The Latest On The Global Economy: Apprehension Spreading From West To East

American consumers have been prescient in forecasting declining economic fortunes since mid-2021 and their gloom is now spreading across the Atlantic. European sentiment is being shredded as the Euro dips below parity against the $US, and next up is the Chinese yuan. The global economy may hold up and stay positive but equity markets are beginning to discount a recession and all the political turmoil that could result from it. 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. The US yield curve is rising and in the current context that is bullish. But there were also several negative factors across global asset classes. Copper is pointing to declining global GDP expectations. The action in currencies signifies $US strength. Expect the S&P 500 to be decline over the next few days as high inflation forces restrictive monetary policy and an ensuing recession in the US, Europe and possibly Asia .

The one region actively fighting economic negativity is China, where the equity market is on fire and confidence remains strong despite stop and go COVID policies. Confidence is substantiated by the recent trade surplus data, even though the report also indicated huge imports from Russia. But while the Chinese intend to stimulate rather than follow the US into restriction, the latest news of further lockdowns owing to the BA.5 variant suggests the Chinese consumer and investor will soon follow their western siblings into purgatory, bringing the economy down to anemic levels.

Higher than expected core and headline inflation largely extinguishes the debate about which inflation gauge to use, as it’s clear energy shortages and broader supply chain issues in combination with the Great Resignation are pushing prices up or cutting output for everyone everywhere. Since the causes of inflation are diverse the Fed would be smart to shift the focus to restrictive fiscal policy, but wary of their reputational risk they are opting instead to lead the fight to boost unemployment by raising interest rates. Such political mistakes are the foundation for underconfidence, and a key reason lower lows in the S&P 500 are on the horizon.

My current positions are a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.