Economic Updates for June 2024

Atlanta FED GDPNow estimate is projecting around 3% GDP growth for Q2 2024 at this moment.

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 been steady in the past few weeks. While other Central Banks have started easing, FED has remained higher for longer.

Energy prices have been steadily going up since the beginning of the year, but now is taking a breather.

The excitement in Gold and BitCoin earlier this year has abated and both have been range bound in the last few weeks.

Post halving for BitCoin, the price is settled into a range.

The CPI reading for the month of May 2024 came at 0.2% (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, but FED still wants to stay put and not lower the rates yet.

PPI is projected to be -0.3% for May 2024. It has come a bit cooler than the consensus expectation of 0.1%.

This is the headline inflation number that everyone talks about. For May 2024 we are at 3.3%. 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. 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 change 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 3.2%.

University of Michigan's consumer sentiment has come in consistently higher over the first 3 months of this year. This month, it came to 69.1. This is much lower than the expectation. Perhaps the inflation and 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.

First time since September 2022, we are seeing an expansion in Manufacturing. The last four months have reported an expansion with the latest reading at 51.3.

Services PMI reading rocketed upwards strongly at 54.8. It is great to see such strong numbers after softer and numbers that were trending lower over the last few months.

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 272k jobs while the expectation was for around 185k 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 after some stability in the past 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. Recently as the inflation has resumed, so has the 10-year Treasury yield in response. You can see the slight rise in mortgage rates in May as a consequence. Only in the last week or so, the 10-year is moderating.

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.

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 -0.37% or 37 basis points from being fully flat.

Yield curve - Then

Yield curve - Now
Notice how the 10 year and beyond part of the curve has lowered a bit after the FED's dovish comments in the last FOMC meeting. Otherwise, the curve looks fairly identical to the curve one month ago.

Technology and communications have regained the top spot this month. Over the past few weeks, the large cap tech stocks have been on a tear.

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 April/May, 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 $255 which translates to a price to earnings ratio of 20.7 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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