The pace of headlines not directly related to President Donald Trump seems to be picking up a bit: Fed hikes, inflation vector shift higher, crude volatility, Brexit, whatever cute name Scottish Exit will get this time, Dutch/French elections, just to name the primary ones.

Several of these could actually affect asset pricing and allocation mixes, so perhaps the macro-wide, low-volatility regime is nearing its nadir. Right on cue, one-year vols are trading down to almost 15 percent, which tends to act as a lower bound, and a few brave souls search for precious vega to sell.

Bull Case

  • The FOMC is behind the curve, and rate hikes — combined with massive balance sheet — are still accommodative as real rates remain at or near negative (medium term).
  • Or ... time doesn't end bullish cycles, rate hikes do. Higher rates will bring on the next crisis in (insert favorite personal sum of all fears) (long term).
  • Or ... gold is a substitute for the short rates while I wait to take some duration risk after a few hikes.
  • Bullish broad commodity calls are starting to appear more frequent among analysts, the financialization of commodities is likely to increase intracommodity correlations. Example of this: Buy zinc/copper/steel through the broad index, which includes gold.
  • Gold EFP in backwardation again has some precedent of underlying strength from OTC — unlikely to see producer selling at these levels.
  • Metals have actually held up pretty well in the face of rising real rates, and buyers seem to see decent value below $1,200, perhaps ahead of the 50 percent fib retracement which is somewhere between $1,192 and $1,193.40 depending on your base levels.
  • DXY resistance at 102? GBP and EUR have headline risk, but USD has stagnated against the Yen as well.

Bear Case

  • FOMC rate hikes will bring higher real interest rates and potentially a stronger dollar to boot. The opportunity cost of holding a zero-yield asset is certainly negative.
  • Market now pricing in around 60 percent odds of three rate hikes this year, with 25 percent chance for four. We haven't had a Fed outperform hawkish since basically 2006.
  • Physical demand is weak. Silver retail sales are fractions of prior years by almost any metric, and gold demand seems to be getting hammered by India, among others.
  • Two-year rates at 1.39 are the highest since 2008, yes that 2008 (back end of curve not following through as long run growth estimates remain weak).
  • Atlanta Fed's GDPNOW real-time indicator running the lowest in a year all of a sudden. See below for further.
  • Underneath a slew of resistance from moving averages and channels: 1,208, 1,216, 1,250, 1,261.

Chart 1

I can never decide if periodic outperformance is bullish or bearish for an asset that has no cash flows, and therefore little basis for fundamentals on its own. In any case, gold (white) in particular, and to some extents even silver (gray), have held up well in the face of rising real yields (inverted two-year nominal as proxy here in orange) and a stronger dollar (blue).

If short rates continue into multiyear highs, we are likely to see it weigh on metals further, but for now holding strong.

Chart 2

It's admittedly a noisy data set, but I think the drastic turn lower in the Atlanta Fed's GDPNow real-time indicator for both PCE (white) and GDP forecasts (orange) might give voters the slightest bit of pause in being aggressive with the long end of the dot plot curve. There is clearly some Q1 seasonality weakness that needs to be tempered, but with a Fed that is clearly nervously biased toward dovishness, it is at least something to watch.

Employment data has been strong for years, and inflation seems to just be ticking up. If first readings of Q1 GDP come in significantly lower, the Fed might rethink its stance on what constitutes a "strong economy" at the risk of derailing job gains and the almost certain executive tweet storm that would follow.

Coin Toss

Dot plot and news conference today will be the items to watch, especially with Core CPI continuing to print north of FOMC target 2 percent. We often get a relief rally after the actual hiking event, though that may depend on the long-run forecasts, which have historically disappointed (recall the phrase "dovish hike"?).

Bias is somewhat paradoxically to the upside on rumor/news axioms.