Commentary

The bad news is that the stock market seems to think that the U.S. is following Britain, France, Germany and Mexico by slipping into a recession. Some pundits are highlighting these recession risks: J.P. Morgan said that the U.S. economy is at risk of plunging into an “air pocket.” Furthermore, the Atlanta Fed’s GDPNow model now projects the U.S. economy may contract at a 2.4% annual pace in the first quarter.

I’d say the Atlanta Fed is overreacting to the January trade deficit statistics, which drag down the GDP. In contrast, I see national income and production still growing while lower consumer sentiment is restraining spending. That’s why personal income rose 0.9% in February while consumer spending contracted 0.2% in the latest PCE report. The main reason for that is that we had severe weather in January, plus tragic fires in Southern California. In fact, the months of December through February were the coldest three months in 11 years, registering 1.1 degrees below the historical averages. For example, the day that it snowed in Louisiana, it was actually warmer in Anchorage, Alaska – mostly due to a severe dip in the Jet Stream.

In other words, I want to assure you that when spring arrives, consumer spending and consumer sentiment should perk up. Spring is a happier time of year. When the daffodils and tulips pop up, it makes people happier, so I expect consumers will increasingly get out and about more, starting later this month.

As for the stock market’s correction since February 19th, I believe traders are blowing Trump’s tariff talk all out of proportion. I maintain that these tariffs are temporary bargaining positions, which means that when competing nations meet and compromise, those tariffs may be lowered, and both nations will prosper. That will lift stock markets suddenly, in all likelihood. In other words, the tariff threats that hurt the markets so much, so fast, can be lowered just as suddenly, sending markets up sharply in the process.

Here are the most important market news items and what this news means:

- On Monday, the stock market ignored the news that Taiwan Semiconductor Manufacturing Company (TSM) sales surged 43.1% in February and instead focused on a Bloomberg report that Apple (AAPL) was delaying the launch of Siri AI upgrades as well as its smart home hub. When a big component of NASDAQ, like Apple, takes down the indices, it tends to feed on itself. I am shocked that TSM’s explosive sales growth was largely ignored.

- If there is a silver lining in recent market chaos, it is that Treasury yields have plunged, so I am expecting that the upcoming Federal Open Market Committee (FOMC) statement will be dovish and that the FOMC dot plot will signal two key interest rate cuts. I am expecting a global crash in interest rates, led by China and followed by the rest of Asia as well as Europe. The U.S. will be the slowest to cut key interest rates, but since the Fed cannot fight market rates, it will have no choice other than to cut to get in line with market rates.

- Canada’s Liberal Party replaced Justin Trudeau with Mark Carney, who is a very serious fellow who used to head the Bank of Canada and the Bank of England. Prime Minister Carney helped Britain navigate Brexit and is now being hired to navigate the U.S. trade crisis. Carney told Liberal Party members in Ottawa after this win that “Americans should make no mistake. In trade, as in hockey, Canada will win.” That strong talk sounds great, but since the U.S. accounts for 78% of Canada’s exports, Carney has virtually no leverage. However, I suspect that Prime Minister Carney will do a lot better than Justin Trudeau in negotiating with the Trump Administration. I should add that Prime Minister Carney has to declare a national election soon, so he will try to have a quick solution to the U.S. trade situation to boost his re-election chances.

- Fed Chairman Jerome Powell clarified that the Fed will wait for “greater clarity” on the impact of tariffs before making further key interest rate decisions. Specifically, Powell said in a speech for the U.S. Monetary Policy Forum that the White House “is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation.” Powell also was positive about the macro environment by saying the U.S. is in “a good place” with a “solid labor market” and inflation moving back to target.

- As evidence that the recent tariffs on China may not show up, deflation has re-emerged in China. Specifically, China’s National Statistics Bureau reported that consumer inflation has declined 0.7% in the past 12 months. Here are more horrific details in the Chinese inflation data: (1) the producer price index declined at a 2.2% annual pace, (2) food prices plunged 3.3%, and (3) consumer goods prices have declined 0.9%, while service prices declined 0.4%. In other words, China is in the midst of a deflationary spiral.

- Since many investors are worried about tariffs, I think it is important to look at the big picture, which is that Commerce Secretary Howard Lutnick will largely be imposing retaliatory tariffs if our trading partners do not lower their tariffs and/or agree to onshore more of their manufacturing in America.

- Germany’s political crisis persists since its Green Party is objecting to the budget that the CDU and SPD parties proposed for infrastructure and military spending. Incoming Challenor Merz continues to ignore the AfD Party that got the second most votes after his CDU party. Essentially, it is proving hard for a political center to emerge in Germany to create a ruling coalition. This crisis is expected to hurt the euro and cause the European Central Bank (ECB) to cut key interest rates further.

- Ukraine may now be at the negotiation table with the U.S. in Saudi Arabia, but the fact that it launched a massive 337-drone attack on Russia, including 91 drones aimed at Moscow, bodes poorly for successful negotiations. The fact that the U.S. has cut aid and most intelligence sharing to Ukraine is sending a strong signal that the war will soon be over, and Ukraine must now give up territory if it wants a peace agreement. Secretary of State Marco Rubio is meeting with senior Ukrainian officials in Jeddah, so the outcome of these negotiations will be pivotal.

In summary, the stock market is a manic crowd. A crowd does not think, it merely reacts. We now have a grossly oversold stock market. A positive CPI report on Wednesday could spark a market bounce, but I suspect that Nvidia’s AI Conference for Developers may be the spark that send many of the AI stocks soaring. During the last day of the Nvidia conference, the focus will be on the development of quantum computing that Nvidia is striving to dominate with selected partners.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.