Expectations For A Bright Spring Will Soon Diminish As Inflation Throws Ice Cold Water On Hope As an Investment Strategy: The Latest On The Global Economy
Markets continue riding high on hopes the global economy glides into a goldilocks equilibrium with moderate growth and moderating inflation despite a slew of contradictory data. Not only is inflation running hot but the consumer is running out of steam as retail therapy loses its utility and layoffs start adding up. Unless central banks offer happy talk I expect fears of diminishing liquidity and consumption to sap the bulls and invigorate the bears as we enter the last few weeks of winter. For now 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. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to be range-bound over the next few days before heading lower as February recedes.
Key to market ebullience is belief that the Chinese reopening does more to open supply chains and drive disinflation than to raise commodity prices and stoke inflation. So far the oil market has zigzagged and yielded rising gasoline prices in the US, helping keep inflation in the 5-6% range. Oil demand is forecast to rise on China reopening to a rate of about 102 million barrels per day, and recent moves by Russia suggest supply make pull back and eventually lead to a deficit by the second half of the year. This is one critical reason to see higher interest rates for longer, as inflation proves hard to bring down.
India is another Asian bright spot despite foreign capital outflows fleeing endemic corruption and deficient corporate governance. South Korea is fighting a trade slowdown and Japan continues to muddle through with low expectations as disinflation returns and incentivizes the Japanese consumer to continue saving rather than spend. Across the continent Europe is now expected to grow marginally as well, at less than 1% for 2023, which is more than double the estimates from December. But inflation will remain high at over 5%, so ECB rates will rise and stay high in Europe unless something breaks.
US housing had been contracting at a 25% pace but strong employment is giving this sector a rebound, providing more reason for higher for longer rates despite increasing political pushback. With services inflation and the labor market both raging hot the possibility is growing that the Fed will consider selling mortgage-backed securities as part of its quantitative tightening program. A decrease in global liquidity would rudely poke investors out of their gauzy haze, and the Fed may soon find that is required to avoid a repeat of the long 1970s.
My current positions include a significant cash position, 3M (MMM), Pfizer (PFE) and the inverse levered ETF SPXU, which nets out to a significant short position.