Consumer Confidence, Commodities, TIPS, and EM Update
Today’s release of Consumer Confidence by the Conference Board shows American consumers remains positive, and their confidence level is at a historic high (see first chart). This is significant as we look at the trends for inflation, rates, and risk assets more broadly.
A strong consumer sets the stage for healthy growth into 2019 and increases the probability that the rise in inflation expectations we are seeing in the TIPS market will accelerate as an economy operating near full employment begins to experience wage push inflation (tariffs will likely accelerate this trend).
As the second chart shows, TIPS Breakevens have broken through a short-term downtrend and are now rising sharply towards the top of an intermediate trading range. Commodity markets are confirming the rise in inflation expectations as the CRB Commodity Index has broken its downtrend. Probabilities are rising that TIPS will break through 2.2% B/E rate. This is negative for the dollar and positive for EM and risk.
As the last chart shows, EM Bond spreads are tightening and are on the verge of breaking through the widening trend put in place when EM stocks began their downleg. If the EM spread rally continues, it could confirm the stability we are seeing in EM equity markets, and EM FX markets.
CONSUMER CONFIDENCE INDEX
Source: Bloomberg. Data accessed on 9/25/2018
10 YEAR TREASURY
Source: Bloomberg. Data accessed on 9/25/2018
CRB INDEX
Source: Bloomberg. Data accessed on 9/25/2018
JPMORGAN EMERGING MARKET BOND INDEX
Source: Bloomberg. Data accessed on 9/25/2018
Jonathan E. Lewis, Chief Investment Officer
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Index Definitions
1. The Thomson Reuters/Core Commodity CRB Index (TR/CC CRB) is a commodity futures price index.
2. The JPMorgan Emerging Market Bond Index (EMBI)are a set of three bond indices to track bonds in emerging markets operated by J.P. Morgan.