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Global Macro: Inflation Fears Subside

Andrew Sachais

NEW YORK ( TheStreet) -- The weak inflation data seen on Tuesday was reflective of the overall sentiment surrounding the domestic and global economy.

China reported weak GDP on Monday, and gold subsequently tanked. There are many factors behind the gold freefall, but I like to think the lack of inflation to hedge as being a main driver.

With the string of bad data in the U.S. -- from the underperforming nonfarm payrolls to the weak manufacturing and CPI readings -- it seems the economic picture is not improving as hoped.

The Federal Reserve minutes released Tuesday show the unemployment situation continues to worry officials. Unless 200,000 becomes the norm for nonfarm payrolls, it is unlikely the Fed will takes its foot off the stimulus gas anytime soon. The lack of inflation fear can be seen across markets, and is especially apparent in intermarket charts tracking the phenomenon.

Courtesy of stockcharts.com

The first chart, above, is of iShares Barclays TIPS Bond Fund over iShares Barclays 20+ Year Treasury Bond Fund . This ratio rises when markets are inflationary, signaling investors are buying inflation protected assets over risk-off long-term debt.

The ratio rose in stride with the SPDR S&P 500 upturn during late 2012, but recently has broken the trend. Many analysts have cited that the economic speed bump hit towards the end of the first quarter, and this chart is a testament to that. The chart advocates for a turn to defensive portfolio positioning, but more evidence is needed.

Courtesy of stockcharts.com

A major turn of events Monday was gold's freefall, as referenced earlier in the article. The chart above of SPDR Gold Trust over an equal weight DB Commodity Index Tracking Fund shows that relative to the commodity sector, gold had been positioning for a major move lower.

Inflation fears had long been overdone without consistent growth coming in to back up the claim, and the drop in the ratio, although much more than expected, is evidence that the inflation bears have finally won out.

Courtesy of stockcharts.com

The last chart is of the DB USD Index Bullish over SPDR Gold Trust. This shows the battle between inflation hedge, gold, versus the dollar, that gains strength when inflation pressure subsides. The price action had flirted with highs for much of the past year, but finally broke through with the volatile price movement Monday.

Many will attribute the extent of the volatility Monday to program trading and the power it has over markets. But regardless of the magnitude, the direction was justified. With global indicators breaking bearish, it is only a matter of time before equities break down as well.

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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