Economic Updates for January 2023
Summary
-
Few things are less fun than seeing paint dry. The economic update since the last month belongs to this
category.
- Higher interest rates are being marinated in the economy; the effects are yet to precipitate.
- We are seeing factors of productions - Manufacturing PMI and Services PMI - slowing.
- Home sales are slowing.
- Unemployment is still low but expected to inch up.
- This is the most expected recession in history, potentially making it a mild one.
-
Earnings Watch
- Analysts are starting to expect lower earnings guidance for 2023 from companies reporting their Q4 earnings.
- As inflation has come down, earnings has fallen -4.6% for the 11% of S&P 500 companies that have reported so far, according to factset.
Broad Indicators
Atlanta GDP NowCast
GDP is currently projected to be 3+% for Q4 2022. Although the inflation numbers have been coming down,
the GDP continues to chug along.
US Dollar Index
Dollar has been coming down sharply from its peak in September 2022. Other countries have followed the FED and have
started increasing their rates. Even Bank of Japan has made the moves to be
hawkish
Hawkish implying they want to increase interest rates thereby tightening the economy.
.
This has tempered the relative
attractiveness of the dollar. Additionally, the markets are expecting the FED to stop rate hikes or pivot which is also
reflected in this move. 
Commodities
Commodities have generally been directionless over the last few months. The decline in Dollar is
a positive for commodities. On the other hand, if there is a demand destruction due to an impending
recession, it does not bode well for continued demand for commodities. This tug of war has kept the commodities
in check for now.
Gold
Gold is starting to see some positive momentum lately. As the yield has somewhat stabilized, the higher
inflation level is perhaps attracting investors to gold. Additionally, the rally in gold corresponds with
the peak in Dollar.
BitCoin
BitCoin has been flat for a long time now. Lately, there has been some activity, perhaps the optimism with
the new year that has pushed BitCoin to over $20k.
Inflation
CPI Month over Month
Inflation is heading in the right direction. The official inflation rate for 2022 came at 6.5%. Hopefully, it
continues to go down in the coming months. Historically, inflation is notorious for bouncing back and hence
it is worth keeping a close eye.
PPI Month over Month
PPI has also moderated primarily due to the softer prices on energy and materials. The services sector is
holding up well.
NYFed Global Supply Chain Pressure Index
If you believe the rise in inflation was transitory, here is a comforting chart. Many believe the cause
of inflation was due to supply side constraints caused by COVID shutdowns across the world. This chart tracks
the pressure on global supply chain. Clearly, according to this data, the pressures have been coming down and are
now close to 1
see wikipediastandard deviation
of the normal pressure.
Reported Year over Year Inflation Rate
This is the headline inflation number that everyone talks about. Currently, for 2022 we are at 6.5%, definitely heading in the
right direction.
Inflation NowCast
Inflation Nowcast is built using other economic indicators besides the report CPI to come up with the latest CPI number until
the next release. Thus, it gives a more up-to-date picture on what the CPI is at any given time. Per the Nowcast, year over year
CPI in January is sitting at 6.34% while core CPI is at 5.58%.
CPI Components
CPI Components Last Month
CPI Components This MonthEnergy has been the largest contributor to the decline in inflation. The other components have all come down a bit as well. (Please note that the y-axis in both the graphs have different scales).
One Year Inflation Expectations
This survey data shows that inflation one year from now is expected to be 4%.
5 Year, 5 Year forward Inflation Expectations
This is a market based indicator showing the inflation in 5 year forward interest rate, 5 years, is in a 2
handleIf a measure such as stock price ranges in 35.01 through 35.99, the stock price is said to have a handle of 35.
.
This indicates the current inflation bout is just a blip in the radar and not an indicative of a structural change in the
economy.
10 Year breakeven Inflation Expectations
This is another market based indicator showing the inflation 10 years from now is in a 2
handleIf a measure such as stock price ranges in 35.01 through 35.99, the stock price is said to have a handle of 35.
.
This indicates the current inflation bout is just a blip in the radar and not an indicative of a structural change in the economy.
Real Yield - 10 year Treasuries
It is great to see real yields in the positive territory after a long period of being on the negative side.
This indicates the optimism in bonds where you can make some positive
carryYield on the investment
.
Sentiments
Consumer Sentiments
The survey indicator for consumer sentiments has taken a leap upwards in December! While this is a good sign,
it could also be due to the holiday effect in December. Also, we would like it come above 80 to confirm everything
is great in consumer land.
Investor Sentiments
The investors have remained bearish for a while. Investors are getting bullish on the margins with the New Year. We
have a feeling this is going to revert as S&P 500 crosses over the 200 day moving average.
GDP Factors
Manufacturing PMI
Manufacturing PMI reading indicates a contraction (below 50) which is not great and does not share the Atlanta
FED optimism on GDP growth. More so, this may indicate the slowdown in the economy that is yet to come.
Services PMI
Services PMI reading is also in line with the Manufacturing PMI indicating a contraction. It has been contracting over the
last four months.
