Hard Talk From Central Bankers Has Yet To Force A Hard Landing — The Latest On The Global Economy

Jerome Powell spoke the obvious yesterday but spooked investors who had been hoping political pressure might ease the Fed Chairman toward a live and let live policy stance. Unfortunately the broader cultural and political trends driving the tight labor market get under the skin of central bankers and lead them to sentinel stolidity in the face of above-average inflation. So rates may go even higher and stay even longer than most had discounted. I expect the markets to soon digest this fact and retrace some of the downside action seen this week. 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 moderately bullish. 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 were also several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is inverting to historic levels. Expect the S&P 500 to be range-bound over the next few days before making one last attempt to retest the 4200 level.

The global economy persists in growing in the face of higher interest rates and geopolitical tensions. Supply chains are easing, which is good news for disinflation. Commodity markets have stabilized while the fears of mass hunger or shivering Europeans have dissipated despite a near-doubling of the world population living in food insecurity. These basic facts allow central bankers to opt for tightness to rein in residual inflation. Key is whether this tightness eventually results in a labor market recession to follow the existing profits recession.

So far the evidence points to the optimistic scenario. The American consumer shows modest signs of retrenching while the labor market remains tight, implying no recession in the US until the lagged effect of monetary tightening kicks in by Autumn. Europe is muddling through despite the prospect of rising interest rates, implying that recession is off the table until next winter. China’s trade numbers fell, indicating moderating global growth, confirmed by data out of India, South Korea and Japan. If central banks continue allowing liquidity to remain stable even as they hike rates then the prospects of recession even in 2024 grow more remote. But if liquidity dries up then valuations will follow earnings down and take the S&P to new lows until a capitulation selloff finally emerges.

My current positions include a moderately large cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and a much smaller position in the inverse levered ETF SPXU.