Economic Updates for October 2024

Atlanta FED GDPNow estimate for Q3 2024 is around 2.5%. In spite of the recent slowing, the economy has been holding up well so far.

The LEI, after giving a recession signal for almost a year, has now firmly reverted back about the red recession line! It is still at the red line though, indicating that there is likely a landing either soft or hard.

FED cut rates by 50 basis points, however, we see that Dollar has been strong since the start of October. Extreme easing measures in China and firm dovishness on the part of Bank of Japan has made the US Dollar the goto currency again.

The tension in the middle east has escalated swiftly. This has caused the energy and oil prices spike sharply over the past few weeks.

The rise in Gold prices has taken a short breather this month as the Dollar has started coming back up.

BitCoin got a good boost last month after the FED eased the rates by more than expected. Lately, BitCoin has been behaving more like a risk asset and may see upside if the US economy continues to expand.

The CPI reading for the month of August 2024 came at 0.1% (not seasonally adjusted) inline with expectation. Markets seem to have moved on from being too sensitive to the inflation print. The consistent softer inflation numbers confirm that the economy is gradually slowing towards a soft landing. The markets are now more concerned if the unemployment numbers spike and the economy falls into a recession.

PPI is projected to be 0.2% for August 2024.

This is the headline inflation number that everyone talks about. For July 2024 we are at 2.5%. Historically, inflation is known to bounce back a few times before it finally subsides. Over the last 5 months, the inflation readings are steadily trending downwards indicating the price pressures have abated.

CPI Components Last Month Source BLS.gov Consumer Price Index

CPI Components This Month
Energy prices eased quited a bit in August helping the inflation come down. However, the recent reversal in energy prices is yet to show up in the inflation numbers, look for it next 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 came in consistently higher over the first 3 months of this year. However, starting May, it has come in softer and has been trending downwards. The last few months, we are seeing a rebound with the latest report for September reading 70.1.

The AAII sentiment remains optimistic rebounding from the lows early last month.

Since peaking in March at 50.3, ISM Manufacturing PMI has been on a downtrend. Currently, for the month of September, it is at 467.2 indicating a contraction.

ISM non-manufacturing number have been fluctuating widely. For September 2024, we are at 51.4.

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

Retail Sales in August 2024 remained in the positive territory.

After a weaker payroll numbers last month, this month the payroll numbers came out very strong adding 254k jobs. The consensus expectations were for 140k jobs.

Total Vehicle sales came in around the average number over the past few months.

New home sales have been slow over the summer as high prices and high mortgage rates continue to weigh on new buyers.

The mortgage rates have followed the 10-year Treasury yield lower over the last few weeks with the assistance from the jumbo rate cut by the FED. However, it is likely that we have seen the lows for some time to come.

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 has been climbing over the past few months causing recession fears. This is the second month it has been retreating by 0.1%. Currently, we are at 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 lower allaying any fears of an imminent recession.

The yield curve reading is flat - 10 year constant maturity minus 2 year constant maturity is about 0. The yield curve uninverted shortly after the FED's rate cut.

Yield curve - Then

Yield curve - Now
We witnessed a swift bull steepener during the period of FED's jumbo rate cut. Right now, we are seeing somewhat of an inversion in the curve after the strong payroll report.

All sectors are in the positive territory year to date. The sharp 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. It is interesting to note how Utilities has climbed to the top and have maintained their lead this year.

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 well so far even in the face of the Yen carry trade unwind.

The spreads are so tight now that we need to expect a mean reversion here making it high yield bonds a bit riskier at this point in time.

A spike in put / call ratio indicates that investors are very apprehensive about a sudden fall in the equity markets. In September/October, 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 $270 which translates to a price to earnings ratio of 21.33 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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