Tag: Inflation

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Gold strengthens on Dollar weakness

  • Treasury yields weaken
  • The Dollar continues to test long-term support
  • Gold is strengthening

Interest Rates and the Dollar

The yield on ten-year Treasury Notes is again testing support at 2.50 percent. Failure would indicate a decline to 2.00 percent. Follow-through below 2.40 would confirm. Market expectations favor low interest rates and 13-Week Twiggs Momentum below zero continues to warn of a primary down-trend. Recovery above 2.65 is less likely, but would suggest the correction is over, offering a medium-term target of 2.80 and long-term of 3.00 percent.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

The Dollar Index tests short-term support at 80.00. Respect of zero by 13-week Twiggs Momentum warns of continuation of the primary down-trend. Breach of 80.00 would indicate a test of primary support at 79.00. Recovery above 80.50 is unlikely at present, but would suggest an advance to 81.50.

Dollar Index

Gold

Low interest rates and higher inflation expectations favor a stronger gold price and a weaker Dollar. Gold is consolidating in a narrow band below medium-term resistance at $1325/$1330, suggesting continuation of the rally. Breakout would signal a test of $1400. Recovery of 13-week Twiggs Momentum above zero hints at a primary up-trend; breakout above $1400 would confirm. Retreat below $1300 is unlikely, but would test support at $1240.

Spot Gold

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Gold rallies as inflation expectations rise

Overview:

  • Treasury yields are recovering
  • Inflation expectations rise
  • The Dollar weakens
  • Gold rallies

Interest Rates and the Dollar

The yield on ten-year Treasury Notes found support at 2.50 percent. Recovery above 2.65 would suggest the correction is over, offering a medium-term target of 2.80 and long-term of 3.00 percent. 13-Week Twiggs Momentum below zero continues to indicate weakness. Reversal below 2.40 would signal a decline to 2.00 percent* — confirmed if yield follows through below 2.40 percent.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

Long-term inflation expectations, indicated by 10-Year Treasury Yields minus 10-Year Inflation-Indexed (TIPS) Yields below, turned upward after 12-month CPI jumped to 1.8 percent in May, but are still range-bound between 2.0 and 2.50 percent.

10-Year Treasury Yields minus 10-Year Inflation Indexed (TIPS) Yields

The Dollar Index continues to head for primary support at 79.00 after retreating below 80.50. Respect of zero by 13-week Twiggs Momentum warns of continuation of the primary down-trend. Recovery above 80.50 is unlikely at present, but would suggest an advance to 81.50.

Dollar Index

Gold

Gold is testing medium-term resistance at $1325/$1330. Breakout would signal a test of $1400. Recovery of 13-week Twiggs Momentum above zero hints at a primary up-trend; breakout above $1400 would confirm. Retreat below $1280 is unlikely, but would warn of the opposite; confirmed if support at $1240 is breached.

Spot Gold

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Full Employment and the Path to Shared Prosperity | Dissent

Great summary of the current political gridlock by Dean Baker and Jared Bernstein:

There are many policies that can reduce inequality, but there is none as straightforward conceptually and as difficult politically as full employment. The basic point is simple: at low rates of unemployment, the demand for labor allows workers at the middle and bottom of the wage distribution to achieve gains in hourly wages, annual hours of work, and thus income.

Levels of unemployment are not the gift or curse of the gods; they are the result of conscious economic policy. The decision to tolerate high rates of unemployment is a choice. It is one that has enormous implications not just for the millions of people who are needlessly unemployed or underemployed but also for tens of millions of workers in the bottom half of the wage distribution whose bargaining power is undermined by high unemployment.

It is pretty obvious that low unemployment would enhance wage growth amongst middle- and low-income workers. But the policies to create low unemployment are not as clear:

  • Raising inflation to lower real interest rates would not get strong support in many quarters. It would seem that you are manipulating market signals to dupe business investors to act in a fashion that may not be in their long-term best interest.
  • Infrastructure spending is the key to a sound recovery, but beware of raising public debt to fund anything other than productive assets that can generate a market-related return (to service the debt).
  • The trade deficit is a big part of any solution. We need to penalize currency manipulators like China (Japan before them) for buying US Treasurys to suppress their exchange rate and undermine US manufacturers.
  • Job sharing is not a long-term solution, but it does enable unemployed workers to retain skills that would otherwise be lost.

    • Overall, an excellent summary of what needs to be done. But it omits one vital piece of the puzzle. How do we get politicians and interest groups to act in the best interest of the country rather than their own?

    Read more at Full Employment and the Path to Shared Prosperity | Dissent Magazine.

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Full Employment and the Path to Shared Prosperity | Dissent

Great summary of the current political gridlock by Dean Baker and Jared Bernstein:

There are many policies that can reduce inequality, but there is none as straightforward conceptually and as difficult politically as full employment. The basic point is simple: at low rates of unemployment, the demand for labor allows workers at the middle and bottom of the wage distribution to achieve gains in hourly wages, annual hours of work, and thus income.

Levels of unemployment are not the gift or curse of the gods; they are the result of conscious economic policy. The decision to tolerate high rates of unemployment is a choice. It is one that has enormous implications not just for the millions of people who are needlessly unemployed or underemployed but also for tens of millions of workers in the bottom half of the wage distribution whose bargaining power is undermined by high unemployment.

It is pretty obvious that low unemployment would enhance wage growth amongst middle- and low-income workers. But the policies to create low unemployment are not as clear:

  • Raising inflation to lift real interest rates would not get strong support in many quarters. It would seem that you are manipulating market signals to dupe business investors to act in a fashion that may not be in their long-term best interest.
  • Infrastructure spending is the key to a sound recovery, but beware of raising public debt to fund anything other than productive assets that can generate a market-related return (to service the debt).
  • The trade deficit is a big part of any solution. We need to penalize currency manipulators like China (Japan before them) for buying US Treasurys to suppress their exchange rate.
  • Job sharing is not a long-term solution, but it does enable unemployed workers to retain skills that would otherwise be lost.

