By Jim Donnelly, Olson Global Markets

After Federal Reserve Bank of St. Louis President James Bullard noted that the U.S. economy might be getting closer to a Japanese-style outcome hinting that the risks of deflation were rising, yields on U.S. treasury securities declined once again. That said, other observers including Charles Plosser, president of the Philadelphia Fed, said that “I don’t think deflation, or sustained deflation, is a real problem at this point. It is hard to imagine how you can get that when you have got a trillion dollars in excess reserves sitting in the banking system or as long as expectations of inflation are well anchored.”

These viewpoints, as well as many others, underscore how the debate over inflation versus deflation has become more and more a front burner issue. While it is clear that wage pressures are extraordinarily muted at the moment give the employment picture, commodity prices as measured by the Reuters/Jefferies CRB Total Return Index have risen somewhat since the end of May. With that in mind, it is interesting to note that this Index is approaching a test of key trend line resistance now sitting at the 283 level. A break above it, if it occurs, would tend to raise hopes that demand for commodities is strengthening, and in turn hint that final demand and the economy are improving as well.

Nevertheless, the employment numbers due out at the end of this week will be key in sizing up whether employment and wage stability are at risk. Those factors, as well as the direction of commodity prices, are crucial to the “inflation versus deflation” debate.

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By Jim Donnelly, Olson Global Markets

A sharp three-week price decline in crude oil combined with setback in the value of copper (when measured in U.S. dollars) has the Reuters/Jefferies CRB Total Return Index turning lower. A recent surge in the value of the U.S. dollar has clearly been a large part of this story. Nevertheless, the direction of crude oil prices is being viewed by some as a proxy for the expectation of a slowdown in global economic growth.

Another aspect to the dynamic is that of inventory levels. With the Cushing Oklahoma oil storage facility this week reaching 37.9 million barrels and quickly nearing its peak operable capacity of about 41mm-42mm barrels, the front contract sank on Thursday in front of its May settlement. This facet of the equation is a reminder that the forces of supply and demand also have to be reckoned with.

In any event, the CRB index is now approaching a test of key “cross” trend line support now sitting at 245. Interestingly, the current technical setup for the CRB index does not yet reflect an oversold condition. As a result, the worry is that if the 245 support level should give way to selling pressures, a move down to the 205 level might be possible. A decline of this nature, if it occurred, would no doubt have a negative impact of equity prices, and at the same time force intermediate-to-long-term U.S. treasury yields to move lower still.

If, on the other hand, the 245 area can hold as support, an easing of recent bearish equity influences might occur. Unfortunately, the current technical set-up does not yet favor such relief.

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By Jim Donnelly, Olson Global Markets

Although commodity prices, including gold, silver, crude oil and the grain complex, have experienced a modest correction lower since the beginning of the New Year, the bias for commodity prices (as measured by the CRB Index) remains bullish when looking at long-term charts.

On October 12, 2009, the CRB Index broke solidly above key “cross” trend line resistance and has remained above it since. Complimenting the commodity rally were continued dollar weakness and a renewed upward trend in the S&P 500 index at that time.

After an intermediate top was reached on the CRB Index at 293.75 on January 6, 2010, a pullback in commodity prices emerged however. Still, with long-term technical studies currently locked onto bullish signals, commodity prices should generally grind higher from current levels even though the current correction to lower levels may not yet be over. Important to note is that key support for the CRB index now sits at 253.50.

If this bullish scenario for commodities is accurate, the upside “potential” for the CRB Index would be for a potential move up to the “backside” of former trend line support which now sits at the lofty level of 350.

Intermediate and long-term charts favor further dollar strength combined with a near-term pullback in equity prices. This suggests that the correction to lower levels in the CRB Index is not yet over. The longer-term outlook nevertheless suggests that the dollar should eventually reverse lower with the S&P 500 Index returning to a bullish trend. That, however, could take a few weeks or possibly months to occur.

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By Jim Donnelly, Olson Global Markets

On October 11^th, we observed that a possible bullish “cup & handle” pattern that targeted a move up to the 343 area was developing on the CRB Index of commodity prices. A “break” above key “neckline resistance at the 268 level was needed to verify this pattern’s validity, and that occurred on October 14th.

Supplementing the notion for a solid extension higher in commodity prices can be helped by looking at monthly bar charts. When looking at the monthly time frame, the CRB index broke above key “cross” trend line resistance at the 265 level on October 12^th with long-term technical oscillators signaling “buy”.

Important to note, however, was that an upward sloping trend line dating back to the CRB Index’s 182 low of November 30, 2001 held as support until October 7, 2008 as liquidations of many asset classes ensued following the collapse of Lehman Brothers. It is now interesting to observe that the “backside” of that former support line now sits as resistance coincidentally at the 343 level (and rises gradually over time).

With the relationship between commodity prices and the S&P 500 index still apparently in effect, a rise in commodity prices should be positive for equity prices. One reason for continuation of this relationship is that a rise in commodity prices points to a global economic recovery with the demand increasing for raw materials, both hard and soft. Another reason is that the U.S. dollar will likely continue its bearish trend for a bit longer. If that assessment is accurate, U.S.  companies should benefit by having competitive pricing power for goods and services, thus helping their bottom lines.

In any event, commodity prices and the CRB Index appear to hold a bullish bias with much more upside yet to unfold.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

Continued dollar weakness combined with a steady stream of positive economic data last week helped support the idea that the economy might actually be improving. And although the current unemployment level remains stubbornly high and is sill rising, enough economists have conveyed the notion that employment is a lagging indicator. As a result, commodity prices have continued to firm on a week-over-week basis.

Technically, it appears that one barometer of inflation, the CRB Index, is in the process of forming a bullish “Cup & Handle” pattern on daily bar charts that targets a move up to the 343 area. A break above “neckline” resistance, now at 268, is needed to validate this pattern’s importance.

Up to this point, a rise in commodity prices has been bullish for equity prices. The theory is that if commodity prices rise and the dollar coincidently sinks, U.S. companies should benefit with competitive pricing power, thus helping their bottom lines.

If this relationship holds and the CRB Index rises, the S&P 500 Index may continue to advance as well. Key technical resistance for the S&P 500 Index, for example, sits near the 1,165 area, which is more than 8.5% above Friday’s 1,071.49 close.

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