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Is The Economy Over-Inflating? Futures May Hold The Answer

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Is The Economy Over-Inflating? Futures May Hold The Answer

The equities markets in October is turning into a proving ground of sorts for U.S. monetary policy.

The Federal Reserve seems keen to maintain it’s hawkish stance on nipping any sign of inflation in the bud, forecasting one more rate hike for 2018 and bringing the total increases in 2018 to four. Fed chair Jerome Powell doubled down on this approach further when he introduced the possibility of instituting up to seven more rate increases over the course of 2019.

President Trump, on the other hand, is characteristically vocal about how that plan is wreaking havoc on the stock market, which is one of his favorite examples of success for his administration and the Republican-dominated legislature due to the recent tax cuts.

While the stock market might seem to be siding with the commander-in-chief in it’s aversion to interest rate increases, inflation might not be what the market, or President Trump is truly bracing for. The answer to what’s rattling investors could lie in some fundamental and technical readings of the humble futures market.

The story so far is that, after the Fed’s September rate hike, bond prices were hammered down to new recent lows, pushing bond’s Relative Strength Index below 25, well into oversold territory.

But, during the mid-October selloff, something interesting happened: 10- and 30-year bond futures jumped more than a full percentage point in a single day, with the buying pressure bumping the 30-year above an RSI of 40 and showing the first upward cross in the bond’s moving average convergence/divergence (MACD) since August.

This may have simply been a flight to safety for investors spooked by the sudden surge in volatility, but it might also be a sign that some investors are less worried about inflation than the threat of rising relative prices. And there’s a big difference between the two.

While recent economic data has shown an uptick in a variety of inflationary indicators like GDP and unemployment, key figures like the consumer and producer price indexes have not revealed the same level of price pressure. The most recent release, which came in the midst of the selloff, actually showed both indexes come in below the modest 0.2 percent that was forecast by the Fed.

However, that doesn’t mean prices aren’t on the rise. The CRB commodity price index, which shows average price changes in a basket of 19 futures-traded goods, has actually gained quite a bit of momentum, rising nearly 11 percent YoY, it’s biggest increase since 2011. The index reached a 3-year high earlier in the year and has been particularly volatile throughout 2018, spiking and dropping by 5 percent or more in the matter of days.

These commodity increases, particularly in volatile areas like energy and food, aren’t calculated by the PPI because they don’t reveal inflationary trends, but overall price trends. Nevertheless, those prices are up, and they’re up in a time when interest rates are on the rise globally.

While it’s too early to draw conclusions, the uptrend in commodity prices, coupled with rising rates, the continued effects of U.S. tariffs on Chinese, Canadian, Mexican and European goods and an outperforming USD, could start to put the squeeze on U.S. companies. If commodity prices continue to ramp up and investors begin turning toward bond futures, the October rout might not be the end of Wall Street’s worries.

RJO Futures is a content partner of Benzinga

Posted-In: InflationFutures Technicals Economics Federal Reserve Markets Trading Ideas General

 

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