Economic Updates for November 2023

Atlanta FED GDPNow is estimating Q4 2023 GDP growth around 2% while blue chip consensus is around 1%. While it is still positive, the growth rate has slowed from Q3 into Q4.

LEI after giving a recession signal for almost a year is now firmly reverting back! 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.

The Dollar has followed the recent drop in 10 year yields over the last couple of weeks.

Recent tension in the middle east caused a spike in energy commodities last month, the prices are reverting since then.

Gold and Bitcoin are diverging this month! Gold has come down as the 10 year yield has softened, inflation has retreated. However, there is some bullishness in Bitcoin with some rumors around the approval of the first Bitcoin spot ETF.

Same comment as above in Gold.

The yearly inflation number seems to be at a low point after the large monthly inflation prints from last summer have rolled off. In the coming months, the competition will be with very low monthly inflation numbers from last fall and hence the yearly inflation might appear to bounce up. Barring this nuance, we are in a good territory with respect to inflation - 0.0% for October.

PPI is projected to be -0.3% in October.

This is the headline inflation number that everyone talks about. Currently, for October 2023 we are at 3.2%. We are certainly in the right neighborhood. In the coming months, we hope the inflation remains contained. Historically, inflation is known to bounce back a few times before it finally subsides. The last three prints show it could be bouncing back.

CPI Components Last Month

CPI Components This Month
Energy prices have reverted down this month. You can see that as energy's contribution to reducing inflation is more pronounced 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 4.4%. It is showing the ominous trend upward, perhaps many survey participants think inflation will bounce back again.

Consumer sentiment has come down gradually over the last 3 months. It is currently at 60.4. Since the last month, the sentiment has declined as we are seeing more credit card delinquencies, defaults in loan payments. However, these are just starting to tick up and not in any dangerous territory.

The AAII sentiment has turned bullish as the S&P 500 has been going higher in the past few weeks.

FED has stay put last month and is likely to do so in December as the inflation numbers have come in lower than expected.

This month has witnessed some stability in Manufacturing PMI. However, it still is at 50 indicating not much change since last month.

In contrast to the Manufacturing PMI, Services PMI reading has been steadily above 50 over the last few months but slowing its expansion in the last few months.

Industrial Production has stayed in the positive territory this month with a reading of 0.08%.

Retail Sales have consistently been in the positive territory by a narrow margin for 6 months in a row except this month it has dipped below zero. It is too early to see if this is marking a coming slowdown.

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month the jobs number came in below expectation and was cheered by the equity markets.

Total Vehicle sales continues to be within its trend band higher, which is a good sign. New cars are scarce in dealer lots.

Used car prices seem to be reverting down this month. This has helped core inflation in its downward trend.

New home sales have kept their upward trend this month.

The mortgage rates have followed the 10-year Treasury yield higher over the last few months. Recently as the inflation is contained and 10-year Treasury yield has rolled over, the mortgage rates has come down a tad bit.

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 as 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 higher, indicating a softening job market. It could turn out to be seasonal and needs to be watched over the next few months if the continuing claims build up.

This month again, the wage inflation continues to exceed the headline inflation as it recorded a reading of 5.2% compared to the headline inflation of 3.2%. This is an indication that inflation is being 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 flattening over the last month as the 10-year Treasury yield has climbed as FED plans to keep rates higher for longer. In the last few weeks it has widened a tad bit as the 10-year yield gave back.

Yield curve - Then

Yield curve - Now
Notice how the long end of the curve has shited down a bit. This has supported the bond and equity markets alike this month.

Year to date, technology, consumer discretionary and communication sectors have been the leaders. Lately, utilities have been suffering more than any other sectors as the 10-year yield has climbed.

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 spreads have been very tight and there are no spikes in the spread observed yet to indicate a potential credit crunch. Some market participants are taking the cue from the equity markets to suggest high yield may be getting into risky territory and we may see some spikes fairly soon.

A spike in put / call ratio indicates that investors are very apprehensive about a sudden fall in the equity markets. In October/November, we have seen some interesting activities but nothing out of the ordinary. Recently, as the inflation number came out better than expected, this has led to a short covering rally in bond and equity markets.

The current earnings forecast by equity analysts estimate the earnings potential for S&P 500 companies to be around $240 which translates to a price to earnings ratio of 18 at the current S&P 500 price level. This is below the 5 year average but above the 10 year average.

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