The Latest On The Global Economy: The Real Upside Lies In The Words Of Anodyne Fed Governors Rather Than The Flamboyant Verbal Jousts Of National Politicians

Downside risk remains to the global economy and that moved the S&P 500 to test the January lows yesterday afternoon before rebounding modestly on the notion that the worst has already been discounted on both economic and geopolitical fronts. 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 was also one negative factor across global asset classes. Gold is trading as a risk-off asset. I expect that fears both economic and geopolitical will resurface and the S&P 500 to be range-bound over the next few days, before pivoting late in the week based on the content of speeches from various Fed officials.

The global economy is chugging along on low interest rates and the prospect for lower rates for longer in nearly every place but the US, where rising rates driven by the Fed are keeping confidence tethered. Inflation expectations continue to moderate and yet the Fed is not walking back the idea of a 50bp hike as I expected: on Monday Governor Bowman noted a 50 bp hike in March was still possible if inflation comes in too high, though given its current rate her statement is milder than those from uber-hawk Bullard. Rising rates mean equity volatility and that vitiates business confidence, which combined with low consumer confidence result in downside risk to US growth. With equity valuations historically high even the robust forecasts of high single digit earnings growth can’t backstop equities if the Fed is bent on raising rates too fast.

The broader global economy has no upside to offer either, as modest but persistent growth would be assured were it not for the inability of the Chinese to put their property crisis behind them. Many banks in China are lowering rates to prop up the mortgage market, and given the impractical zero-COVID policy this means there is significant downside risk to China. So while Europe is improving on the back of higher business confidence in Germany (IFO index), and India is locked into strong growth and easy monetary policy, China offsets both and makes for a mildly worrisome picture for the global economy that only the Fed can resolve. With more Fed governor speeches later this week I expect to get some resolution as talk of a 50bp rate hike in February cools down.

Yesterday I took an additional small position in the market via the levered ETF UPRO. and my current positions still include a sizable cash position, as well as Amgen (AMGN), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.