In his daily note, David Rosenberg expands on a point we just made, that if you dig beneath the oil spike and its knock-on effect on inflation, the real story right now is deflation:
What is fascinating is to see what the bond market is telling us. Yields continue to fall and are now down around 20 basis points for the long Treasury from the nearby high even in the face of mountains of supply ($29 billion of seven-year notes today) and the news of how Bill Gross at PIMCO radically cut his exposure recently. The bond market is telling you something very important here that rather than being a permanent source of inflation, what we are witnessing is a global exogenous deflationary shock (the impact on discretionary spending in America will be considerable — consumers use 140 million gallons of gasoline annually and prices are already up 30 cents so far this year and the run-up is far from over). The price of copper is telling you the exact same thing as it rolls over to a four-week low, though security of supply and hoarding of raw materials in general should help establish a firm floor for all non-oil commodities. The surge in wheat, corn, and soybean prices is also being unwound.
It would seem that the stock market is echoing that sentiment. European bourses are down for a fifth day running — that hasn’t happened since last October. The Asian markets are in the loss column for the fourth day in a row — the longest losing streak in three months — and as a group is now down for the year.
To us, one of the key questions right now, is whether central banks — thinking that inflation is their big threat — will raise rates anyway.
We noted the bond yield decline earlier.