We called falling inflation heading into the second quarter of 2017 (see Reflation's Rollover). And it's happening.
If you're looking for evidence of past peak in inflation, look no further than what happened last week in the commodities patch. Here are the callouts from Hedgeye CEO Keith McCullough in this morning's Early Look:
- CRB Commodities Index dropped another -2.1% week-over-week = down -2.5% in the last 6 months
- Oil (WTI) deflated another -6.3% week-over-week = down -2.6% in the last 6 months
- Gold corrected another -3.3% week-over-week = down -6.7% in the last 6 months
- Nickel declined another -3.3% week-over-week = down -9.4% in the last 6 months
- Orange Juice deflated another -7.6% week-over-week, crashing -23.0% in the last 6 months
- Sugar was down another -5.1% week-over-week = down -18.8% in the last 6 months
Why are commodities falling so precipitously?
Market-based measures of inflation have been falling throughout the year. Consider U.S. 5-year break-even inflation rate. The breakeven inflation rate is a measure of investor's future inflation expectations. It is calculated by taking the difference between the yield on a nominal bond and an inflation-linked bond of the same maturity.
Last week, the 5-year break-even inflation rate declined another -5 basis points to 1.76%, and is down from 1.96% in January. In other words, five years from now investors expect less inflation than was previously thought.
We think Reflation's Rollover continues...
