Institutional reforms will ultimately be necessary to maintain the long-term integrity of Europe's currency union, but disruptive short-term economic adjustments may prove too onerous for political stability. In this highly uncertain environment, investors have sought relative safety, driving US, UK, and German government bond yields down to record lows (following Japan's interest rate path). Unlike the Bank of Japan though, we do not believe the Fed, the Bank of England or the ECB will passively tolerate deflation, but economic conditions and inflation expectations may have to deteriorate further before there are more aggressive policy responses. We think that if measures of inflation expectations fall significantly below 2%, the Fed will likely pursue further monetary stimulus, as they did in 2009, 2010 and 2011.

David Fuller's view Inflation is a lagging indicator and it should moderate in line with the declining Continuous Commodity Index (CCI) (weekly & daily) which I last reviewed on 14th May 2012 (will require subscription registration).


Interestingly, CCI currently appears somewhat overextended in both the short-term trend and in relation to its MA. However, today's decline has reversed most of last week's small rally. The first area of potential support can be seen near 500 and watch for an eventual upward dynamic to check the current slide for more than a brief pause.