Economic Updates for December 2023

Atlanta FED GDPNow is estimating Q4 2023 GDP growth around 2.5% while blue chip consensus is around 1%. While it is still positive, the growth rate has slowed from Q3 into Q4.

The LEI after giving a recession signal for almost a year is now firmly reverting back! The LEI's reading may be misleading in the post COVID era. Tom Lee of Fundstrats opines that LEIs may be signaling a recession incorrectly because we are fighting an inflation cycle and not a business cycle.

The Dollar has followed the recent drop in 10 year yields over the last 6 weeks.

Energy prices are still moderating in spite of the tensions continuing in the middle east.

Gold and Bitcoin are diverging this month! Gold has come down as the 10 year yield has softened, and inflation has retreated. However, there is some bullishness in Bitcoin with some rumors around the approval of the first Bitcoin spot ETF.

Same comment as above in Gold.

The CPI reading for the month of November came at -0.2%. This is a very encouraging reading, improving the odds that inflation is firmly being contained.

PPI is projected to be -0.3% in November - for the second month in a row.

This is the headline inflation number that everyone talks about. For November 2023 we are at 3.21%. We are certainly in the right neighborhood. In the coming months, we hope the inflation remains contained. Historically, inflation is known to bounce back a few times before it finally subsides. The FED has also signalled their pivot from a hawkish stance acknowledging the inflation is most likely contained for good.

CPI Components Last Month

CPI Components This Month
Energy prices have stayed down this month again. You can see that as energy's contribution to reducing inflation is more pronounced this month. (Please note that the y-axis in both the graphs have different scales).

This survey data shows that inflation one year from now is expected to be 3.1%. It has significantly come down from the estimate last month. This adds to the confidence perceived in the financial markets that inflation will remain tame.

University of Michigan's consumer sentiment surged to 69.4 this month in sharpe contrast to the last few months. The renewed optimism is perhaps reflecting the drop in inflation and inflation expectation.

The AAII sentiment has turned very bullish as the S&P 500 has been going higher in the past few days following the FED dovish pivot.

This month has witnessed some drop in the Manufacturing PMI. It is now at 48 indicating shrinking in manufacturing activities.

In contrast to the Manufacturing PMI, the Services PMI reading has been steadily above 50 over the last few months and the activity appears to be gradually increasing.

Industrial Production has slowed this month with a reading of -0.3935%.

Retail Sales have picked back up into the positive territory this month. Perhaps the early beginning to the holiday season explains part of this increase.

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month the jobs number came in above expectation.

Total Vehicle sales continues to be within its trend band higher, which is a good sign.

Used car prices seem to be reverting down this month. This has been a tail wind for core inflation in its downward trend.

New home sales were lower than the previous month, but with no definite trend to talk about.

The mortgage rates have followed the 10-year Treasury yield higher over the last few months. Recently as the inflation is contained and 10-year Treasury yield has rolled over, the mortgage rates has come down a tad bit.

The unemployment rate has remained low despite the FED's attempt to induce a slowdown. This indicator is a lagging indicator and we do expect to see this number creep up as recession becomes imminent.

This chart will be the first indicator of a telltale sign that unemployment is increasing. As you see the continuing jobless claims number rise, it implies the people who lost their jobs are not going back to labor force fast enough and the unemployment rate is starting to creep higher. Over the last couple of weeks, it has trended higher, indicating a softening job market. It could turn out to be seasonal and it needs to be watched over the next few months if the continuing claims build up.

This month again, the wage inflation continues to exceed the headline inflation as it recorded a reading of 5.2% compared to the headline inflation of 3.1%. This is an indication that inflation is being entrenched in the labor market and may lead to wage/price spiral. Something that the FED does not want to see and makes it likely to keep rates higher for longer.

The yield curve has been flattening over the last month as the 10-year Treasury yield has climbed as FED plans to keep rates higher for longer. In the last few weeks it has widened a tad bit as the 10-year yield gave back.

Yield curve - Then

Yield curve - Now
Notice how the long end of the curve has shited down a bit. This has supported the bond and equity markets alike this month.

Year to date, technology, consumer discretionary and communication sectors have been the leaders. Lately, utilities have been suffering more than any other sectors as the 10-year yield has climbed.

If the economy were to enter a recession, it is likely that some of the companies will struggle to keep up with their debt payments causing their credit spread to widen. This indicator shows how the credit spreads have been behaving so far.

The spreads have tightened by another 40 basis points or so after the FED dovish pivot last week. This may be a good indication that the soft landing narrative is actually playing out.

A spike in put / call ratio indicates that investors are very apprehensive about a sudden fall in the equity markets. In October/November, we have seen some interesting activities but nothing out of the ordinary. Recently, as the inflation number came out better than expected, this has led to a short covering rally in bond and equity markets.

The current earnings forecast by equity analysts estimate the earnings potential for S&P 500 companies to be around $245 which translates to a price to earnings ratio of 19.3 at the current S&P 500 price level. This is above the 5 year and the 10 year averages.

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