Written by Jim Welsh
Macro Tides Weekly Technical Review 02 April 2021
The Citi Inflation Surprise Index has soared to the highest level in more than 20 years. This happened because the majority of economists have underestimated how much inflation would jump in recent months. This doesn’t come as a surprise as most investors want to believe the FOMC’s assessment would be correct and the current surge in inflation will prove transitory.
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Understanding the impact from Base Effects certainly supports this view. But as noted in the June Macro Tides, the uptick in inflation is due to a broad list of factors that extend beyond Base Effects. If inflation is more intense and persistent in coming months, it will come as a rude surprise. It is this surprise that could upset the financial markets and lead to speculation that the FOMC is behind the inflation curve and may have to hike rates in 2022, rather than waiting till 2023.
Additional evidence that the Treasury market believes inflation will be transitory is apparent in the distribution of annual Core CPI readings and the 10-year Treasury yield. There have been times since 1985 where the 10-year Treasury yield was above and below the annual Core CPI. The spread between the two plots is quite wide at this point relative to the last 36 years.
If inflation does continue to surprise economists and investors as seems likely in the next 6 months, the spread will narrow as the 10-year Treasury yield plays catch up to higher Core CPI inflation. Given the Memorial Day holiday, publishing the June Macro Tides yesterday, and that my expectations for the markets is largely unchanged from last week, the market comments are brief.
Stocks
The S&P 500 is expected to push to another new high above 4238 before a larger correction develops. If Treasury yields fall as expected, the QQQ’s could test its prior high of 342.80.
Treasury Yields
Treasury yields are expected to drift lower and could test their May 7 lows of 1.47% for the 10- year and 2.16% on the 30-year. The employment report for May could disappoint if the factors that depressed job growth in April remained in May as discussed in the June Macro Tides. The forecast is for 675,000 new jobs in May so anything less than the estimate would be a disappointment and help Treasury yields decline.
Dollar
As noted previously the long term pattern in the Dollar suggests it should fall below the January 4 low of 89.21 before an important low is established. On May 25 the Dollar traded down to 89.53, so it’s getting close. A weaker than expected employment report would likely lead to further weakness.
Gold
On June 2 Gold traded up to $1915.40 so the minimum expectation of a rally above $1900 has been achieved. The expectation is that Gold will pop one more time and trade above last week’s high before recording a short term high. As noted last week the upcoming high is likely to be followed by a correction, so lightening up on the next rally is good risk management.
Silver
Silver is expected to rally above $28.61 and test the February 1 high of $29.79 before a short term high is established. Instructions Sell the remaining half of the Gold ETF IAU at $36.60 and raise the stop to $35.62. Sell the remaining half of the Silver ETF (SLV) at $26.75 and raise the stop to $25.50.
Gold Stocks
Sell the remaining half of the Gold Stock ETF GDX at $40.70 and keep the stop at $38.50.
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
The MTI generated a Bear Market Rally (BMR) buy signal when it crossed above the red moving average on April 16, 2020 as the S&P 500 closed at 2800. A new bull market was confirmed on June 4, 2020 when the WTI rose above the green horizontal line. The S&P 500 is expected to push to a new high above 4238. The trend is up until Treasury yields reverse higher and the Dollar bottoms.
The primary 10 sectors for the S&P 500 with the Russell 2000 and Midcap included.
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