The big picture is that markets are trying to balance concerns over slowing global growth with surging inflation and just how aggressive central banks will have to be on their rate hike path. So, here is a brief outline of the major narratives and what to watch going forward.

Growth worries led by US consumer woes

The US consumer is showing signs of falling confidence. The print this week from the US consumer confidence dropped to 98.7. The expectations index fell to the worst level in nearly ten years. The main concern was rising petrol and food prices which have both been hit by inflation. This data supported last Friday’s print from the University of Michigan which again showed a fall in consumer sentiment. The US consumer is the biggest driver of the US economy and a weakness here is a weakness that could be felt everywhere. Another factor for global growth is how quickly China is able to break out of its China Covid Zero policy.

Inflation is pumped, but by how much and for how long?

On June 10 the US inflation print came in at 8.6% y/y vs expectations of 8.3% and a prior reading of 8.5%. This led the Fed to hike by 75bps the following week rather than the 50 bps expected. They unconventionally let the market know through a Wall St Journal article in the black out period. So, the question no-one knows the answer to is this ’if inflation has not peaked, when will it peak?’. This makes the US Core PCE print today very important. If the reading comes in below 5.1% y/y for May, then markets can start to feel that peak inflation may be here. This is important as if the markets sense peak inflation it can dial back aggressive rate hiking expectations from central banks.

Dip buying?

This makes dip buying of stocks hard. Where is the bottom for stocks? Are we on the brink of a global recession? Will inflation keep tracking higher and will central banks be forced to hike rates into slowing economies and viciously hit demand? Or will inflation fears fade and the Fed manage a soft landing? Ultimately this is unclear, but one strategy with stocks over the medium term is to buy on major trendline breakouts. Stay above and stay with the trade. Get below and get out. It’s not a perfect method by any means but it will help with some of the uncertainty. Look at this trendline on the S&P500 for an example.