Great Graphic: CRB Index Revisited

October 27, 2016

2 minute read

Great Graphic: CRB Index Revisited

Bond yields are rising. The break-even rates, which compare conventional yields to the inflation-linked securities are also rising. These developments, which we do not think can be attributed to central bank policy, encouraged us to take another look at commodity prices.

Some investors are talking about a potential head and shoulders bottom in the CRB Index. This Great Graphic, created on Bloomberg, draws the neckline to the pattern that has been unfolding over the past 14 months. The neckline is found near 191.80, and by the end of next month, it is closer to 190. It is trading a little heavier today. It is the second days of losses,and unless it recovers over the next 36 hours or so, it will finish lower for the second week, snapping a four-week advancing streak.

The importance of chart pattern, like the head and shoulders, is the price projection upon the confirmation. The confirmation is a convincing violation of the neckline. From the head to the neckline is about 35 points, so a break of the neckline projects 35 points higher as an initial target. That would bethe CRB to around 225. The would bring the index into the gap created by the sharply lower opening on 6 July 2015.

This technical work could be part of a largely bullish story. Commodity prices peaked around the middle of 2008. Commodity prices collapsed. The CRB Index reached a high near 474 and put a low in early this year a little below 155. By June it had gained 27% but has been trading mostly sideways between 176 to 190 since the peak (~196).

Nevertheless, we are not convinced that rise in yields and breakevens (ostensibly reflecting an increase in inflation expectations. Although one would be on the lookout for a reversal pattern after a prolonged decline, we are not convinced that a head and shoulders bottom is being carved. The technical indicators suggest it may be a broad sideways trend, with the risk to the downside. The Slow Stochastics and the MACDs have turned lower.

Moreover, if it was just headline inflation rising, it might not be so important for many (thoughnot all central banks). For them,the core rate is more revealing, even if it is not targeted. Also, price pressures of tradable goods continue to be muted, but non-tradable goods inflation is stronger. In the US, for example, rising price pressures are evident in medical services and rents.

Disclaimer

This post was originally published by Marc Chandler at his blog, marctomarket.com

Author

Marc Chandler

Marc Chandler has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks.

After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

Disclaimer
Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets. This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency. There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.