Trumpflation — or whatever you want to call it — has basically been priced into markets for perfect execution.

The dollar remains incredibly strong against pretty much any cross, up 5 percent in the broad indices and as much as up 16 percent against what had been the darling of the year, JPY. The S&P 500 remains at all-time highs and is up 8.5 percent from early November, and yields continue the grind higher. Ignoring the variability in specific durations, a ballpark 10-year note price is down 5.5 percent since the election on the expectation of higher rates, and a 30-year note is down around 12 percent.

It's like everything that was wrong with our economy was basically fixed overnight by someone who lost the popular vote and hasn't been sworn in yet. I'm not saying he will or won't execute on policy well or even what that policy may entail, but right now we are very much on the rosiest end of the spectrum.

I've been overly bullish U.S. economy for most of this year, but it's as if the judges have scored the dunk/dive/skate as a perfect 10 and we aren't even on the platform yet.

Bull Case

  • Year-end institutional short gamma covering in equities probably drives a bit of the bid. We would expect to see that vanish over the next few weeks, but not without a Santa rally first.
  • Higher rates are starting to flow through to mortgages, with 30-year fixed up 50 bps since October. That may hurt the all-important construction boom, or does it drive a rush before higher yet?
  • Yes, the Fed will likely hike tomorrow, but the rhetoric around it will likely confuse and soften expectations of rate hikes in 2017 to two or so.
  • Unless the econ/inflation paradigm shifts into high gear and forces the Fed, further upside in the dollar seems limited.
  • CFTC net spec positioning shows there are still plenty of net longs, but shorts are at their highest level since February of this year. In hindsight, that was a painful position.

Bear Case

  • The rally can become self-perpetuating for a time if investors feel rich, consumers more confident, buy homes, etc.
  • Underlying economic data is still pretty solid, with Econ surprise indices flashing highest since 2014.
  • Atlanta Fed GDPNow index, which is pretty good, is hovering right around 2.6 percent at current.
  • Their real-time PCE at 2.3 percent shows some inflation remaining in the market. If this ticks higher, it will force the Fed's hand, and higher rates will come much faster.
  • Full employment will likely continue to drive early signs of wage inflation higher as well.
  • The gold and silver ETFs are a one-way liquidation train right now, though much more (8.6 percent) has come out of gold than silver (2.8 percent), furthering my theory that retail folks would rather die than sell silver.

Chart 1

How strong? Too strong. The last time the USDJPY broke above 120 and sustained was in the late 1990s, when U.S. GDP was running north of 4 percent. We are running into resistance at the 116 level currently, but it's interesting to think about what is being implied by being back in the range of the '90s and 2000s booms when economic growth is below trend v. those periods.

Much of this is interest rate differentials, but again, those too are shaped by the market perception. Higher U.S. rates and USD seem to be giving breathing room to other central banks to slightly curtail their dovishness, allow interest rates to normalize some, all while being more accommodative than the Fed and keeping their currency weaker.

Basically, I think we can see a broad coordinated shift in global rates higher without it changing the currency flows too much, but it's a delicate dance for all involved.

Chart 2

Down channel. With the ETFs continuing to liquidate (yellow line), a sustained rally is going to take some real change in news flow, but we can absolutely see the short covering rips on occasion.

My favorite part of this chart is how closely the ETF holdings follow the spot gold 50-day moving average (pink line, bold). This holds true for the 10- and 15-year charts as well, its pure trend following.

Also, note that we are holding a sustained down channel trend, but a close above $1,165 or so in the next two days will be a break from it, and the easy money on the short side may have been made.

Coin Toss

The headwinds for metals next year are going to be more from global interest rates than just the USD. We have seen that trend develop over the last few months (discussed last week), and I think it begins to make more and more sense on an opportunity cost basis for that to hurt gold if it plays out.

I don't see too much changing between here and year end, but as I mentioned earlier, markets have in general come too far, too fast. A dollar/equity/rates breather might make room for gold to trade sideways, break the down channel and potentially challenge the $1,200 by catching shorts off-guard. Higher.