The Bulls Are Hopped Up And Ready To Go But Logic Eludes Them — The Latest On The Global Economy

The fight between bearish liquidity and bullish consumption continues to move both the global economy and equity markets higher but with ever decreasing conviction. With little newsflow to animate either side the markets and by extension global business is waiting to see what follows the debt ceiling deal in terms of liquidity. Should the Fed accommodate increased debt issuance the bulls will win a temporary battle that could push the S&P 500 beyond resistance at 4300. But in the event the Fed leaves it to banks and money market funds to finance the debt then a negative liquidity event will send the market off a cliff. That decision is still a week away so for now the volatility risk premium is pointing to a range-bound 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 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 and Oil charts are pointing to declining global GDP expectations. Expect the S&P 500 to rise modestly over the next few days.

Signs of modest growth around the globe continue with few bright spots. India continues to outperform expectations but the heavyweights in Asia offer little reason for exuberance. Japan continues to grow modestly and with higher inflation, which theoretically should lift consumer spending and make growth more sustainable and thus improve confidence. Chinese manufacturing is slowing while services remains modestly positive. While China’s official economic data is spurious a non-governmental source of survey data (China Beige Book) notes that May economic data picked up, suggesting the reopening is proceeding at a modest pace that will likely drive confidence gradually higher.

Europe remains lackluster as it depends on China and a lesser extent the US to drive current account surpluses and confidence. Consumption and government spending both declined in Germany, which together with declining manufacturing mean Europe may be slowing down. The Fed’s actions aren’t helping as US GDP is now tracking lower to 1.9%, reflecting both a manufacturing recession and the trade deficit. But the debate about recession continues with the bulls winning on current data and losing on logic. The latest Conference Board survey of confidence confirmed that consumption is holding steady despite a gradually loosening labor market and persistently higher than normal inflation. A strong equity market and housing market can keep consumption from falling and validate the bulls, but this amounts to nothing less than fighting the Fed. Expect asset prices to peak shortly as the Fed gets its way and forces the global economy to rest and recuperate after its post-pandemic exuberance.

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