Keystone's Inflation-Deflation Indicator Continues to Signal DEFLATION

In May, Keystone's indicator dropped into Deflation. Things have not changed; the economy remains mired in Deflation. The CRB (Commodities Index) languished at 270 on the cliff edge during June but recovered. Taking a look at the numbers;

CRB/10-Year Price = 294.50/102.328 = 2.88

Over 4 = Inflation
Between 3 and 4 = Neutral; inflationists and deflationists fight it out
Between 2.90 and 3.00 = Disinflation
Under 2.90 = Deflation

The U.S. 10-year Treasury yield is at 1.5%. Chairman Bernanke announced QE 1 in 2009 and QE2 in 2010 as the country became mired in deflation with Keystone's indicator in the 2.5-2.6 range. The indicator dipped into this area a month ago, albeit briefly, but then recovered. Therefore, the QE3 watch continues but for Bernanke to act, the 10-year yield will need to drop lower (price higher) as well as the CRB dropping back down thru 270 and heading lower again.  The next FOMC rate decision and meeting is 9/12/12 and 9/13/12; on the second day Chairman Bernanke will present the economic projections by members and conduct a press conference. Traders are expecting a QE3 announcement in the coming weeks but if the equity markets remain at current levels, the Fed will do nothing.

The Fed's decision on QE3 will be dictated by deflationary pressures.  Focus on the commodities index, CRB; once it loses 270 the Fed will stand ready with QE3. At CRB 250-270, the Fed will act with QE3. That may happen in a few days, or it may take a few weeks, or perhaps the can-kicking is successful and markets remain in this sideways malaise for weeks to come not requiring QE. The coming presidential elections will likely have no effect on Bernanke's decision, the Fed will take its direction off the CRB. CRB under 270 shows that the country is falling into a deflationary spiral a la the Great Depression or Japan in the 1990's. Bernanke will avoid deflation at all costs which will cause him to act with QE3. Barring further deflationary concerns, the markets will simply muddle along in the current funk.