Economic Updates for April 2023

PPI, however, has remained muted with a 0.1% fall in March. This certainly moved the markets on the day when the report came out.

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 is now 1 below the normal pressure.

This chart has continued its trajectory downward.

This is the headline inflation number that everyone talks about. Currently, for March 2023 we are at 5.0%, a full percentage point below the previous month's number! Although, inflation is known to be sticky, the current trajectory is definitely very promising.

CPI Components Last Month

CPI Components This Month
All components of inflation are seen moderating. As mentioned earlier, energy's contribution to inflation is negative in a long while! (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 4.6%, a reversal from the trend downwards. Not sure what the survey participants are envisioning, perhaps a hot jobs market remaining hot for a long time.

This is a market based indicator showing the inflation in 5 year forward interest rate, 5 years, is in a 2 . This indicates the current inflation bout is just a blip in the radar and not an indicative of a structural change in the economy.

This is another market based indicator showing the inflation 10 years from now is in a 2 . This indicates the current inflation bout is just a blip in the radar and not an indicative of a structural change in the economy.

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 . It has bounced back after the decline following the banking crisis confirming the resistance around 1%.

The survey indicator for consumer sentiments remains just fine. It is good to see it has not declined considerably after the January effect last month.

The investors have remained bearish for a while. With the earnings season, we are likely to see more volatility in equities in the coming weeks. It will be interesting to see if investors get further pessimistic as the earnings season progresses into May (upholding the cliche 'Sell in May and go away').

Manufacturing PMI reading bounced a bit from last month but still below 50 indicates a contraction 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. However, in the last few months, we are seeing a bump to the positive side and we hope it continues to build up to above 50.

Services PMI reading has pushed past 50 and continues the trend from last month1 Many are jumping to the conclusion that this may indicate a soft or no landing scenario, essentially implying that we may avoid a recession.

Industrial Production remains close to zero.

Retail Sales has remained negative in the last two months in a row. Perhaps the holiday sales lacuna is a reason, perhaps consumers are seeing the pinch from continued inflation.

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month the jobs number was inline with expectation but too high to indicate any slowdown in job growth. This just makes FED's job so much harder.

Total Vehicle sales continues to be within its trend band higher.

The used car prices are starting to inch up again seemingly the demand is coming back up. It may also be indicating a slowdown in inflation ahead.

New home sales are starting to tick up again. Perhaps new buyers are feeling courageous to take on the higher mortgage rates thinking it may only go higher in the coming months.

The mortgage rates are stabilizing and buyers have been coming back to the market. The housing market is showing signs of thawing as spring has arrived.

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 are about 2 job openings for every unemployed person looking for a job.

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.

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.

This month, the wage inflation is exceeding the headline inflation as it recorded a reading of 6.4% compared to the headline inflation of 5%. This is an indication that inflation is being entrenched 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 excitement last month on the inversion in the yield curve reverting did not last long. The short and long term yields continue to rise as we expect FED to continue to raise rates in their next meeting in May.

Yield curve - Then

Yield curve - Now
No joy here as yet. Last month, there was some excitement around the inversion in yield curve correcting, but it turned out to be short lived. FED seems to have successfully contained the banking crisis. Now, the rates are starting to push higher again.

Year to date, technology and communication sectors and back to being the leaders. Is this a dash for trash, long duration trade back on again? Or is this for real this time? The developments in the banking sector foretells this move is short-lived.

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.
Since the SVB banking crisis, the credit spread has been contracting! This indicates a credit crunch is not imminent.

A spike in put / call ratio indicates that investors are very apprehensive about a sudden fall in the equity markets. In March, the activity has been quite well behaved in the overall market (SPY) in spite of the turmoil in the banking sector.

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 17.1 at the current S&P 500 price level. This is just below 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, the earnings have declined by -6.5%.

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