Monday, April 29, 2013

O Inflation, Where Art Thou?

The latest PCE inflation reports for March were reported this morning and continued to reflect the troublesome disinflationary trend we have been highlighting over the past few months. As we noted back in March in: Ignorant - Until Proven Guilty - the writing has been on the wall for sometime in our leading inflationary proxy of the precious metals sector, specifically - the XAU composite mining index. In terms of a downstream asset flow chart for the presumption of inflationary/disinflationary trends, the headwaters begin with the miners and flow south. Considering the XAU's performance throughout April (-20%) - we expect the disinflationary runoff to continue rising on the Fed's banks and maintain broader pressures on the commodity complex. 

While the knee-jerk reaction in the market today has put moderate pressure on the dollar and provided more impetus to extend and even increase the amount of quantitative measures down the road, we continue to feel the markets psychological reflex to QE and maintaining/increasing inflation expectations has broken down. With that said, we don't expect the Fed to conceded its perennial deflationary fight anytime soon and recognize that the growing audible concerns of disinflation will refocus market expectations - as ephemeral as they may be. 
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As a side note, from our perspective - oil as well as the Australian dollar look extremely vulnerable to catching up to the weakness expressed in the CRB and XAU indexes. 
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