Is Disinflation Around The Corner?

1.) GOLD – Did gold just lose its footing? Maybe. The 200-day moving average has been one of those levels that are often defended by investors, both retail and institutional. Yesterday, gold sliced through that level like a hot knife through butter, closing at $4,329. The 200 DMA is at $4,412. Gold is oversold here, so a bounce would not be surprising. Another “bullish” aspect, or at least something that can point toward a bounce, is that it also found support at the 50-WEEK moving average. If it cannot hold these levels, $3,500 would not be a huge surprise. Not in a straight line, of course. But the point is that when an asset breaks its trend level, no matter how “amazing” the asset is or what the narrative surrounding it is… it’s likely to underperform for a bit. So far – since its March 19 trend break – that has been true. Now, if you’re itching to be a gold owner, this is a spot that could work. You just have to be ready for the possibility of a slow, sideways slog until it can get back above trend near $4,700. Here’s a good chart that shows what can happen when gold has a long stretch of trading above the 200 DMA, then breaks it. Look back to 2011 for a comparison. As you can see, it took a while for gold to get back to those 2011 highs.

2.) OIL – In addition to semiconductors holding their trend, one of the more bullish macro developments is oil continuing to drop below its trend level (shaded area on the chart). Oil (WTI crude) is now at $90.54, down 2.45%. We still need to get through tomorrow’s U.S. CPI data print, which we think will show an acceleration. But this energy decline from its cycle highs ensures we get a disinflation data print in June. Now, before we get too excited that "prices" of good will come down, my mention of disinflation has to do with what's important to markets. Inflation falling from a previous data point - or deceleration - is what matters to markets. So I'm speaking here as an investor, not a consumer. Important distinction. Anyway, that means bond yields are probably done going up, for now. The US 10YR Treasury yield made a lower high yesterday at 4.58%. The first real test of rates breaking down will be at the 4.41% level. As you can see below, a longer-term picture of oil still supports the lower long-term high. An $80 oil price would not be a surprising development over the next several weeks.

3.) CTAs – I often cite CTA or systematic buying and selling potential based on various market scenarios. These are the arbiters of “The Flows,” so it pays to understand what they are up to. Goldman Sachs regularly models CTA/systematic flows under different market scenarios (up, flat, down tape) over short horizons like 1 week and 1 month. These are based on their prime brokerage data, futures positioning, and trend-signal tracking. CTAs are momentum/trend-followers, so their behavior is mechanical and path-dependent. Recent reports show CTAs remain net buyers in the near term under most scenarios, but with asymmetric downside risk over longer horizons. Over the next week (most recent): Flat tape: ~$5.5 billion in equity purchases; Rising market (up tape): >$7 billion in buying (stronger momentum); Weaker tape (down): Limited selling (or near-flat); mechanical deleveraging is muted short-term due to current signal strength. Over the next month: Flat tape: ~$18 billion in purchases; Rallying market (up tape): >$37 billion in buying; Sustained decline (down tape): Potentially >$100 billion in selling. This would be if trends break, triggering broader exits. Bottom line: CTAs have room to add in the near term.