Economic Updates for September 2023

Last month, the GDP Nowcast from Atlanta FED has been confounding many investment strategists with the large gap between this and the bluechip consensus estimates. This month, this gap has narrowed with the Nowcast stepping down a bit while the bluechip consensus estimate climbing a bit.

In sharp contrast to the GDP Nowcast above, the Conference Board's leading economic indicator (LEI) is giving a recession signal. The indicator has been signaling a recession for almost a year now!

The Dollar has bounced back from its mid-July lows very nicely. The tailwind certainly has been the increasing 10-year yield.

Since July, energy prices have been steadily climbing. Recently, we are noticing some resistance and the prices are rolling over.

Gold and Bitcoin are continuing their pause as the dollar has climbed.

Same comment as above in Gold.

The yearly inflation number seems to be at a low point after the large monthly inflation prints from last summer have rolled off. In the coming months, the competition will be with very low monthly inflation numbers from last fall and hence the yearly inflation might appear to bounce up. Barring this nuance, we are in a good territory with respect to inflation - 0.4% for August.

PPI is projected to be 0.6% in August. These numbers have been creeping higher in the last 2 months.

This is the headline inflation number that everyone talks about. Currently, for September 2023 we are at 3.7%. 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 last three prints show it could be bouncing back.

CPI Components Last Month

CPI Components This Month
Energy prices have risen in the last month. You can see that as energy's contribution to reducing inflation is coming down - it is a double negative. (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%. This has not changed much in the last month. Perhaps more of the survey participants remain convinced that the inflation will abate sharply.

Consumer sentiment has come down gradually over the last 2 months. It is currently at 67.7. It is still a good number. As long as the consumer is strong, it is hard to make a case we are in recession.

The AAII sentiment has been moderating as the S&P 500 has been rolling over in the past few weeks.

FED's higher for longer narrative is pressuring stocks at the moment.

This month has witnessed a bounce back in Manufacturing PMI. However, it still is below 50 indicating a slowing contraction.

In contrast to the Manufacturing PMI, Services PMI reading has been steadily above 50 over the last few months but slowing its expansion in the last few months.

Industrial Production has inched into the positive territory this month with a reading of 0.25%.

Retail Sales have consistently been in the positive territory by a narrow margin for 5 months in a row now. We will take it as a positive.

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month the jobs number came in above expectation and too high to indicate any slowdown in job growth.

Total Vehicle sales continues to be within its trend band higher, which is a good sign. New cars are scarce in dealer lots.

Used car prices seem to be bottoming this month. While this has helped core inflation in its downward trend, perhaps we are going to see the inflation creep up in the next few months.

New home sales are continuing their trend higher.

The mortgage rates have climbed higher along with 10-year Treasury yield over the last month as FED rhetoric has pushed interest rate expectations a bit higher. The mortgage rates are touching 7.5% now.

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 lower, indicating a robust jobs market.

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 Bureau of Labor Statistics (BLS) report on job openings to unemployed, we expect to see some sharp corrections if a recession is imminent.

This month again, the wage inflation continues to exceed the headline inflation as it recorded a reading of 5.3% compared to the headline inflation of 3.7%. 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.

Yield curve - Then

Yield curve - Now
Notice how the long end of the curve has risen! This has been the driver of many a price moves in the markets this month.

Year to date, technology, consumer discretionary, industrials and communication sectors have been the leaders. Lately, the leaders have been suffering more than the laggards 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 been very tight and there are no spikes in the spread observed yet to indicate a potential credit crunch. Some market participants are taking the cue from the equity markets to suggest high yield may be getting into risky territory and we may see some spikes fairly soon.

A spike in put / call ratio indicates that investors are very apprehensive about a sudden fall in the equity markets. In August, we have seen some interesting activities but nothing out of the ordinary. The VIX index has moved around in sympathy.

The current earnings forecast by equity analysts estimate the earnings potential for S&P 500 companies to be around $240 which translates to a price to earnings ratio of 18 at the current S&P 500 price level. This is below the 5 year average but above the 10 year average.

As 10-year yield has increased and is likely to rise further, an expectation of slow down in the economy may depress the prices in the stock market.

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