A key global trade indicator and what it’s telling us… checking in on our other inflation-indicators from John Jagerson and Wade Hansen… straddling a key level in the 10-Year Treasury yield

 

Yesterday brought news that consumer prices in May rose the fastest since August of 2008, right before the financial crisis.

The number popped 5%, topping the expected 4.7% forecast.

This is a perfect segue into how our technical experts, John Jagerson and Wade Hansen, began their latest Strategic Trader update:

Inflation has everybody worried sick… Worried sick that the Federal Reserve is going to be forced to spoil the economic growth party by raising interest rates to combat inflation.

But what if the inflation we are seeing right now in the global economy isn’t going to last?

What if it’s a short-term phenomenon driven by the global economy’s response to the coronavirus pandemic?

What if everything is going to balance out once we get through this adjustment period?

If that’s the case, maybe we don’t need to worry so much about the Fed right now.

True – and that would be wonderful.

So, how do we determine if that’s the reality or not?

Well, John and Wade have a key indicator they’re watching right now for clues.

This is the latest in a series of metrics we’ve been tracking from our Strategic Trader experts in recent months. Regular Digest readers know that many of our Friday issues this year have featured John’s and Wade’s analysis.

That’s because we’ve faced some dicey moments in the market, and John and Wade have helped us navigate them by providing key insights and perspectives through their technical analysis.

Today, let’s keep it going.

We’ll look at the latest indicator from our Strategic Trader team, while checking in on some of their other recent ones.

In doing so, we’ll get a better feel for what’s really going on with inflation. I think you might be surprised…

Let’s jump in.

***What massive ships tell us about inflation

For newer Digest readers, John and Wade are the analysts behind Strategic Trader, InvestorPlace’s premier trading service. It combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.

To identify profitable trade set-ups, they analyze a variety of data points, ratios, chart patterns, indicators, and global markets – and today, we’re getting a new one…

Ships.

Here’s John and Wade to explain:

The Baltic Dry Index (BDI) measures what it costs to ship raw materials – like iron ore, steel, cement, coal and so on – around the world.

As global demand for goods that need to be shipped across the ocean rises, the BDI goes up. As global demand falls, the BDI goes down.

The London-based Baltic Exchange calculates the BDI each day. To compile the index, members of the Baltic Exchange call dry bulk shippers around the world to see what their prices are for 22 different global shipping routes.

Once they have obtained these numbers, they compile them and find an average.

***Why the BDI gives us insights into the state of inflation

John and Wade explain that the BDI is a leading indicator that offers insights into the global demand for commodities and raw materials.

It’s the focus on raw materials that helps provide color on inflation.

Back to John and Wade:

The fact that the BDI focuses on raw materials is important because demand for raw materials provides a glimpse into the future.

Producers buy raw materials when they want to start building more finished goods and infrastructure – like automobiles, heavy machinery, roads, buildings and so on. Producers stop buying raw materials when they have excess inventory and when they stop infrastructure projects.

Typically, demand for commodities and raw goods increases when global economies are growing. For investors, knowing when the global economy is growing is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should increase.

The opposite holds true as well. When demand is decreasing, it often foreshadows global economies that are stalling out or contracting. When investors see a stalling economy, it likely means “watch out” for stock and commodity prices.

***Supply chain bottlenecks have led to a BDI surge in recent months

You’ve likely heard about the breakdown in supply chains around the world over recent months.

This breakdown was a result of businesses and suppliers shutting down for Covid-19, then not having the inventory ready to send out once the world reopened.

John and Wade note that, right now, producers are scrambling to get the raw materials they need to make enough product to meet demand. This has led to elevated BDI rates.

Back to the 

Strategic Trader update:

This isn’t going to last forever, though.

Producers are eventually going to catch up to demand. At that point, they won’t need to pay a premium to get materials as soon as possible. They will have the flexibility to wait and demand better prices.

We can see this dynamic by looking at a chart of the BDI from John and Wade.

Below, you’ll see it bottoming out at a low of 400 during the height of the 2020 global economic shutdown. But since then, it’s been climbing.

It broke above the high of 2,518 the index reached in 2019 on its way to forming a recent high of 3,266 on May 5.

Back to John and Wade to interpret all this:

The BDI is currently sitting at up-trending support, which is just below its September 2019 high. This will likely be a key inflection point for the index.

If it bounces back up off this level, that would be a good indication that demand is still strong and prices are likely to remain high in the near term.

However, if the BDI breaks down through this up-trending support level and moves back down toward 2,000, that would be an indication that global demand may be starting to return to normal, which would likely lead to prices pulling back.

Note that John and Wade didn’t write that breaking through this support would mean falling stock prices. It’s important to point out that the BDI is elevated, in part, because of this scramble to move inventory all around the world. It’s not typical.

So, though a falling BDI might normally hint at a stalling economy, in this case, it’s more likely to suggest a return to normal as supply chain imbalances sort out.

Given this, if we see the BDI breakdown and continue falling, it’s a clue that inflation may, in fact, be transitory as the Fed suggested.

***Checking in on other inflation and market metrics from John and Wade

Last week, we introduced two new metrics from our Strategic Trader duo – the Japanese yen, and the Chinese Hang Seng.

In short, we wanted the yen to remain weak, and the Hang Seng to rally.

So, where do we stand today?

Last week, the Yen to U.S. Dollar Index came in at a value of 0.907. This week, we’re at 0.915. So, we’re slightly higher, but it’s important to contextualize this.

Below, we look at a chart of the Yen/Dollar Index. You can see that though we’re slightly higher, we’re in a recent succession of lower-highs and lower-lows (trend line added). So, the overall direction remains down.

So far, so good.

What about the Hang Seng?

Last week, it was at 28,942. As I write, it stands at 28,721.

So, it’s barely lower – not even 1%. While we’d prefer to see it having popped higher, we’ll take it.

***And what about perhaps the most important indicator of all – the 10-Year Treasury yield?

Despite yesterday’s hot consumer price increase number, the 10-Year yield actually fell. As I write Friday morning, it’s coming in at 1.469.

This is great news for alleviating inflation worries. It also happens to have landed on a key level that John and Wade are watching.

Here they are on that note. Keep in mind, they wrote the following on Wednesday, when the 10-Year yield was higher:

If the (10-Year yield) continues to pull back, breaking below support at 1.47%, we’ll know for sure the initial inflation-based panic from this spring has passed.

This should clear the way for the S&P 500 to continue moving higher this summer.

Again, as I write, the number is 1.469%. We’ll keep watching to see which direction it breaks decisively.

Wrapping up, there are growing reasons to believe that inflation may not be as terrible as feared. Though market conditions can change quickly, for now, the indicators we’re tracking from John and Wade are cautiously pointing toward a favorable outcome.

We’ll continue to keep you up to speed here in the Digest.

Have a good evening,

Jeff Remsburg