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.

Source Atlanta FED GDP Nowcast

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.

Source TradingView.com DXY Chart

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.

Source GSCI Commodities Index Chart

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.

Source Finviz.com Gold Futures

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.

Source Finviz.com BitCoin/USD Chart

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.

Source Bureau of Labor Statistics: Latest CPI

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.

Source Bureau of Labor Statistics: Latest PPI

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.

Source NY Fed Global Supply Chain Pressure Index

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.

Source TradingEconomics.com Inflation Year over Year

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%.

Source Cleveland FED Inflation Nowcast

CPI Components

CPI Components Last Month

CPI Components This Month
Energy 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%.

Source TradingEconomics.com U of Michigan survey of Inflation Expectations

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.

Source St Louis FED 5 Year 5 Year Forward Inflation Expectations

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.

Source St Louis FED 10 Year Breakeven Inflation Expectations

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

.

Source St Louis FED Real Yield

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.

Source TradingEconomics.com U of Michigan Consumer Confidence Survey

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.

Source AAII Investor Sentiment Survey

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.

Source TradingEconomics.com Manufacturing PMI

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.

Source TradingEconomics.com Services PMI

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.

Source TradingEconomics.com Industrial Production

Retail Sales

Retail Sales is very much inline with history and it is hard to infer any positive or negative signal from it.

Source TradingEconomics.com Retail Sales

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.

Source TradingEconomics.com Non-farm Payrolls

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.

Source TradingEconomics.com U.S. Total Vehicle Sales

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.

Source Economy.com Manheim Used Car Index

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.

Source TradingEconomics.com U.S. New Home Sales

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.

Source St Louis FED 30 Year Fixed Mortgage Rates

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.

Source St Louis FED Historical Unemployment Rate

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.

Source Bureau of Labor Statistics Job Openings to Labor

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.

Source St Louis FED Indeed Job Postings

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.

Source Atlanta FED Wage Growth Tracker

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.

Source St Louis FED Yield Curve Inversion

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.

Source Zacks.com

Market Sectors

Energy sector has been the top performer while the Communications sector has been the worst for most of 2022.

Source Zacks.com

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.

Source St Louis FED High Yield OAS

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.

Source YCharts.com S&P 500 Put/Call Ratio

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%.

Source Factset.com Earnings Insight

Diclosures