An Inflation Surprise - Invoking Volcker

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Includes: BCX, CAFE, CANE, CHOC, COMT, CORN, CSFSX, DXKLX, DXKSX, EDV, GLD, GLDI, GLDW, IEF, IMTB, IVE, JO, NASDX, NDAQ, NIB, PFF, PST, QQQ, SGG, SH, SHY, SIL, SLV, SOYB, SPY, SPYD, SPYG, SPYV, SVXY, SYTS, TBF, TBT, TBX, TIPX, TLT, TMF, TMV, TTT, TVIX, TYNS, UST, UVXY, VIXH, VIXM, VIXY, VOO, VTI, VTSAX, VXX, WEAT
by: Rigel Mercantile Limited
Summary

Core CPI is still subdued but wage pressures are building up and 5-year forward inflation expectation is ticking up.

Higher inflation in the future implies long-term rates have to move higher.

The market is still betting on a flattening yield curve when the yield curve is about to start steepening again.

Time to bring out the reflation trade: long commodities, long precious metals, long equities, and short long-dated US treasuries.

Lately, there has been a lot of speculation on who the next US Federal Reserve chairperson will be. Many articles have been written speculating, opining, polling, and inferring the likely outcome as well as likely policy implications; we will not waste our time theorizing the same. Instead, we will focus on the technical aspects of the US treasury futures market, the underlying dynamics of US wage and inflation data.

Our view is that we could be due for an inflation surprise. Interest rate sensitive assets (IEF, PST, UST, TBX, TIPX, IMTB, TYNS, DXKLX, SYTS, DXKSX, TLT, TBT, TMV, IEF, SHY, TBF, EDV, TMF, TTT, PST) could be vulnerable, the slope of the US yield curve could steepen quite dramatically, and the reflation trade (BCX, COMT, CSFSX, CORN, SOYB, WEAT, NIB, CHOC, NBC, JO, CAFE, SGG, CANE, GLD, GLDX, GLDI, GLDW, SLV, SIL, SPY, SPYG, SPYV, SPYD, SH, VXX, SVXY, VOO, IVE, NDAQ, QQQ, NASDX, VXX, VIXY, VIXM, VIXH, TVIX, UVXY, VTI, PFF, VTSAX) could be back with a vengeance.

We hope you enjoy the presentation, we look forward to your comments.

Disclaimer: Rigel Mercantile Limited specializes in Macro/Value Research and Systematic Trading. The views expressed above are our discretionary ideas that we have arrived at using discretionary analysis and, therefore, are limited to our discretionary portfolios only. Our systematic strategies may or may not have a position (long or short) in the securities mentioned above. Under no circumstances should the information contained herein be used or considered as an offer to sell, or a solicitation of an offer to purchase, any security or investment service. The information presented herein is presented in summary form and is, therefore, subject to qualification and further explanation.

Disclosure: I am/we are long AGRICULTURAL COMMODITES, GOLD, US EQUITIES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.