The Global Consumer Wants To Be Served Even As Central Bankers Grow Increasingly Reserved — The Latest On The Global Economy
A middling global economy continues to frustrate central bankers around the world, setting the stage for more interest rate hikes through the year. The strength of the US consumer puts in doubt whether there will be a corresponding recession ensuing from such hikes, but unless China roars back to life odds call for a shallow US recession that pulls the global economy down to practically no growth. Bonds are increasingly conforming to that view while equities resist, and consequently 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 neutral. Yesterday's cross-asset action brought one positive factor for US stocks. Copper's chart is signifying global growth. But there were also several negative factors across global asset classes. Oil is pointing to declining global GDP expectations. 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 as we consolidate under 4200, setting up a new move lower as we enter March.
US services continues to be strong based on various diffusion indices and surveys, while manufacturing falters inexorably and housing meanders lower but with the potential to rebound. The same is precisely true for Europe, though sentiment in Germany remains weak. Even the UK is showing signs of strength in services, despite fiscal austerity. Emerging markets like India and Mexico continue to grow while China appears to suffer only modestly from widespread COVID infection rates. The middling economic data from around the globe mask the real issue buffeting rising stock markets in China, Europe, Japan and until recently, the US: namely, global liquidity. As long as China’s PBOC and Japan’s BOJ keep adding liquidity the bulls can keep equities from falling dramatically. I expect this context to change as inflation continues across the most of the world and the Chinese recovery sputters along. Declining liquidity married to declining profit margins will set the stage for a swoon in equities as we enter Spring.
Yesterday I exited a large portion of my short position in the markets via the inverse levered ETF SPXU, and bought a long position via the levered ETF UPRO. Consequently my current positions include a large cash position, 3M (MMM), Pfizer (PFE), a significant short-term bullish position in UPRO and a small short position via in the inverse levered ETF SPXU, which nets out to a moderate long position in the markets.