The Latest On The Global Economy: China Saves the Morning But Probably Not The Day

The nuanced Chinese moves to contain the Evergrande crisis has the markets bullish this morning but it’s highly likely this fades and we test Monday’s lows sometime this week. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to be range-bound over the next few days.

China apparently resolved one interest payment issue for Evergrande, but tellingly didn’t concern itself with a dollar-denominated payment due too. So key now will be the Fed’s view on the economy which will be provided this afternoon. While The Beige Book shows the economy has moderated considerably, housing starts continue to rise well above economists’ expectations, and that is key to household wealth and spending. So expect the Fed to signal that tapering is likely to be announced in November but a rate hike is only a mild possibility in 2022. The Fed needs to signal that some form of tightening is coming since other central banks are clearly concerned with inflation. EMs like Russia, Hungary and Brazil have already raised rates, and more will do so this month. So key today is whether the Fed signals a rate hike in on the horizon in 2022. Even though inflation is a modest issue in the US, and employment is rising, the Fed doesn’t want to mislead the world into thinking the goldilocks economy will last for years.

My current market positions are in Activision (ATVI), American Express (AXP), Amgen (AMGN), Gibraltar Industries (ROCK), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).