S2N Spotlight
I came across two charts where crude oil was compared to the US 10-year Treasury yield and the US 10-year inflation expectations. There appears to be a very strong correlation. The issue I have is that the charts only go back to 2023, which is a short time frame. So I wanted to explore whether these charts are presenting noise.
I ran the same analysis over a longer 20-year window to see if there was a genuine relationship. I transformed to log scales as comparing yield/inflation with oil price over 20+ years needed some manipulation. There is clearly a relationship, but I have never been a fan of trading these kinds of analogs.
S2N Observations
We saw inflation numbers come out yesterday. The headline inflation year on year continued to come down. However, the core inflation rose for the second month.
If we look at the inflation expectations derived from the bond market over 5 and 10 years, everything is pointing down. What worries me is that this market continues to be high on a drug called debt. I won’t bore you with another note on how unsustainable all this debt is on the global economy. At least unsustainable without an inflation spiral.
I will end with the statement that we seem to be back in “buy the dip” mode. If I look at the market breadth of the 500 companies in the S&P 500 index, I can see breadth weakening slightly. If the market continues a little higher with breadth continuing to weaken, I suspect we will have some serious selloffs in the weeks to come.