We seem to be gearing up for the next overreaction as markets and President Donald Trump learn that it's difficult to implement immediate change from the executive office. Geopolitical strife and some disappointing U.S. data managed to give us a bid last week and push us up out of the two-month $1,200-1,260 range amidst dollar weakness, but the last few days have seen a slight reversal of trend.

We are currently trading right along the longer-term downtrend from the July-September and November highs currently at $1,286.

Bull Case

  • Two-year and 10-year nominal rates look poised to test levels not seen since the election. Even average 30-year mortgage rates are well off their 4.2 percent highs, back to 3.8 percent.
  • Pretty much any real-time economic data is showing its now typical Q1 swoon, and we can expect some volatility around growth estimates for the U.S.
  • Rate hike expectations are being revised lower, with the odds of two further hikes this year now just below 50 percent.
  • First round of the French election Sunday and British PM Theresa May has just called for snap elections to solidify some of the popular gains.
  • The dollar is a full 2 percent off its march highs at 102, and momentum is clearly to the downside. We'll see if support at 100 can step in.
  • Lower rates are not just a U.S. story, but the aggregate global yield of all bond markets is down to 1.8 percent from 2.08 percent highs in early march.
  • Equity markets have pretty much stalled and are 2 percent off the February SPX 2,400 highs. Forward earnings growth expectations are being quickly revised lower, so we are left looking to multiple expansion.

Bear Case

  • Contango rates for gold (120 bps) and especially silver (240 bps) make carry on active futures expensive. Silver roll (7-8 cents) coming up may have many traders re-evaluating their positions.
  • 14-day RSI for gold at 71 is flashing its highest levels of "overbought" in 14 months.
  • Silver CFTC spec length is at all-time record highs, leaving little room for further buying without new money entering the market.
  • Silver physical demand remains terrible, with silver eagle sales from the mint barely registering 380K so far for April (700K run rate). Weakest monthly pace since 2007.
  • Despite the weak headline number for March NFP, the underlying data for U-3, U-6 and average hourly earnings indicate it is likely a labor supply, not demand issue that restricts new hires.
  • Further, job quits (JOLTS) data indicates a high level of confidence in workers being able to find new jobs.

Other Observations

  • Q1 seasonal data weakness is doing its annual thing again.
  • Expectations of the Trump administration doing anything substantive on fiscal policy, taxes or healthcare are collapsing.
  • Chinese growth data seems to be improving, perhaps just in time for U.S. data to trend lower. Could give either industrial commodities or global growth a surge.
  • Volatility indicators across macro markets seem to be waking up a bit. Long-term implieds are still cheap relative to long run averages, but no longer at cyclic lows.
  • Recommended reading: The effects of market diversification on risk premiums across markets. Makes a ton of sense given the current landscape and could explain some of the global equity pop.

Chart 1

Gold (white) and USDJPY (orange) both seem to have run out of steam on the rally, with the long run downtrend as the solid white line, which has been significant resistance since July of last year. We have the $1,256 level now acting as support from the 200 DMA and that seems like a reasonable next test.

Chart 2

Seasonality chart of the last five years of GDPNow estimates. Orange is current track, which is getting a bunch of press, but it's in no way an anomaly. We seem to bottom every year around tax day and spend the rest of the year recouping lost ground. I think we are still on track for 2 percent growth and 2.5 percent inflation.

Coin Toss

From a longer-term macro perspective, there is plenty of room for further gold gains as rates and dollar take a breather from their rallies and economic data mean reverts, providing less incentive for any semblance of aggressive rate hikes. But in the interim, gold and silver both seem overbought here and likely to retest the 200 DMA, currently at $1,256 and $18 respectively.

Lower. Silver in particular looks vulnerable here due to crowded longs and lack of physical demand.