The 5-year breakeven rate for inflation — calculated by deducting the yield on 5-year TIPS from the 5-Year Treasury yield — rallied in recent weeks and is testing resistance at 1.60%. But the long-term trend is down and we should expect another test of support at 1.2%.
Apart from Japan, deflationary pressures are rising in all major OECD countries. Given the global trend, the Fed is likely to raise interest rates at a leisurely pace. Expect low inflation and low interest rates for the next 2 to 3 years.
10-Year Treasury yields rallied along with the inflation breakeven and are now testing resistance at 2.15%. Breakout would test the descending trendline around 2.40%. But reversal below 2.0% remains as likely and would signal another test of 1.65%.
The Dollar Index broke through resistance at 95.50, offering a medium-term target of 100*.
* Target calculation: 90 + ( 90 – 80 ) = 100
Low inflation undermines support for gold. Spot Gold is testing long-term support at $1200/ounce. Reversal of 13-week Twiggs Momentum below zero warns of another decline. Breach of support at $1200 would signal another decline, while follow-through below $1150 would confirm.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000