We have a general rule that we don't link to a site more than once per day that we violate at times.
This is one of those times.
From Marc Chandler's Marc to Market:
....In the US, the issue for investors is that inflation will rise. In fact, since the end of October, the eve of the election, the increase in inflation expectations has more than accounted for the rise in yields. Since then, the 10-year yield has risen about 30 basis points, while the 10-year breakeven (the difference between the conventional bond yield and the inflation-protected security) has risen by nearly 50 bp. We note that deeper negative real rates did not prevent the dollar from rebounding smartly over the past month, recouping, for example, more than half of what it lost to the euro since the election. Before the disappointing US employment data, the dollar traded above its 200-day moving average against the yen (~JPY105.60) for the first time since last June.
The inflation that our monetarist friends are concerned about is more about a grind than a bump in a month-over-month reading. Recall that headline CPI rose 2.3% year-over-year in December 2019. The pandemic distortions eased, and the year-over-year rate was between 1.2% and 1.4% in the last four months of 2020. The rate may have crept up in January, but it is about to surge.
As the pandemic struck, the CPI fell by 0.4% in March, a whopping 0.8% in April, and another 0.1% in May for good measure. These numbers will drop out of the year-over-year calculation and be replaced by some higher number. Even unchanged readings would make it appear inflation was accelerating. It is not so different from an apparent surge in eurozone inflation to 0.9% in January from -0.3% in December. The drama was a function of technical things like the end of a six-month VAT holiday in Germany, a delay in some seasonal sales in France, and an adjustment in the CPI basket's composition.
What the base effect giveth, it taketh away. Headline CPI jumped by 0.6% in June and July, and these too will be dropping out of the comparison but likely replaced by smaller increases. The spring inflation scare will give way to a more relaxed summer, only to flare again at the end of the year. Of course, the base effect is not the only driver. Without putting too fine a point on it, the accompanying chart shows the co-movement of the 10-year breakeven rate and the generic WTI futures contract (the time series have been normalized to show a common y-axis).
It may be like the correlation between the number of churches and the number of mortuaries. It indeed is not a causal relationship. They are both correlated to a third variable, population size. Inflation expectation and oil prices could be related to the expectations that a large part of President Biden's stimulus proposals will pass before the extension of jobless benefits and other support from the last stimulus expires. This is even before the larger stimulus and infrastructure initiative is unveiled, perhaps before the end of the month.
Yet, it would not explain the general good fit between oil prices and 10-year breakeven. Moreover, the last leg up in the price of crude appears to be driven more by supply than demand. US and China have drawn down their inventories. In the US, it has reduced inventories by nearly 11 mln barrels over the past two weeks, which was more than expected. The overhang of supply, measure against the five-year average, has almost been absorbed. There have also been other supply disruptions, such as in Libya. The front-month WTI futures contract was a little below $36 a barrel at the end of October. Last week it was probing $56, more than 10% above year-ago levels, and that gap will expand over the next couple of months...
....MUCH MORE
He makes some of the same points that were raised in Friday Evening's "Supply chain costs are mounting in all sorts of ways".
