The Slow Burn Of Disinflation Is Sapping Confidence Everywhere But The Equity Markets — What Fixed Income, Currency & Commodity Markets Are Telling Us

The Fed and the consumer are getting disinflation but at a glacial pace, as real wages fall and frustration with political gamesmanship accelerates. The hangover from the excess stimulus during the pandemic is still in early innings and the Fed knows it even if its clients in the bond market fail to grasp it. For now equities are following bonds in boldly fighting the Fed, and this can only last so long. 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. Yesterday's cross-asset action brought several positive factors for US stocks. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. Copper is pointing to declining global GDP expectations. Expect the S&P 500 to rise modestly over the next few days to 4210 but then fall hard as the bulls lose heart to keep up the fight.

With disinflation and economic growth slowing in tandem the result is stagflation, a dreaded scenario that requires drastic medicine or a slow burn of austerity to wring out. Earnings are a modest hedge against stagflation, assuming the state doesn’t interfere, but Xi Jinping’s politics and legal manœuvres set a template for dramatic interference across the globe. This is busting confidence and sending commodities lower. Fossil fuels broke down last week and look set for a reflexive rebound, which will likely fail, as sellers return later in Spring to retest the lows. Precious metals are in an uptrend while industrials are downtrending, suggesting stagflation is in the cards across the world. Foods have rebounded but the downtrend is likely unbroken, while most meats and softs look to weaken as well. And the dollar’s decline against the majors has been reversed of late, particularly against EM currencies, suggesting a global growth slowdown.

Yet the equity markets are ignoring commodity trends and inflation prints and focusing instead on interest rates, in the vain belief rates will only fall from here and provide justification for high valuations. Bond volatility has eased off but still remains high, suggesting the high interest rates of March will be retested. As equity breadth falters on the road to 4210 the bulls will discard their baseless optimism and empower the bears to take equities back to the October lows.

My current positions include a moderately large cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and inverse levered ETF SPXU, all of which net out to a significant long position in large-cap equities.