Desiccating Economies In Europe And Asia Seem Worlds Away For The Bulls — The Latest On The Global Economy
The American economy continues to grow and possibly disinflate to the delight of the bulls, despite clear and obvious headwinds that are growing in strength. Dodging negative Fedspeak and earnings reports is the latest sport for the bulls and now that 3rd quarter reports are wrapping up the road upwards looks unclouded for a few more days. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is short-term bullish and longer-term bearish. Yesterday's cross-asset action brought several positive factors for US stocks. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days before hitting resistance and beginning a new leg lower after Thanksgiving.
The clash between the American consumer and the Fed has spilled over into retail stocks as the haves and have not alike move to value in the face of relentless interest rate hikes. Those in the middle like Target are getting crushed while the bottom and top ends thrive. This shift masks the overall trend in same-store sales which remains elevated despite being in a clear downtrend. The consumer is stronger than what the Fed expects at this stage of its tightening cycle and that underlies recent Fedspeak deriding the idea of a pause in rate hikes. Until labor market data turns starkly negative interest rates will be vulnerable to surges higher and I expect the next rise after Thanksgiving.
Meanwhile the markets are moving higher and taking a host of bad global news in stride. Yesterday the market failed to even blink in the face of a missile killing two individuals in Poland. Economic data across Asia has been bleak and global liquidity continues to dry up due to the Fed’s hawkishness. Even the ECB has gotten into the act by incentivizing repayment of TLTROs (long-term loans) which can do nothing but further drain liquidity. The persistence of stagflation in Europe combined with contraction in Asia will reverberate in the US in the form of gloomy fourth quarter earnings, the rumors of which will be bruited by December and cause a retest of the now-forgotten October lows.
My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETF SPXU, all of which nets out to a large short position in equities.