Is the party over?
Today’s publication of the US Consumer Price Index might have a profound effect. It will force investors to choose whether a drop in asset prices is a buying opportunity or a sell signal.
Stocks continued to retreat. Chinese economic data surprised to the downside, which sparked commodity traders to cut long metal and oil futures. News that the Zimbabwe military had staged a coup did not help confidence. Commodity-linked stocks are sagging, as investors rotate into defensive names. Petroleum tumbled, after the IEA said that crude prices and milder weather would weigh on demand.
In Japan, GDP growth in Q3 reached 1.4% (down from 2.6% in Q2), the seventh straight quarters of expansion. The yen strengthened, putting pressure on the Nikkei for the fourth day. USD is broadly weaker against the EUR. A strong German GDP has reinforced Europe’s positive economic outlook, fuelling speculation that the European Central Bank might ease up on quantitative easing. UK wage data, to be released today, could likely accelerate sterling’s recent weakness against the Euro.
Inflation will burst the bond bubble
Inflation is back, especially in the US, where the US Price Producer Index has broken its downtrend of nearly a decade. In the next few months, this will explode volatility and the bond-market bubble, when investors start unwinding their bonds – along with the US Federal Reserve doing the same. Stocks and bonds are now positively correlated, whereas normally they are inversely correlated. The VIX volatility index has significantly jumped recently, climbing from 9 to a one-month high of almost 11.
Today the US Consumer Price Index will be released and should come in around 2%. Ironically, the better (higher) the rate, the more pressure will be on the markets that are on steroids from the Fed with its era of free money. It is definitely time to get cautious.
