Economic Optimists Now See No Landing But A Glide Back To The Stratosphere — The Latest On The Global Economy

The state of the global economy is not strong but financial markets are increasingly talking about resurgence instead of recession, hoping that such talk becomes a self-fulfilling prophesy. Central Banks must get out of the way for that to happen and here the optimism evaporates into vapid exuberance, indicating that the rally in equities is about to end. 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. There are several negative factors across global asset classes. Oil is pointing to stagflationary conditions. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to be range-bound over the next few days as it retests 4200 then comes down hard in a trial run of the volatility to come by winter’s end.

Bad economic news percolates across the globe and suggests recession is upon us, yet the bulls point out that the data reveals resilience almost everywhere. On the trade front Taiwan is replicating the bad news from South Korea yet optimism regarding China’s reopening counters that narrative easily. In Europe the UK is in a sustained downtrend, France is suffering through strikes and protests that test its national commitment to solidarity, while Germany, Spain and Italy are mudding through with marginal growth or decline; yet the ECB is raising rates with small fear of going too far. And in the US lending and borrowing conditions are declining yet the labor market is not just strong but the underlying data from the payrolls report indicates that firms will keep on hiring right through until spring. Consequently the notion of “no landing” is being bruited and keeping equity markets in an uptrend.

Consequently the global economy muddles through with interest rates hikes and geopolitical tensions and now horrific natural disasters while recession seems further away than feared just a few months ago. Spurts of growth can be found here and there a couple of nations are confidently plowing ahead, suggesting the global economy can conceivably cool down and then rebound nicely by late in the year if the US can manage a soft landing. I consider this a risky bet, as sequential spikes in inflation are now in the Fed’s thinking and consequently interest rates look set to stay higher for longer unless a deep recession confronts us. Expect global growth to weaken throughout the first half of 2023 and stabilize just north of 0% growth, assuming the US labor market declines gradually. The upside risk is negligible while downside is obvious and profound, and as that realization percolates through the markets expect another leg lower in the S&P 500 as winter ebbs.

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.