The S&P 500 Index (SPX) and Nasdaq Composite Index (COMPQ) traded to yet new all-time high yesterday. Despite the latest market advances, investors continue to fret about rising inflation and its implication on whether the Federal Reserve will accelerate the timeline of future interest rate increases.
The FED continues to call inflation transitory as they look for the US economy to recover and for unemployment to decline further. Although many investors expect the central bank to remain accommodative through the rest of the year, attention will turn toward the latest two-day FED policy meeting.
All eyes will be on FED’s messaging tomorrow on inflation and the timeframe for the unwinding of its easy monetary policy. Depending on the FED’s message, it can lead to an increase in market volatility, especially for growth-related -stocks and areas that are sensitive to interest-rate moves.
The pertinent question remains – is inflation transitory?
FED’s current explanation for inflationary being transitory rests on people returning to work, the decrease in the stimulus checks, including the $300 weekly bonus for unemployed workers. Although the supply chain disruptions and bottlenecks in the past year may have slowed down the growth rate, the demand continues to be strong. Wages have begun to rise, raw materials, energy, food, and agriculture prices have skyrocketed.
Technically, there are many things to monitor to determine if rising inflation is sustainable. Many will turn to commodity indexes such as Reuters/Jefferies CRB Index (CRB), Agriculture ETF (DBA), Metals and Mining ETF (XME), and WTI Crude Oil futures. Enclosed are the charts of popular commodities and the key technical levels to track.
If inflation is only temporary, then commodity prices will begin to show supply overtaking demand in the weeks and months ahead. Only then will this lead to commodities peaking and the fear of inflation subsiding.