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Disinflationary Pressure Is Building

Disinflationary Pressure Is Building

As part of the [Weekend Dashboard] report, published to members of EPB Macro Research each week, we cover the trends in inflation expectations very closely. 

This week, one area we looked at was the signal from less liquid industrial commodity prices. 

Below is an excerpt of the weekend report as well as a reminder that today you can still join EPB Macro Research before the membership fee increases. Today, you can lock in the 2-year anniversary sale rate for the entire life of your membership.

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Inflationary Trends / Commodity Trends

As noted earlier, while interest rates rose over the past month, driven mostly by the real rate, inflation expectations continue to fall, nearing a new cyclical low.

10-Year Breakeven Inflation Rate:Source: Bloomberg, EPB Macro Research

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After a geopolitical scare drove oil to $60 per barrel, the move entirely retraced, falling back down below $56. A seemingly permanent geopolitical bid under oil is keeping the price higher than what is being signaled from other industrial commodities that are not traded via liquid futures.

Crude Oil:Source: Bloomberg, EPB Macro Research

In a risk-on trade two weeks ago, we saw a pop in the CRB industrial metals equity index, a measure that is easily influenced by market sentiment and "trade headlines."

Despite these factors, the bounce gave way to a continued decline in the price of industrial metals equities. This index is less important to the long-term cyclical outlook as compared to the CRB indexes of commodities that contain commodities not traded via liquid futures such as oil and copper.

CRB Index Industrial Metals Equity Index:Source: Bloomberg, EPB Macro Research

The CRB index basket of raw industrial materials, which contains items outlined in the graph below, continues to decline and hit new cyclical lows each week.

There have been several instances of rising exchange-traded commodities that have not been confirmed by their less-traded counterparts. In most cases, the reversion favors the data below.

A persistent decline in the price of industrially sensitive materials, not easily influenced by headlines, suggest that price pressure is weak and demand for these industrial materials is unlikely to be overwhelmingly strong.

Industrial Materials Spot Index:Source: Bloomberg, EPB Macro Research

If we pull the chart of industrial materials back to 2013, we can see that the disinflationary impulse today is almost as strong as the 2015-2016 episode which resulted in outright deflation in some cyclical industries.

Industrial Materials Spot Index:Source: Bloomberg, EPB Macro Research

While the Federal Reserve and mainstream analysts have finally accepted the slowdown in growth, the cyclical downturn in inflation is not something that has garnered the same attention because the disinflationary pressure has not yet filtered through to the lagging metrics that most follow such as headline and core CPI.

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To read this week's full [Weekend Dashboard] report, click the link below.

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