global panic, B)- deleveraging baby boomers reduce the supply of dollars making them more valuable…so strong dollar,strong(manipulted) markets,weak gold..at some point,regardless of the boomer deleveraging,the feds print to the point of dollar destruction..then gold wins hands down.So I see a murky crystal ball,with as you say,many factors in play.
Domestic credit growth is between 4% and 5% p.a. Households are weaker, but still positive. So risk of deflation seems low.
Especially with M1 money stock growing at above 10% p.a.