TIPs, gold and inflation

The US payrolls data did not prove to be decisive for markets.  Bonds sold off and the dollar strengthen, but the pace of jobs growth and the direction of the unemployment rate wasn't enough to make a call on the next move by the Fed.

But stepping back from the day to day movements in markets, it is interesting that the big drop in the gold price, which at the time seemed out of sync with other markets, has proceeded the sell off in bonds.

The chart left shows the 10 year TIPs yield inverted and the gold price since the start of the year.  The big leg down in gold at the start of April was after intense physical selling pressure that began at the end of February, with the rationale on the back of shifting predictions of further QE and more bullishness around the dollar.

Bonds sold off later, with the start of May starting the rise in yields.  10-year TIPs bonds are now yielding close to zero for the first time since mid-2011.

When looking at TIPs and gold over a long period time, its hard to discern the timing of events and without high frequency data you would just assume these events were coincident.

But for those with shorter horizons the timing of these things is important as it might be a useful guide to the near future.

It does appear that gold is much more sensitive to expectations on QE than bonds.  So if gold does make another big move in the absence of much happening in other markets, perhaps we should take notice.

The other interesting piece of the puzzle is that inflation expectations as implied by TIPs are falling and on the 5-year horizon are now below 2%.

In previous years this would be pushing markets towards more easing rather than less, especially with headline and core inflation dropping.  But all the focus appears to be on labour market outcomes, which is the only variable currently surprising to the upside.