The chart below shows a month over month change in CPI inflation readings, which look to be trending slightly lower. The blue line represents the actual month over month movements and the red line shows a smoothed four-month moving average. The moving average signals that although stimulus efforts have been greatly increased in 2013, U.S. inflation continues to trend lower.
Weak inflation and high, albeit improving, unemployment figures show that the recovery remains gradual. Monetary policy has remained simulative, but fiscal policy has proven to be counter-growth. January saw the implementation of tax hikes and March brought with it budget cuts, better known as the federal sequestration.
As a testament to the level of pain fiscal policy is bringing to the economy, Wal-Mart
Monetary policy is aiming to counteract fiscal austerity. Until both act in an expansionary manner, economic weakness looks to persist.
The chart below is of DB USD Index Bullish
Although economic data is not impressive in the U.S., monetary easing in other countries has kept the dollar at elevated levels. As long as inflation remains weak and other countries continue to devalue their currencies, commodities should underperform the dollar.
The last pair is of Barclays TIPS Bond Fund
Investors do not see the need for inflation protected securities because they do not fear inflation. Although monetary policy remains accommodative, and in the future rates have nowhere to go but up, investors do not see rates moving in the near term.
Contrary to Japan, where there is an increased fear of rising rates, the U.S. government has not done enough to coordinate both monetary and fiscal policy that leads to GDP expansion. However, financial markets are signaling that they will continue to bid equities higher, even in the face of gradual economic improvement.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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