Industrial Production
Industrial Production is still positive but close to zero. We will take what positive indicators we can get and
be happy with it.
Retail Sales
Retail Sales is very much inline with history and it is hard to infer any positive or negative signal from it.
Non-farm Payrolls
Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. The numbers are coming
down over the months, but they still are too good to see the effect of the FED medication. We are closely reading
into this number to see if any effects of the FED interest rate rises are being felt in the job market. The FED is
certainly looking to see a softer number to confirm their strategy is working.
Total Vehicle Sales
Total Vehicle sales have been moderating after the COVID frenzy. The next chart shows that the prices
for used cars have also been correcting. This is very helpful to bring down the goods inflation.
Manheim Used Car Index
Total Vehicle sales have been moderating after the COVID frenzy. This chart shows that the prices
for used cars have also been correcting. This is very helpful to bring down the goods inflation. This month,
we see that the decline in prices has slowed.
US New Home Sales
New home sales have followed the rise in mortgage rates and have been slowing considerably. Price corrections
are now seen in many key markets. Home buyers who financed at low rates will be reluctant to make any moves
as the rates have gone up considerably.
30 Year Fixed Mortgage Rates
The mortgage rates are stabilizing a bit. Recently, there were reports in the news that home buyers are coming back
and there has been an uptick in new mortgage originations. We want to see confirmation in the New Home Sales data and see
if this builds into a trend.
Employment Indicators
Historical Unemployment Rate
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 in the months to come.
There is a lot of chatter regarding layoffs in the technology industry. These are highly paid white-collar jobs and the numbers are relatively pretty small to make a dent in the unemployment number. The lower paid jobs have remained pretty stable.
There is a lot of chatter regarding layoffs in the technology industry. These are highly paid white-collar jobs and the numbers are relatively pretty small to make a dent in the unemployment number. The lower paid jobs have remained pretty stable.
Unemployed to Job Openings Ratio
There are about 2 job openings for every unemployed person looking for a job. This is a great situation for individuals. Our guess
is that this will change in a hurry in the coming months. We are already seeing layoffs in Tech. This will coincide
with cutting open positions. However, we believe the retail sector which is more cyclical is seeing a resurgence due
to reopening after COVID lockdowns. This is likely to keep the job opening number from falling too fast.
US Jobless Claims
Source Initial Jobless Claims
This chart is 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.
Source Continuing Jobless Claims
Indeed Job Postings
Interestingly, the rate of change in job postings is reducing but the total jobs are still rising according to
this indicator. While this is consistent with the BLS report on job openings to unemployed, we expect to see
some sharp corrections if a recession is imminent.
Wage Growth Tracker
While wage inflation has followed inflation in goods and services, we are glad to see that the inflation has not
become endemic in the job market. The wage inflation rate still trails the overall headline inflation rate.
Market Indicators
Yield Curve Inversion
The yield curve remains inverted - the short end of the curve is above the long end of the curve. The inversion is one of the largest in the last 40 years. This follows
the FED's agressive actions to combat the 40 year high inflation rates. From a forward looking perspective, a yield
curve inversion is one of the strongest indicator for future recession.
There has been debate on whether the current recession prediction has the most consensus ever seen. If so, the recession may not even come to a pass as everyone is expecting one. The man who invented this indicator, himself, doubts this. Read more.
There has been debate on whether the current recession prediction has the most consensus ever seen. If so, the recession may not even come to a pass as everyone is expecting one. The man who invented this indicator, himself, doubts this. Read more.
Yield Curve - then and now
Yield curve - Then
Yield curve - Now
Equity Markets
Equity markets have continued their correction in the past 12 months. The July lows are now surpassed by the September
lows. The markets have done well in January this year so far. The earnings season is just getting started
and will certainly paint the color on how the markets do going forward.
Market Sectors
Energy sector has been the top performer while the Communications sector has been the worst for most of 2022.
High Yield Index Options-Adjusted Spread
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 credit spreads have been pretty muted so far suggesting a healthy credit market.
Put Call Ratio
A spike in put / call ratio indicates that investors are very apprehensive about a sudden fall in the equity
markets. The recent activity in this chart suggests this. The spikes happened around the days when the FED announced their
rate hikes as well as around the days when the CPI report was released. All of these suggest that investors are very edgy.
S&P 500 Current Valuations
The current earnings forecast by equity analysts estimate the earnings potential for S&P 500 companies to be
around $230 which translates to a price to earnings ratio of 17 at the current S&P 500 price level. This
is very much in line with the 10 year average.
It is likely that as inflation comes down, so will the earnings numbers. This indicates that the future S&P 500 price level could likely come down. Based on the companies that have reported so far (which is just 11% of S&P 500 companies), the earnings have declined by -4.6%.
It is likely that as inflation comes down, so will the earnings numbers. This indicates that the future S&P 500 price level could likely come down. Based on the companies that have reported so far (which is just 11% of S&P 500 companies), the earnings have declined by -4.6%.
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