Consumers Are Standing Tall To The Consternation Of The Fed — What Fixed Income, Currency & Commodity Markets Are Telling Us
The resilience of emerging market currencies in the face of Jerome Powell’s hawkishness proves that consumerism and the dream of material wealth is stronger than any political ideology across the globe. Not only is the American consumer exploiting the buyer’s market for labor but so is the Swedish, Italian and Indian consumer, despite rising interest rates. On the strength of the consumer the S&P 500 is holding above key support levels, 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. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. The US yield curve is bear steepening. Expect the S&P 500 to be range-bound over the next few days before making one last retest of the 4200 level.
Disinflation slow and bumpy is helping the consumer stay focused on retail therapy while geopolitical and cultural trends feel uniformly negative. Commodity prices have helped the disinflation process this week, as precious and industrial metals are rolling over alarmingly, fossil fuels are trading sideways but with furious volatility, while foods and softs are in danger of rolling over in concert with a strong dollar. But the currency markets tell the real story of global economic growth that remains resilient in the face of enormous financial and political headwinds. The major currencies are all in danger of rolling over but emerging markets are stronger, evidence that the American consumer and Chinese tourist intend keeping their wallets open.
Equity derivatives remain subdued as implied volatility has trailed the downward trend of actual volatility from elevated levels last year. The SKEW index of tail-risk demand has leveled off despite the recent pullback, indicating complacency regarding the current trading range in the S&P. But fixed income volatility has roared back to life and portends continued upmoves in yields as the bond market catches up with the Fed. This logically points to further lows in equities, possibly compounded by something breaking along the way as the bond bear market reaches depths not experienced in generations.
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.