BarroMetrics Views: A Shift in Sentiment?

First off: a wish for all the US readers: I trust that you had a great Martin Luther King holiday!

In this post, I consider whether we are starting to see a shift in the inter-market relationships that mark the beginnings  of stagflation in the US.

Did we see the first glimpse of this shift on Friday?

In the environment to  date, we have been seeing, US$ up (as indicated by the US Dollar Index [DX]), Gold down, Crude down,  S&P down and vice-versa i.e. there has been an inverse correlation between the US$ on the one hand and Gold, Crude and the S&P on the other.

FIGURE 1 below shows that the relationship between the US$, S&P and Crude held, but Gold continued  heading South. I take the view that Gold will be the first to show the change in sentiment, so this may well be the first signs of such a change. In a stagflation environment, the S&P and US$ will be directly correlated to one another and inversely correlated with Gold.

But if it is a sign, it’s still only a preliminary indication. The change in perception (from recession/inflation view to a stagflation view) will be slow and probably won’t be recognised by traders until the CPI starts to climb. That probably won’t happen till 6 months after the FRED graph starts to drop. So far that has not happened (see FIGURE 2)

FIGURE 1 Intermarket Relationships

FIGURE 2 FRED

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