- Backwardation
A commodity's spot price trading lower than some given future contract is, in cases, normal (e.g. seasonality or perishable commodities). The backwardation we are seeing today is extreme by any standards.
Physical commodities have a cost of carry that include risk premium, accounting costs, storage. For commodities like oil, this cost of carry adds a certain dollar amount to the cost of a barrel. WTI Crude today trades at a 10+% discount six months out from now. The discount 12 months out is nearly 20%.
- Breakeven Inflation
Markets are pricing in an average inflation much lower than 3% over the following ten years. This is not much further off from rates we were seeing in late 2021. The average 10y breakeven for Q4 2021 was 2.53% vs 2.74% today.
- US Dollar Index
Most world currencies are tanking, resulting in strong US Dollar performance. Paradigms can shift, so this may become old knowledge, but the past decade has shown that a strong US Dollar results in dollar scarcity and deflationary tendencies. Could a more compartmentalized global economy change this? It is possible although fully theoretical.
This is not all of the data at hand, and the data I have picked align with my beliefs. I believe the former three points are strong, and independently show a comprehensive waning of medium and long-term inflation.
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