Reflation Rotation; Gold Breaks Above $1800

A ~10bp selloff in UST yields driven by higher inflation expectations is driving broad-based weakness, particularly in high-yielding EM. The extent to which central banks push against steeper yield curves depends on the makeup of the move between real yields and inflation breakevens in gauging whether financial conditions are tightening.

A willingness to increase asset purchases is a common theme from central bankers, echoed this week by the RBA in its on Tuesday.

Fed Chair also said the risk of doing too much is less is far greater than the risk of not doing enough in his Senate testimony.

As for actual inflation picking up and central banks turning more hawkish, the Fed’s new framework allows the economy to ‘run hot’ in theory. More immediately, US market-based inflation expectations are rising, as measured by breakevens.

Since the Trump administration allowed the presidential transition process to start on Nov. 24, the US 5y5y inflation swap’s yields have broken out of a range (2.08%-2.20%) to new highs for 2020 (2.25%), and the highest since May 2019. Which was the clear cut dollar sell call.

Higher market-based inflation expectations are consistent with pro-reflation trades outperforming, including a rotation from tech to value in equities and selling the USD virtually against anything you want.


closed comfortably back above $1800 overnight, bouncing back from November’s lows to snap the lower highs/lows series last week. The RSI got off the oversold region for to possibly stage a larger rebound over this week.

A rise in inflation expectations (breakeven higher) prompted by signs of inflationary pressures in global PMI reports was encouraging. Month-end expiries and the Comex roll have been dealt with, and the look-see above the 200-day moving average gave optimism. The market should refer to the seasonality strength into December. Positioning is cleaner, and snap rallies we have seen in the last 24 hours might be the feature in the next weeks.

I do not have a huge ax to grind (long but not a ton as per yesterday’s call), but I like the seasonality trends on gold and the Euro higher into year-end.


The failure of an OPEC+ agreement in postponed talks on production that resumes Dec. 3 is a near-term risk to this dynamic. The consensus expectation is for a three-month extension to current production quotas due to rising by 2mbd on Jan. 1, 2021. Front-month is down 3.8% since the November high, although implied volatility remains low. The biggest fissure is between Saudi Arabia and the UAE. The latter opposed an agreement to an extension without more stringent oversight of output cuts from other members.

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