US manufacturing expanded again last month as July's strong pace was maintained in August at 55%+. New orders increased at a healthy rate of nearly 5%, but right along with this prices also increased by 5%.

This is the threat to the Goldilocks backdrop that has supported policy makers' ability to continue the inflation because there has been after all, little inflation by the measure most people look at, which is prices.

ISM snapshot, courtesy of the Institute for Supply Management

Here is what a sampling of respondents had to say...

ISM respondent quotes, courtesy of ISM

And per ISM, a look at the details of the cost component...

'Prices' detail, courtesy of ISM

And yet the Broad CCI commodity index has thus far had a failure to launch in the face of a strong economy and rising manufacturer input costs. The daily view shows a potential 'W' bottom at critical support (500).

CCI daily from NFTRH 254

Here is the bigger picture weekly view showing why 500 is critical support. A lower low would likely signal a return of acute economic contraction and a deflationary backdrop. If however CCI uses the daily 'W' bottom and breaks the red trend line, we may be talking about an inflationary phase in the markets. Stay tuned.

CCI weekly from NFTRH 250

With gold out performing commodities on the big picture and in secular fashion we should consider the question about whether the inflation will take this time.

Gold vs. Commodities, monthly view from NFTRH 254

Yes, the manufacturing economy is growing (as we have been expecting since January when NFTRH alerted that the Semiconductor equipment industry was ramping an up cycle) but this does little to change the fact that it is inflationary policy making that has been responsible for the upturn. The chart above, from the most recent NFTRH, clearly shows that we are in an era of chronic economic contraction (as the metal negatively correlated to the economy stair-steps higher vs. positively correlated broad commodities).

The upturn in gold vs. commodities at a 'higher low' is not good news for a continuing economic upturn. NFTRH has often stated that if this ratio makes a lower low then the analysis would be proven wrong (it happens) and that I have no personal agenda other than to do what big picture macro charts like the above tell me to do.

The chart above tells me that gold has just turned up vs. commodities (signifying an end-stage economic up cycle) even as the Federal Reserve appears to have spent the majority of its bullets fighting the contraction. That bullet expenditure comes in the form of rising yields as America's main creditors appear to be rebelling against (or capitalizing upon) policy designed to keep yields low by selling Treasury bonds. Hmmmm.

Markets tend to turn when things look rosiest and legions of trend followers are touting. We continue to hold open the prospect of a final strong rally in the stock market if the S&P 500 gets down to the mid-1500′s in the near term. But on a bigger picture, the gold vs. commodities ratio says another contraction is coming.

Bottom Line

The failure of commodities to reflect price increases and cause any sort of inflationary concerns is actually a negative divergence to the policy makers' wishes, which by their own statements is to promote a somewhat higher level of inflation, at which point they would try to put the genie back in the bottle. Greenspan's genie went back in the bottle alight, in the form of 2008′s liquidation.

But here we have a failure to launch (inflation) and a Goldilocks phase that could be ending with rising T bond yields. It is interesting to say the least and several potential outcomes are in play. But one thing is clear, gold has thus far found a 'higher low' bottom vs. commodities and so the ongoing big picture economic contraction continues. Manage accordingly.