Economic Updates for July 2024

Atlanta FED GDPNow estimate for Q2 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! 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.

US Dollar has corrected downwards since the inflation report.

Energy prices have stabilized during the summer.

Gold has started picking up since the start of this month but still below resistance from earlier in the year.

BitCoin has witnessed some selling pressure lately due to some expected position unwinds. It has stabilized in the past couple of days.

The CPI reading for the month of May 2024 came at 0.0% (not seasonally adjusted) below the consensus expectation. This is a softer inflation print after a trend higher earlier this year. Markets are certainly liking it, Market strategists expect FED is most likely going to start easing later this year.

PPI is projected to be +0.4% for Jun 2024. It has come a bit hotter than the consensus expectation.

This is the headline inflation number that everyone talks about. For June 2024 we are at 3.0%. Historically, inflation is known to bounce back a few times before it finally subsides. Over the first 3 months of this year, inflation was trending upwards. With this reading, inflation has come in softer and has broken that trend for a few months in a row. This is certainly good for inflation expectations going forward.

CPI Components Last Month Source BLS.gov Consumer Price Index

CPI Components This Month
The contributors to inflation have remained fairly consistent. However, the reduction in contribution from energy is noticeable this 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 3.3%.

University of Michigan's consumer sentiment has come 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 July, the indicator is at 66. This is much lower than the expectation. Perhaps the perceived tightness in the job market is catching up to the consumer. We will be closely watching as this develops in the next few months.

The AAII sentiment has remained consistently bullish even after the very short dip in S&P 500 in April. Since the cooler inflation report, flows are diverting to small cap stocks and the rest of the market away from the Magnificient 7.

Since peaking in March at 50.3, ISM Manufacturing PMI has been consistently on a downtrend. Currently, for the month of June, it is at 48.5 indicating a contraction.

While we saw a great number in ISM Non-manufacturing last month, we are back to below 50 in June. The reading is 48.8.

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

Retail Sales is flat for this month.

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month the jobs number came in at 206k jobs while the expectation was for around 218k jobs. The job market seems to be still quite robust.

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 are looking robust with a slight trend upwards as the summer months beckon.

The mortgage rates have followed the 10-year Treasury yield higher over the last few months. The mortgage rate is now in 6 handle and is likely going to moderate.

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 this month to 4.1%.

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 wage inflation continues to exceed the headline inflation as it recorded a reading of 4.7% compared to the headline inflation of 3.5%. While the gap between the two has certainly reduced this month, this is an indication that inflation may become 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. Recently, the data on this indicator has been falling behind and we are still awaiting updates after April.

The yield curve has been fairly steady over the last month and is reading -0.27% or 27 basis points from being fully flat.

Yield curve - Then

Yield curve - Now
Not much change since the last month. Only lately, after the inflation report, we are seeing some volatility in rates over the last few days. We expect the yield curve to steepen as the rate cuts come into effect.

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.

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 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 June/July, we have not seen any interesting activities.

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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