Economic Updates for May 2024

Atlanta FED GDPNow estimate is projecting around 4% 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.

With the rise in inflation numbers in the last few month, USD has followed suit. But, lately, USD is now reversing with FED's dovish rhetoric that it is hard for any further rate hikes.

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

Gold and BitCoin have melted up this year. Perhaps the price increase here has been a harbinger of increasing inflation. At the moment, BitCoin seems to have found some resistance level.

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

The CPI reading for the month of April 2024 came at 0.3% (not seasonally adjusted) inline with the consensus expectation. Inflation has come in hot for the first three months of the year in a row and now has moderated. Markets are taking this with a sign of relief.

PPI is projected to be 0.5% for April 2024. It has come a bit hotter than the consensus expectation of -0.1%.

This is the headline inflation number that everyone talks about. For April 2024 we are at 3.4%. Historically, inflation is known to bounce back a few times before it finally subsides. Over the last 3 months, inflation has defied gravity causing some concerns in the financial markets lately. The market is certainly cheering the latest number as it is seen breaking that upward trend.

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 2.9%.

University of Michigan's consumer sentiment has come in consistently higher over the first 3 months of this year. This month, it came to 67.4. 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 50 even.

Services PMI reading, although in the expansion territory, has been slowing over the past few months indicating the growth in Services is starting to slow. Is this an initial indication of labor market softness? Time will certainly tell.

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 175k jobs while the expectation was for around 243k 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.

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.

This month again, 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.

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.

Utilities had been a laggard over the last couple of years as the interest rates spiked. This month, we have seen it come back with a vengeance! Attractive entry price as well as the rosy prospects for power providers in the light of voracious consumption by AI seems to have lifted the outlook for Utility companies.

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 20.77 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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