Is inflation making a comeback? When it comes to the Commodities sector, inflation has been absent since the highs back in 2011. When it comes to the bond market, a little bit of inflation has been occurring for years as yields were in a down trend.
Are bonds worried that inflation will accelerate? Is the long-term bond bull market ending right in front of our eyes? What the inflation indicator does from here could well answer many key questions about where the macro/global picture is heading.
Below looks at the TIP-to-TLT ratio, which is often viewed as a good indicator for the prospects of inflation or lack thereof.
The ratio has been trending down for the past 7 years, creating a series of lower highs and lower lows. Since 2011, whenever this indicator looked like it was heading higher, it wound up peaking and turning south inside of falling channel (1).
Since July of 2016, the ratio has been rising sharply, causing some to wonder if inflation/global growth theme might be taking place. This sharp rally has taken the ratio back to the top of falling channel (1) at (2). Over and over, this ratio has peaked and run out of gas inside of this falling channel, suggesting that global growth was peaking again.
Now that the ratio is testing falling resistance again, will the results be different? If it does breakout at (2), it will do something it hasn't done for years, delivering a positive price message to commodities possibly disappointing bonds.
What this indicator does at (2), could influence portfolio construction in a big way. Keep a close eye on what this ratio does at (2). Over the past several years, this is where commodities have peaked and bond prices have started to rally.
It'll be most interesting to watch this test to see if it really is 'different this time around.'