Politicians Can’t Whip Inflation Into Shape But They Can Whack Their Enemies To Distraction — The Latest On The Global Economy
As Joe Biden gives his rendition of doublethink for those nostalgic for the Nixonian 1970s Fed Chair Jerome Powell will get an opportunity to sing a similar tune of obfuscation this afternoon. The markets are geared for another penalizing rate hike but also for soothing words in the subsequent press conference, and I expect Powell to please his audience by signaling a pivot. Traders seem to agree 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 short-term bullish and longer-term bearish. 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 rise modestly over the next few days before falling again as the midterms approach.
The global economy is proceeding to gradual decline that can only morph into stagflation or worse unless inflation suddenly reverses. Consequently politicians are reacting by blaming others besides themselves, amplifying the status quo trend of assigning blame instead of changing behavior. The Fed is culturally offended by the behavior of American workers who are tuning out, and since they can’t speak out on the issue like Larry Summers recently did, they use their power to make a difference by raising rates and cutting liquidity to abate demand. The result is high rates and a strong $US that could easily wreck the highly leveraged financial system, while disinflation comes steadily but too slowly to warrant a change in policy.
I expect Jerome Powell to forestall a financial meltdown by using today’s press conference to signal a pivot without actually committing to one. Answering politicians’ call for his head is likely a key personal objective, but to maintain the Fed’s policy of reducing demand and disciplining American workers the signal he gives must be open-ended enough to be essentially inconsequential. He can do this by signaling that the terminal rate might be lower than thought should disinflation pick up steam, or that declining financial conditions merited constant surveillance of QT rather than blind compliance with it. This would help equities continue their recent rally, up to the point valuations overstretched and the shorts jumped back in.
Recent economic data support this approach. China is slowing markedly and recognition of this led the Communist Party to bruit the notion of easing the Zero-Covid policy, This amounts to nothing more than fake signaling too, since China is actually locking down quietly in order to both restrict their people while driving the policies out of the public’s mindset. The rest of Asia is almost uniformly declining as well (per recent PMIs) while Europe is perfectly united in decline and simultaneously enduring record inflation. The US is a relative bright spot as its PMI was ok but did show inflation is coming down, lending Powell some substance for making a pivot in words only.
My current positions include a small cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETFs UPRO and SPXU, all of which nets out to a small long position in equities, which I expect to exit in the coming days.