The ninth month of the year 2012 has seen a series of quantitative easing and stimulus announcement from a sundry of major government and central banks. First off the block was the ECB, which announced a commitment to buy unlimited amount of sovereign debt of up to three years in maturity. Then China’s central government announced a $150bn infrastructure spending package. In the middle of the month, Federal Reserve embarked on QE3 with a plan to buy $40bn worth of mortgage-backed securities each moth without an announced end date. During the same period, Bank of Japan, concerned due to rising yen, launched $26bn quantitative easing, it’s eighth so far.
With so much stimulus and quantitative easing, the talks about inflation were bound to become headline. But, is that the case?
Reuters/Jefferies CRB Index had been declining ever since it retraced to the 61.8% Fibonacci level of the 2008-financial crisis induced fall in May 2011. After reaching to the highest level in May 2011 since March 2009, it turned down and retraced 61.8% of the advance from the lows of March 2009. The index then bounced off the lows of June 2012 and by September, it had retraced 50% of the decline from May 2011. This Fibonacci level also coincided with couple of other resistance highs made in October 2011 and February. The resulting down-drift from this resistance ceiling is increasing a chance of an inverse-head-&-shoulder pattern provided the index arrests its decline at around 290 levels. In 2011, CRB index declined first from early September to early October and then from Late October to mid-December. Both times it found support at around 290 levels.
The broader Goldman Sachs Commodity Index has slight different chart action. From the bottom of March 2009, it retraced to 78.6% Fibonacci level by April 2011. Before that it had made a horizontal trading channel for a year – from October 2009 to October 2012. Since April 2011, it has been forming a descending triangle pattern. The lower bound of the triangle overlaps with the upper bound of the 2010 horizontal channel.
These two commodities indices show that though they have risen from the lows they are still stuck in a trading range without a strong upward bias. Their current action after the series of QE and stimulus announcement by the major global policy makers is also muddled with somewhat downside bias. The inflationary pressures do not seem to be too obvious at the moment.
On the other hand, the 30-Year US Treasury bond is perhaps making a topping pattern but it has not yet toppled over decisively, though, the recent action is down. Bonds move in reverse direction than the interest rates. Bonds also do not indicate any dangers of runaway inflation.
US dollar index has broken below an uptrend line that it had been tracing since August 2011. At the end of that uptrend it made an uneven double top formation in July 2012. Since then, by September, it has completed the downside measured move off that pattern. The dollar index is also within a long term trading range – bounded by high 80’s and low 70’s. This chart also corroborates the commodities and bonds that though deflationary pressures are vanishing the inflationary pressures are nowhere to be seen.