Economic Updates for March 2023

The story of this month in one chart is the MOVE Index. It measures the market's expectation of implied volatility of the US bond market using 1-month Treasury options.
It recorded the highest value in its history since its inception in 2019. The banking crisis after the Silicon Valley Bank saga has pushed the short term Treasury yields to fall by about a percentage point.

GDP is currently projected to be 3+% for Q1 2023. Even the blue chip consensus forecast have climbed higher. It remains to be seen if the recent banking crisis puts a dent in this optimism.

The rise in the dollar index during February has stalled a bit in the last week or so.

The easing in commodity prices continue from last month. Increase in yields over the past month as well as the uncertain demand in the future as the economy slows both dampen the spirits in energy prices.

In the last week or so, we have seen a sharp decline in yield and real rates. This has caused a spike in Gold and BitCoin prices. The fallout of Silicon Valley Bank and subsequent generosity from the FED and Treasury has also led to a decliene in 2-year Treasuries by about 100 basis points. This risk off trade has acted as a tailwind for Gold and BitCoin.

The recent divergence in BitCoin prices is seeing company in Gold. Even the Nasdaq is following the move upwards!
We attribute this to the recent banking crisis. In the last week or so, we have seen a sharp decline in yield and real rates. This has caused a spike in Gold and BitCoin prices. The fallout of Silicon Valley Bank and subsequent generosity from the FED and Treasury has also led to a decliene in 2-year Treasuries by about 100 basis points. This risk off trade has acted as a tailwind for Gold and BitCoin.

In the month of February, inflation climbed by 0.6%. This has been in line with consensus expectations.

PPI, however, has remained muted with a 0% rise in February.

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 0 of the normal pressure.

This chart has continued its trajectory downward.

This is the headline inflation number that everyone talks about. Currently, for February 2023 we are at 6.0%. Inflation is known to be sticky. The current trajectory is still promising and there is no need to give up hope yet.

Inflation Nowcast is built using other economic indicators besides the Inflation report to come up with the latest CPI number. Thus, it gives a more up-to-date picture on what the CPI is at any given time. Per the Nowcast, it is interesting to see that headline CPI has remained below core CPI for two months in a row indicating the cooling in gas and food prices while the core part of the inflation has remained fairly sticky.

CPI Components Last Month

CPI Components This Month
Food and energy inflation has come down significantly. Energy inflation is now gone below inflation on all other items as the oil prices have continued their decline. (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 3.8%, a good decline from the reading last month of 4.2%.

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 . Also, you can notice the sharp turn down in the last week since the banking crisis got started. We hope it holds the resistance level slightly above 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. The new facilities at the FED to backstop the banking crisis could act as a shot in the arm and lead to a dash for trash stocks. Our opinion is that it would be short-lived as we see strong signs of a slowing economy.

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. However, this month, we are seeing a bump to the positive side and we hope it builds up.

Services PMI reading has pushed past 50. 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 has turned negative this month, but close to zero.

Retail Sales has also turned negative. Perhaps the holiday sales lacuna is a reason.

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month again, the jobs number broke the consensus expectation by a good margin. While there are layoffs taking place in Tech land, the economy quietly has been adding so many jobs! If jobs are plenty and unemployment is record low, there can be no recession. 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.

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 6.1% compared to the headline inflation of 6%. 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.

This is the big story of this month - the inverted yield curve is now suddenly trying to un-invert! Events following the Silicon Valley Bank fallout has caused a run to haven Treasury bonds that 2-year Treasury yield have dropped by about a percentage point in just a few days! Jeffrey Gundlach, the bond king, in his recent Total Return Macro Webcast is predicting that a sharpe steepening of the yield curve after remaining inverted for some time implies that recession has almost begun.

Yield curve - Then

Yield curve - Now
Within a week's time, we are witnessing the yield curve dropping by about a percentage point around the 2-year point! As many market participants have noted, the short term bonds have rallied more than the long term bonds and this does not happen very often. This is seen as the last stage of the FED hiking cycle. Due to increasing interest rates, something in the system starts breaking (read banking crisis) which inevitably leads to tightening of credit and sharp slowing of the economy. This forces the FED to ease policy rates. The market is seeing through this dynamic and acting accordingly.

The markets have done well year to date. The earnings season has not been as dismal as expected. The companies seem to have kicked the recession can down the road. The sectors that did badly last year have been outperforming this year.

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.
In the last few days, the credit spread has widened by 100 basis points. If this marks the start of a recession, it is likely to widen further.

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 -6.1%.

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