The Latest On The Global Economy: Stagflationary Fears Rise But Will Soon Fall As Higher Interest Rates Do Their Trick

The breakdown in US treasuries has sent interest rates soaring and equities falling, but the silver lining is reduced economic activity will soon help bring down inflation readings and vindicate the original Fed position. Consolidation in equities looks set to continue, even as the volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is bullish. There are several negative factors across global asset classes. Oil is pointing to stagflationary conditions, while the action in currencies signifies $US strength. Taken together I expect the S&P 500 to be range-bound over the next few days.

China’s PBOC is going in the opposite direction of the Fed as the real estate sector continues to feel the effects of lower demand amid a barrage of distressed assets, while the Chinese Communist Party (CCP) tries to finesse both economic management and COVID. On both scores the CCP is fighting contradictions, as the policy of deleveraging contradicts the impulse to save the developers and the provincial governments that rely on them, while the zero-COVID policy flies in the face of achieving herd immunity and letting Omicron works its highly contagious way. China looks set to slow down further than earlier anticipated and that will help lower inflation fears.

Meanwhile diffusion indices in the US have started to dim while consumer confidence remains subdued, and these point to US growth slowing to its natural rate of sub-2%. Analysts expect the largest 100 firms to generate 8%+ earnings growth in 2022 and that makes guidance this week all important. So far the guidance has been lackluster as Jamie Dimon of JP Morgan has set the cautious tone. As worries over a slowing global economy and persistent inflation hover over the markets we will see continued consolidation before investors recognize current inflation is transitory precisely because growth is mediocre and globalization is disinflationary, leading to a new burst to the old highs by month-end.

Yesterday I sold my position in Activision (ATVI) and initiated a new position in Goldman Sachs (GS). My other current market positions include a large cash position, and the following holdings: Amgen (AMGN), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), Starbucks (SBUX), Titan Machinery (TITN) and a long position in the S&P 500 (via the levered ETF UPRO).