Economic Updates for August 2024

Atlanta FED GDPNow estimate for Q3 2024 has dropped to 2% as broadly the economy is perceived to be slowing.

The LEI, after giving a recession signal for almost a year, has now firmly reverted back about the red recession line! 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.

Inflation report for this and last month have come in soft along with jobs data suggesting the economic is slowing and consequently, FED is likely cut interest rates. This has pushed US Dollar lower to levels seen at the start of 2024.

The slowing economy along with the summer behind us has seen oil and commodity prices correcting lower. This is in spite of the tensions in middle east that might send some shocks through the oil markets.

Gold has been an exceptional performer this year. Slowing Chinese economy and booming Indian economy has certainly contributed. In addition, Central banks around the world have started preferring Gold to US Treasuries lately.

It is interesting to see that Gold has diverged from BitCoin. BitCoin remains under pressure and has behaved more like a risk asset such as tech stocks. The recent Yen carry trade unwind has impacted BitCoin.

The CPI reading for the month of July 2024 came at 0.1% (not seasonally adjusted) below the consensus expectation. Markets seem to have moved on from being too sensitive to the inflation print. The consistent softer inflation numbers confirm that the economy is gradually slowing towards a soft landing. The markets are now more concerned if the unemployment numbers spike and the economy falls into a recession.

PPI is projected to be unchanged for July 2024 slightly below expectation.

This is the headline inflation number that everyone talks about. For July 2024 we are at 2.9%. Historically, inflation is known to bounce back a few times before it finally subsides. Over the last 5 months, the inflation readings are steadily trending downwards indicating the price pressures have abated.

CPI Components Last Month Source BLS.gov Consumer Price Index

CPI Components This Month
The contributors to inflation have remained fairly consistent compared to last 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 3.0%.

University of Michigan's consumer sentiment came in consistently higher over the first 3 months of this year. However, starting May, it has come in softer and has been trending downwards. For August, the indicator is at 67.8 showing a small rebound. We will take this as a positive sign for soft landing and no imminent recession.

The AAII sentiment took a dive earlier this month when the market fell sharply during the Yen carry trade unwind. The sentiment has reverted back since then.

Since peaking in March at 50.3, ISM Manufacturing PMI has been on a downtrend. Currently, for the month of July, it is at 46.8 indicating a contraction.

ISM non-manufacturing number have been fluctuating widely. For July 2024, we are at 51.4.

Industrial Production has remained positive this month showing an uptick in activity.

Retail Sales soared in July 2024 to 1%. It is the biggest increase since Jan 2023.

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month the jobs number came in at 114k jobs which was much softer than expected spooking the markets.

Total Vehicle sales came in around the average number over the past few months.

Used car prices are further declining this month continuing the trend from the last few months.

New home sales have been slow over the summer as high prices and high mortgage rates continue to weigh on new buyers.

The mortgage rates have followed the 10-year Treasury yield lower over the last few weeks due to the market panic following the Yen carry trade unwind. This is likely to be temporary.

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 if recession becomes imminent. It climbed a bit again this month to 4.3%. Many market strategists are attributing this to the increase in increased labor force participation due to immigration, not necessarily due to job losses.

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 a bit higher and worth watching over the next few months.

The yield curve inverted a bit further due to the stock market panic caused by the Yen carry trade unwind.

Yield curve - Then

Yield curve - Now
The yield curve inverted a bit further due to the stock market panic caused by the Yen carry trade unwind.

All sectors are in the positive territory year to date. The sharpe rotation trade into cyclicals and interest rate sensitive sectors away from technology has helped. We hope the market continues to broaden in the coming months. It is interesting to note how Utilities has climbed to the top.

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 well so far even in the face of the Yen carry trade unwind.

The tight spread indicate 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 July/August, we have not seen any interesting activities outside a couple of days in early August due to the Yen carry trade unwind.

The current earnings forecast by equity analysts estimate the earnings potential for S&P 500 companies to be around $260 which translates to a price to earnings ratio of 21.4 at the current S&P 500 price level. This is above the 5 year and the 10 year averages. The market is looking pricier by the day.

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