The Fed Pitches Straight Fastballs While The World Waits For A Balk — The Latest On The Global Economy

In the early innings of the stagflation series the Fed is throwing its hardest stuff no matter how accustomed the global economy is to fat pitches. With unemployment across the world relatively low and commodity prices rebounding the Fed is determined to ignore cries from the financial markets and maintain their higher for longer game plan, and that means much lower lows across global equity markets. The volatility risk premium points to a higher market over the next few days due to the high volatility of late, but my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is falling and in the current context that is bullish. Expect the S&P 500 to fall over the next few days assuming tomorrow’s CPI report reads anything north of 7.5% inflation.

Commodities like wheat are bidding to return to the stratospheric levels that followed the Ukraine invasion, while OPEC supply cuts presage steady gas prices for the foreseeable future. Disinflationary trends are too sparse for the Fed to feel comfortable about pivoting in order to save investors, hence the chorus of Fed speakers singing the higher for longer refrain. “Inflation in the mind” syndrome was last seen in the 1970s and that concerns the Fed more than a temporary drop in wealth due to the bear market.

Signals from the global economy validate the Fed’s conservative mindset. Chinese lending data shows it hasn’t fallen into recession yet, but observations of Golden Week suggest retail consumption is dropping off and will lead to much lower growth over 2023. The Chinese stock market roared intraday to finish strongly and suggests the Chinese Communist Party is determined to spin the narrative away from recession. Growth estimates are getting cut for the major Asian economies but since this helps the $US the Fed reasons that import prices will remain steady due to the currency effect. Until the Fed sees financial instability it won’t pivot to help its global colleagues anymore than global investors.

The UK mirrors the US in reporting lower GDP numbers while simultaneously maintaining a strong labor market. The Fed reasons that the labor shortage across the US and Europe has eliminated the normal incentive to lay off workers when the economy slows. And persistent wage demands mean firms will automate and suffer reduced margins, which eventually yields higher unemployment and lower consumption and investment. The Fed is content to wait for that eventuality rather than step in and risk prolonging this inflation era. Hence the increasing worry of a long and deep recession and the near-certainty of a longer and deeper bear market.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the inverse levered ETF SPXU, all of which still nets out to a meaningful short position in equities.