Previously we reported that iron ore prices - having almost doubled in the past year and launching a global reflationary wave - are on the verge of tumbling as the world becomes increasingly aware that China has a "13,000 Eiffel Tower" record inventory problem.
And while we previously discussed the immediate adverse implications for iron ore bulls, the conseqences for the global economy could be far more material.
Conveniently, in a note this morning, BMO's Mark Steel looked at the same issue, focusing on the big picture implications.
His note titled "China's greatest gift to the US" - a "gift" which will become clear in moments - takes aim at the latest overnight selloff in iron ore, when prices fell 1.7% on Friday.
"Iron has already broken below its 50d MA, the BMO analyst writes, and has already broken below trade support, and it is now poised at the bottom of the channel, so, yes, here is another potential “pre-breakdown” view – Exhibit 1."
He then notes that "that kinda looks a lot like inflation expectations, which if anything are just a tad ahead, as they have already broken to the downside in the US, and also in Canada, and also in Germany, and also in France, and also in Japan, and also in Mexico. You get the picture, the inflation trade like a fifty-year-old doing the breakdance for the first time. For the reflationists, it’s not a pretty picture – Exhibit 2.
The conclusion is troubling for the global reflation rally:
We don’t want to make up any new theory, about what drives asset prices. Oh wait, yes we do, and indeed did, with the record-setting Trump disapproval rating looking a lot like the contracting yield curve, but we digress. We are saying that the decent, albeit worsening fit of movements of inflation expectations and commodity house driven oil, is currently improved upon by looking at long term poor, yet currently superior fit of inflation expectations and iron ore – Exhibits 3, 4.
Amusingly, Trump just gifted Mexico $17bn (two minutes in). We are not sure what the POTUS will inadvertently offer China this weekend, but according to the CBO, China’s greatest gift to the US would probably be lower inflation. Just sayin…
Recall: it was China, whose gargantuan credit expansion, monetary easing and "Shanghai Accord" in early 2016 unleashed the global reflationary wave which central banks are currently mistaking for "growth." It is only appropriate that China will be the catalyst that ends it.