Optimistic Markets Are Whistling Into Headwinds — The Latest On The Global Economy

Overcoming a banking crisis in two weeks would be cause for unbridled financial joy were it not for obvious economic headwinds caused by tight Fed policies. This afternoon we will likely hear how those policies need more time to work their furies on inflation, but that the Fed remains alert to dynamics in banking and liquidity that mandate a pause, pivot or any of other term of art for a temporary countermove. Despite the Fed’s clear goal of raising unemployment and slowing the economy the bulls are primed to cherry pick any bit of positivity from Jerome Powell 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 bullish. There are several negative factors across global asset classes. 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 move moderately higher over the next few days before pivoting itself toward a new bear market downturn.

The US economy will flatline not only because of Fed tightness but the ancillary effects of a weakening global economy. Europe continues to muddle through on modest expectations of growth, which comports with the uninspiring global trade picture. South Korean trade data paint an even bleaker picture not just for the global economy but for China and its vaunted reopening. Exports to this key market fell 36%, while the action in key metals like zinc, tin and aluminum further suggest China is facing a slow reopening and that the recent PBOC reserve ratio cut is a genuine sign of weakness.

While growth is limited the inflation picture in the West continues to be problematic as evidenced by a blowout number coming out of the Brexit-hobbled UK. The US is the major holdout, as inflation coexists with economic strength, as evidenced by the Atlanta Fed’s nowcast of 3% growth in the US so far. Understandably the markets are unconcerned about the potential for stagflation, but I see a rising probability that while Fed makes little progress against inflation psychology it does crimp the housing market enough to raise the unemployment rate and slow growth down. The regional banking crisis reflects tight Fed policy and adds onto it since both housing and the broader real estate market are highly dependent on these banks. While the bulls have control and can ignore these headwinds, more data points over the month will force a course correction toward anticipating the worst-case scenario instead of ignoring it.

My current positions include a large cash position, 3M (MMM), Pfizer (PFE), and the levered ETF UPRO.