The reflation theme is driving the markets since the US election. Equities have rallied and bonds yields have risen sharply. However, the commodities, as tracked by the CRB index, have not participated.
The CRB Index sold off sharply following our note on October 27 but has stabilized over the past week. Yesterday’s spike to 185 failed to close the gap created by the sharply lower opening on November 2. That gap is 185.11 to 185.33. It is a small gap but of technical significance. The closing of that gap would lift the technical tone. A close below 183 would again expose the downside. The technical indicators appear to be getting close to turning but haven’t yet.
Some commodities of course have been rallying. The CRB Index is weighted in favor of oil and agricultural commodities. They have not been doing so well. In contrast, industrial metals have been on fire. Aluminum, copper, nickel, tin, zinc and iron ore have been boosted by US and China’s infrastructure plans.
The JOC-ECRI industrial price index has fared better than the CRB. It is up 2% this week, while the CRB Index is up 0.4%. Taking a look at the year-to-date performance, the CRB Index is up five of the first 10 months this year for a little more than a 6% gain. The JOC-ECRI industrial price index has risen in all but three months this year for about a 17% gain.
The rise in the US 10-year breakeven, a market-based metric of inflation expectations has rinse sharply to 1.90%, the highest since mid-2015 from 1.69% at the end of last week is partly a function of liquidity as the inflation-linked securities are less traded than conventional Treasuries. In a falling rate market, the breakevens tend to fall and rising rate market, they tend to increase.