CPI Comes ‘Home’ To The Other Side Of Inverted TIPS

January 2021 was, it may have seemed, only the start of something big. Huge. Colossal. Coronavirus vaccines had been discovered, publicized, and rolled out, meaning for the first time a real shot at ending the pandemic. The world could quickly get back to normal, the economy recovering its footing, and between January and that bright future Uncle Sam was going to flood not just the US but much of the rest of the world (starting with US imports) with Treasury’s cash.

Everything appeared to be going just right, if not in danger of being “too much.” This latter was the phrenzy, a second bout of inflation hysteria which extrapolated (in a straight line) what would never be anything more than a minor bond sell-off into the biggest thing since the Great Inflation; if not Weimar Germany.

Yet, while the hysteria was just ramping up, everyone casually dismissed and ignored the dollar which had been “crashing” yet suddenly stopped and began what eight months later has been a multi-month process of bottoming out while moving higher. Something was up besides its exchange value, a shadowy caution that maybe not much had actually changed in any meaningful sense beyond the short run being filled to the brim with the federal government’s digital checks.

It is a pattern we’d seen before, and not all that long ago. The eurodollar already back on its nose even at that early time:

There weren’t nearly the same obvious issues in January 2021 like there had been four Septembers ago. On the contrary, after early January it seemed as if for the first time in forever all the good things had been lined up just perfectly for the world to finally right itself. Vaccines, stimulus, you remember all the unchallenged positives.

Funny thing, though, just like September 2017 the dollar curiously stopped “crashing.” Defying all the certitude with which this latest dollar downtrend had been called its demise, seemingly out of nowhere it stopped right in its tracks.

Not just King Dollar (where “king” means the same for the rest of us as it always had with whichever Kong), there were other contrary indications that appeared “out of nowhere” at the same time as the dollar’s inflection. A big one showed up in TIPS.

Only a few days apart.

When the dollar bottomed out (according to several broad exchange trade-weighted indices) on January 6, TIPS inflation expectations inverted a mere two days after. That is, the 5-year inflation breakeven (the difference between the disgustingly low real nominal yield and the same maturity nominal UST) on January 8 was a bip more than the inflation breakeven at the 10-year maturity. These are supposed to be the other way around (upward sloping).

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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