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May 2021 Commentary


Deflation inbound?


The last month saw reflation trades continuing where both growth and inflation are starting to pick up which isn’t a surprise given the recovery progress from the recession that happened. We project YoY nominal growth to continue accelerating at around 2.1% with headline CPI growing at 0.2%. Although both growth and inflation are growing which good for us as investors, we see a possible slowdown in inflation in the months to come given the deteriorating momentum in the rate of change of CPI with our indicators painting the same picture.


WTI which often leads CPI is already signalling a decrease in CPI YoY.

Source: MercurialResearch



With growing concerns of monetary debasement emerging, the past month saw investors continue to bid up commodity prices, leading to higher inflation. But we have observed significant decrease in momentum especially in agricultural commodities compared to 6 months ago.



Commodity Returns 6 months vs 1 month


Source: Koyfin


It seems that with global commodities rising to record highs, Chinese government officials are wary of inflating asset bubbles and the PBOC has been restricting the flow of money to the economy.

Economic data in April suggests that both China’s economic expansion and credit impulse may have already peaked which could cause major impacts in the commodities space especially for metals.

Dr. Copper and many other commodities are likely to see a correction in the months to come.

China Credit Impulse (black) vs LME Copper (red)

Source: Bloomberg Economics, LME


China Credit Impulse vs GSCI Commodity Index

Source: MacroMarketsDaily, PBOC, GCSI


The S&P GSCI failing to break resistance same with copper with other commodities starting to fall.

S&P GSCI

Source: TradingView


Copper reporting lower highs ever since its peak at early May.


Copper Futures

Source: TradingView


Same for lumber, silver and many others…


Lumber Futures

Source: TradingView


Silver futures

Source: TradingView


With a short-term inflation and medium-term deflationary outlook, it seems like most commodities will not be able to have a successful breakout of their resistances due to medium-term deflationary headwinds too.


It is in our view that it is possible to see deflation in perhaps the next 3 months. Meanwhile, the month of May still shows signs of life in the reflation trade.

Source: MercurialResearch


However, the last week of the month started to show sector performances that resembles those that we see when there is a slowdown in growth with sectors such as XLY, XLC, XLRE outperforming. A “Goldilocks” environment may be upon us very soon.

Source: MercurialResearch






With deflation possible on our radar, we look to begin trimming our reflation trades and slowly shift towards more cash and fixed income which are 2 assets we are looking to overweight in a deflationary scenario.


Technicals are also indicating a possible bottom for the dollar.


US Dollar Index (DXY)

Source: TradingView


But for now, US10Y seems to be holding up on strong supports.


US10Y log chart

Source: TradingView


Gold which tends to lead rates are signalling a rise in yields.


Gold vs US10Y(Inverted)

Source: TradingView


And the BofA also sees yields rising…

Source: BofA Global Research, Bloomberg


To sum up we feel that there will be a slowdown in inflation in the months to come and if growth slows too on a rate of change basis it will definitely turn ugly for the economy. We look to slowly scale off the reflation trade and scale in on our fixed income and cash positions in the meantime.



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