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Weldon's Money Monitor: Inversion and Indian Lead


It's a HAT-TRICK as all three of the main consumption stimuli are facing extinction.


Not only is the U.S. Yield Curve inverted, but so too is the U.S. Eurodollar Deposit Rate Strip, as noted in the chart on display below in which we plot the end-2006 December futures implied yield versus the nearby March contract.

The 'Minutes' of the Dec-13 FOMC meeting were most revealing.

"Meeting participants discussed tentative signs that activity was beginning to slow in the housing sector. Measures of confidence have fallen back noticeably."

Meeting participants DISCUSSED signs of slowing in housing.

MMMmmmm, we wonder what they said:

"A downshift in attitudes regarding the outlook for the housing sector could have significant market effects, in part by dampening the demand for houses. A slowing of house price increases ... is expected to reduce the growth in aggregate demand somewhat in coming quarters."

A downshift in housing could have SIGNIFICANT MARKET EFFECTS!!!

Moreover, it almost appears as if the Fed EXPECTS a problem, a la the "Staff Forecast" prepared for the Dec-13 meeting participants. Note,

"The Staff Forecast suggested that the growth of economic activity would slow from this year's pace ... increasingly (affected) by higher interest rates, the anticipated waning of the positive wealth effect associated with large earlier gains in equity and house prices, and reduced impetus from fiscal policy."

GEE, an end to mega-low short-rates, a freeze in mortgage equity withdrawal and tapped-out fiscal spending. It's a HAT-TRICK as all three of the main consumption stimuli are facing EXTINCTION.


"Views differed on how much further tightening must be required. Members thought that the policy outlook was becoming considerably less certain. Most members (as) indicated (ing) that given the information now in hand, the number of additional firming steps required probably would not be large."

But WAIT; there is a problem, an issue involving Central Bank 'credibility.'

It involves our long-standing, macro-tenet-theme known as the Secular Spectrum Stretch, in which BOTH reflationary AND deflationary risk is equally intense, each with its own unique dynamic.

In terms of Fed rate hikes that might be ENDING, we cannot help but notice the metals markets, where both industrial and precious metals are SOARING to NEW BULL MOVE HIGHS.

One of those metals is Lead, and we use Lead to spotlight our Secular Spectrum Stretch theme, as a way to highlight just HOW BULLISH the environment for commodities has become.

Evidence the long-term macro-monthly overlay chart on display below in which we plot the price of LME Lead divided by the yield on the U.S. 2-Year Note (red line) and then divided by the yield on the U.S. 30-Year Bond. Clearly, in long-bond terms, a consequence of the persistent dominance of excessive global USD liquidity, lead sits at a NEW HIGH.

However, relative to the short-end, reflective of the Fed's rate hike policy, lead has diverged and in fact, had DISINFLATED.

BUT NOW, if the Fed rate hike campaign has indeed ended, then the very subtle yet discernable uptick in lead adjusted by the 2-Year Note Yield could indicate that:

  • Lead is about to EXPLODE, or...

  • US short-rates are about to fall rapidly. Or...

  • BOTH.

And finally, from the global perspective as applies to the influence of Fed policy, and reflation in raw materials, we note the case of India, where a BOOM in sales of automobiles has driven lead demand (for car battery manufacturing) through the ROOF. Subsequently, the Government has just announced a plan to "assist" with the import of lead in order to meet a widening domestic supply deficit, (expected to be as much as 200,000 tonnes per year) based on estimates that project demand will DOUBLE again over the next 4 years.

Evidence that chart on display above, plotting the path of Lead, 'priced-in' Indian Rupee, where a stable slope of price inflation from 1986 through 2003 has been violently replaced by steep price inflation and a +115% rise over just the last 3 years.

The bottom line for Indian manufacturers is that lead prices have gone from less than 25,000 rupee per tonne, to almost 50,000 rupee, in the last 36 months.

The bottom line for the Fed however, is the U.S. consumer.

Inflation ???

Rewind and re-highlight the FOMC minutes:

... "Participants indicated that their concerns about near-term inflation pressures had eased somewhat over the inter-meeting period. Recent data indicated that indirect effects of elevated energy prices on core inflation had been muted.

... Participants noted that robust competition, including competition from foreign manufacturers, and further substantial gains in productivity were helping control costs and price pressures."

In other words, there is STILL no pricing power evident, nor in the pipeline, meaning raw material price inflation is likely to become an increasingly dominant DISINFLATIONARY macro-influence.

In other words, the Gentle Ben Factor is bullish for commodities, including Lead 'priced-in' Indian Rupee, which is rallying despite the sharp decline in the USD versus the INR.

No positions in stocks mentioned.
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