We have been grand supporters of the "inflation" trade for about 12 months now. But to be honest we have little to really show for it. The big commodity ETFs (DBC, GSG and DJP) have gone nowhere materially since June last year as to have ETFs tracking US Treasuries (TLT).
Now that all promises to change. The big "grunt" in the commodity ETFs, crude oil, closed at a multi-week high in USD, euro, yen, and emerging market currency terms. It also came close to closing at a multi-week high against both the aussie and loonie. Something is going on and it seems a lot deeper than just strength in crude oil. Many commodities also closed at multi-week highs in USD and non-USD terms. Furthermore, gold is only a few percent away from breaking out of its trading range.
In support of the bullish behaviour in commodities is the breakdown of US Treasury markets. On Friday the US 30yr future broke below “support” at the 115 level, propelling the 30 yr yield to a multi-week high. We also see strength coming through in inflation protected treasuries relative to conventional treasuries (i.e. breakevens are moving higher). Perhaps now we will get some loving from the long side of TBT!
We would not take the behaviour of crude oil very seriously if there was no confirmation in the behaviour of other commodity markets or inflationary sensitive Treasury markets. As you can see from the charts below, there is confirmation......yes, the inflation trade is alive and well and ready to begin its next “leg” up. It looks like James Grant is going to win the great inflation debate.......I wonder if Rosenberg is long US Treasuries and short crude oil?
click to enlarge images