Great Graphic: CRB Index Revisited

Bond yields are rising.  The
break-even rates, which compare conventional yields to the inflation-linked
securities are also rising.  These developments, which we do not think can
be attributed to central bank policy, encouraged us to take another look at
commodity prices.  

Some investors are talking about a potential
head and shoulders bottom in the CRB Index. 
This Great Graphic,
created on Bloomberg, draws the neckline to the pattern that has been unfolding
over the past 14 months.   The neckline is found near 191.80, and by
the end of next month, it is closer to 190.  It is trading a little
heavier today.  It is the second days of losses,
and unless it recovers over the next 36 hours or so, it will finish lower for
the second week, snapping a four-week advancing streak.  

The importance of chart pattern, like the head
and shoulders, is the price projection upon the confirmation. 
The
confirmation is a convincing violation of the neckline.  From the head to
the neckline is about 35 points, so a break of the neckline projects 35 points
higher as an initial target.  That would be
the CRB to around 225.  The would bring the index into the gap created by
the sharply lower opening on 6 July 2015.   

This technical work could be part of a largely
bullish story.
  Commodity prices peaked around the middle of
2008.  Commodity prices collapsed.  The CRB Index reached a high near
474 and put a low in early this year a little below 155.  By June it had
gained 27% but has been trading mostly
sideways between 176 to 190 since the peak (~196).  

Nevertheless, we are not convinced that rise in yields and breakevens (ostensibly
reflecting an increase in inflation expectations.  
Although one
would be on the lookout for a reversal pattern after a prolonged decline, we are not convinced that a head and shoulders
bottom is being carved.  The
technical indicators suggest it may be a
broad sideways trend, with the risk to the downside.   The Slow
Stochastics and the MACDs have turned lower.  

Moreover, if it was just headline inflation
rising, it might not be so important for many (though
not all central banks). 
For them,
the core rate is more revealing, even if it is not
targeted
Also, price pressures of
tradable goods continue to be muted, but non-tradable goods inflation is
stronger.
  In the US, for example, rising price pressures are
evident in medical services and rents.  

Disclaimer

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