Conclusion: As we have seen repeatedly throughout history, stability in the U.S. Dollar is acting as a governor on the slope of inflation expectations. As such, we have sold our long position in TIPS.
Virtual Portfolio Positioning: Sold our long position in the iShares Barclays TIPS Bond Fund (TIP).
Yesterday afternoon, Keith sold our long position in Treasury Inflation Protected Securities on the strength of a TRADE line breakdown amid signs of stability in the U.S. Dollar Index, our leading indicator for the slope of intermediate-term inflationary pressures. Conversely, a breakdown of the DXY through its TREND line would, once again, get us increasingly hawkish on the intermediate-term slopes of domestic and global inflation readings.
Fundamentally, USD stability acts as a governor on global food, energy, and raw materials prices, and, as a result, a governor on global producer and consumer prices due to the marginal decrease in supply-chain pressures. Particularly in the U.S., given that there is “slack in the labor markets” and that “capacity utilization remains subdued” (to borrow the Fed’s own lingo), the only thing really moving the dial on domestic PPI and CPI readings is the purchasing power of the U.S. dollar and its impact on price-setting across global commodity markets.
Further, increased clarity in the Republican primary has also been interpreted as dollar-bullish, because it inches consensus one step closer to the generational debate about debts, deficits and monetary policy that we expect to come alive in the months leading up to the general election.
All told, keep your eyes on the aforementioned quantitative levels, as the slope of inflation expectations continues to be the driving force of asset prices globally – a relationship we attribute to investors favoring the reflationary effects of easy monetary policy in the absence of true underlying economic growth momentum and improving fundamentals.