Economic Momentum Will Catalyze Even More Restrictive Monetary Policy as Spring Spirits Emerge — The Latest On The Global Economy

The drumbeat of ever higher interest rates have dropped equities modestly from their recent perch but the bulls are managing to keep the S&P above key support levels. Recent data on the economic front confirms what’s already been priced in and that’s a superficial positive for the bulls. Consequently 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 action in major currencies indicates the $US is weak. But there was also one negative factor across global asset classes. 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 tries retesting 4200 before falling back by mid-month.

Global economic growth is robust but inflationary as liquidity continues to fuel consumer purchases and asset prices. The risk is entirely to the downside as the major central banks need to improve their balance sheets to maintain credibility on the inflation front, and declining liquidity can only choke financial markets and consequently degrade business confidence. For now the bulls are fighting this theory on the hopes the disinflationary trend from November-January reasserts, but I see the bears eventually winning out. Not only will inflation data likely disappoint as evidenced by this morning’s US PMI reading, but productivity and business optimism likely deteriorate the more geopolitical tensions boomerang into statist trade and industrial policies.

The bulls can point to recent economic data if one looks outside the US. China’s official PMI data was strong but the private Caixin data a bit weaker, both reflecting declining COVID infections and a sustained reopening. Metals prices should be among the biggest beneficiaries of China reopening and here the record is mixed, with key industrials and precious metals testing recent lows. Japan continues to lose ground but a better global indicator is the South Korean trade deficit, which has narrowed and shows middling but positive momentum in the global economy. Europe is similarly muddling through as it deals with the high inflation that generally accompanies growth, and this is helping the € against the dollar. Since upwards of 40% of trade is invoiced in dollars the $US is key to monitoring the health of the global economy and for now it clearly shows a slow but steady trend that doesn’t bode well for central bank policy or the asset prices.

Yesterday I added slightly to my short-term bullish position via the levered ETF UPRO. Consequently my current positions include a very large but slightly smaller cash position, 3M (MMM), Pfizer (PFE) and a small short-term bullish position in UPRO.