The Latest On The Global Economy: The Fed Will Push The Markets Higher And Keep The US Economy On Track, But The Bigger Issue is China’s COVID Policy

Volatility is set to decline this afternoon with the Fed announcement, but will likely ramp back up until investors see the Chinese shifting their COVID policy. The volatility risk premium points to a higher market over the next few days, 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. But there were also several negative factors across global asset classes. Gold is signalling inflation fears. Oil is pointing to stagflationary conditions. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to be range-bound over the next few days.

The IMF has downgraded global growth to hop onto the bandwagon the financial markets have long rode toward slow but steady global growth. Downgrades to the US due to lack of an infrastructure package and to China for its zero-tolerance COVID policy are largely to blame. Europe is muddling along as Germany remains very cautious but optimistic, while Italian elections this week are a portent of whether mainstream policy continues or is upended by populism once again. Unfortunately mainstream policy is heavy on fiscal debt and that is also constraining global growth according to the IMF. So the global economy is stuck in a low growth trajectory with only downside risk due to instability in Europe or continued irrationality out of China regarding COVID.

I believe China will gradually move away from its zero-tolerance COVID policy and acknowledge Omicron will affect everyone. That won’t raise growth but will further steady it and remove downside risk, setting the stage for an equity rebound back to old highs. With American diffusion indices continuing to point to normal growth the markets are effectively stuck waiting for the Fed to show its hand regarding balance sheet policy and for China to get sensible about Omicron. Half of that uncertainty will evaporate this afternoon, setting the stage for a modest rally. The broader push to old highs now looks further off than I expected and depends largely on China.

My current market positions include a moderate cash position, Amgen (AMGN), American Express (AXP), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.