Today at 8:30am we’re set to receive a data deluge – including CPI, building permits and housing starts, that will make or break the core thesis for my two largest trades: short Gold and short housing. Short Gold is a contrarian trade, based on the market’s unidirectional positioning and my belief that markets are missing the boat entirely on inflation. Short housing is based on decelerating housing fundamentals and an expectation for rising rates.
Money managers’ (MM) long exposure to Gold futures has gone parabolic! In fact, in the history of the COT report, MM have never been longer. Historically, front month /GC prices track well with net positioning data. However, during cyclical price peaks, an apparent small reduction in net longs precedes a rapid and dramatic collapse in both prices and net positioning, typical of a “stampede for the exit!” Could yesterday’s notional $2.3 billion sale of Gold futures be a trigger?
During these cyclical peaks, net positioning is really only a function of the number of longs in the market. Eventually, short money managers decide to cut their losses and either reverse positioning or lock in the loss and move on. As such, this “stampede pattern” is also observed with long-only positioning data, as well.
On the inflation-front, with the exception of PCE data, a variety of metrics – most importantly, oil, have all rebounded strongly. As shown above, oil has consistently led inflation metrics, even ex-energy indices! With oil up nearly 70% since the February lows, I see real risk to ongoing hotter than expected inflation data. We’re already seeing knock-on effects manifest in wage inflation data. This should put a hike at the June FOMC meeting firmly back on the table. With Fed Funds Futures currently only pricing in a de minimis 3.8% chance of a hike in June and only a 59% chance of one additional hike during the rest of 2016, markets are clearly not positioned for a re-pricing of dollar strength.
In regards to housing, see my full-analysis “Housing troubles to continue?“