    • Overall, an excellent summary of what needs to be done. But it omits one vital piece of the puzzle. How do we get politicians and interest groups to act in the best interest of the country rather than their own?

    Read more at Full Employment and the Path to Shared Prosperity | Dissent Magazine.

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Will Inflation Remain Low? | FRBSF

From Yifan Cao and Adam Shapiro at the Federal Reserve Bank of San Francisco:

The well-known Phillips curve suggests that future inflation depends on current and past inflation and a measure of economic slack or resource utilization. Using the unemployment gap to measure slack, a simple Phillips curve currently predicts that inflation will remain quite low through 2015. Two variations of the model, which impose a higher anchor for inflation expectations or focus only on a short-term unemployment gap, still predict that inflation will remain low, albeit higher than implied by the basic model.

Read more at Federal Reserve Bank San Francisco | Will Inflation Remain Low?.

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US inflation: Will the recent uptrend persist?

From Elliot Clarke at Westpac:

…it seems as though these price movements have not been driven by demand. This is particularly true for food services, which has seen growth in consumption volumes fall from 5.3% in November to –0.6% in May. Housing and utility demand has remained highly volatile, but there was no evidence of a ‘break out’ move in this component of personal consumption in early 2014, and growth has since slumped back to 0.2%. This is not to say that rents have not contributed materially to the level of housing inflation in recent years; more below.

This then points to an exogenous shock being to blame for the recent jump. Further, the coincident nature of the inflation uptrends for food and housing services alludes to a common cause: the cost of energy. The 6.1% gain in total PCE energy prices from April 2013 to May 2014 corroborates this belief. To the extent that shifts in energy costs typically prove temporary, this inflationary impulse will likely dissipate in coming months – leaving aside current geopolitical concerns.

Read more at WIB IQ – world-class thinking in real time..

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Yellen takes the heat out of gold

Janet Yellen held firm on the Fed taper and unsettled markets somewhat with her throwaway “6 months” remark.

The Fed said the change in its rate hike guidance did not mark a shift in its intentions and that it would wait a “considerable time” after shuttering its asset purchase program before pushing borrowing costs higher. Yellen, who had fielded numerous questions without a hitch, hesitated when asked what the Fed meant by “considerable.”

“I — I, you know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing. But, you know, it depends — what the statement is saying is it depends what conditions are like.” (Reuters)

That is not a firm commitment to raise rates any time soon. More like: “We are keeping our options open”.

The Dollar Index jumped, along with Treasury yields, but only 13-week Twiggs Momentum recovery above zero would indicate a trend change; confirmed if there is a breakout above 81.50.

Dollar Index

* Target calculation: 79.0 – ( 81.5 – 79.0 ) = 76.5

Spot gold retreated to support at $1320/ounce in response to the stronger Dollar. Breach of the rising trendline would warn of another test of primary support at $1200, while respect would signal another attempt at $1420/$1440.

Spot Gold

* Target calculation: 1400 + ( 1400 – 1200 ) = 1600

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Rude Awakening Awaits Western Economies | WSJ

Michael J. Casey at WSJ interviews HSBC group chief economist Stephen King, author of When the Money Runs Out: The End of Western Affluence:

Mr. King’s thesis….. is that we in the West are in line for a shock when we discover that the high-growth rates to which we’re accustomed aren’t coming back. In the U.S., we’ve been wrongly budgeting for a return to 3.5% average real growth rates that persisted through the second half of the 20th century — an affliction suffered by both policymakers and households that he calls an “optimism bias” — and yet even before the financial crisis destroyed trillions of dollars of wealth the economy was only clocking gains of 2.5% per year. Forget worrying about the post-crisis onset of a Japan-style “lost decade,” Mr. King says. “We have been through a lost decade already. ”Among the reasons for this long-term shift to a slower potential growth rate, he cites the exhaustion of a various one-off productivity gains that boosted growth after World War II: the entry of women into the workforce; the liberalization of world trade; a tripling in rates of consumer credit founded on an unsustainable increase in housing prices; and education. These gains are no longer to be had, he says, but policymakers are blind to that fact and so are burdening the economies of the U.S., Europe and Japan with long-term debts.

While I agree that we are unlikely to see a resumption of the rapid debt growth of the last 3 decades, this should contribute to lower inflation and greater stability, without a credit-fueled boom-bust cycle, that could partially offset the negative effects. I also question whether productivity gains are really exhausted, or if this is a temporary after-effect of low, post-GFC capital investment. There is ample evidence that the global economy is slowing and productivity gains will fall — if one is prepared to ignore evidence to the contrary such as the rise of automation, advances in genetics, nanotechnology, sustainable energy and slowing global population growth — which should alleviate the poverty trap that many countries are still in. The researcher has to beware of confirmation bias, where they gather data to support a preconceived opinion.

Read more at Horror Story: Rude Awakening Awaits Western Economies – Real Time Economics – WSJ.

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Blame del Pont for the nightmarish rise in Argentine inflation | The Market Monetarist

Lars Christensen cites MercoPress on hyper-inflation in Argentina:

Because of inflation, people collect their salaries and rush to turn them into foreign currency”, added the money traders…

He observes:

The collapse of the peso should be no surprise to anybody who have studied Milton Friedman. Unfortunately Argentina’s central bank governor Mercedes Marcó del Pont hates Milton Friedman, but she loves printing money to finance public spending.

Read more at Blame del Pont for the nightmarish rise in Argentine inflation | The Market Monetarist.

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