Economic Updates for March 2024

Atlanta FED GDPNow estimate has come down a bit for Q1 2024 after the hot PPI report. The nowcast is projecting 2%.

The LEI, after giving a recession signal for almost a year, is now firmly reverting 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.

The US Dollar has given up some of its gains from earlier this year and is consolidating around the 104 mark.

Energy prices have been steadily going up since the beginning of the year.

Gold and BitCoin have melted up this year. Since late February, US Dollar has given up some of its gains. Also, perhaps the increased liquidity in markets in general and profit taking from the explosive tech trade has found its way into Gold and BitCoin.

In addition to the comments on Gold, BitCoin has had the luxury of more inflows from the newly approved ETFs as well as halving of the mining rate to explain its ascent.

The CPI reading for the month of February 2024 came at 0.4% inline with the consensus expectation. Inflation has come in hot for the last two months in a row. It will be interesting to see how FED interprets this data. Most likely they are going to push out the rate easing.

PPI is projected to be 0.6% for February 2024. It has come hotter than the consensus expectation of 0.3%.

This is the headline inflation number that everyone talks about. For February 2024 we are at 3.2%. We are still 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.

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 last 3 months. This month, it came to 76.5. The renewed optimism is perhaps reflecting the drop in inflation and inflation expectation.

The AAII sentiment has remained consistently bullish even after four months of run up in the S&P 500.

First time since September 2022, we are seeing an expansion in Manufacturing. The last two months have reported an expansion with the latest reading at 52.

Services PMI reading has been steadily above 50 over the last few months and the activity appears to be gradually increasing.

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

Retail Sales is reported negative for this month showing some slowness in activity.

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month the jobs number came in at 275k jobs while the expectation was for aroun 200k jobs. This robust job market indicates labor is fairly tight.

Total Vehicle sales came in around the average number over the past few months after a lackluster January.

Used car prices have stabilized after a few months of consistent deflation.

New home sales are looking robust with a readng similar to January.

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 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 lower, indicating a strong job market. It could turn out to be seasonal and it 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 5.0% compared to the headline inflation of 3.2%. 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 marginally steepening over the last month and is reading -0.41% or 41 basis points from being fully flat.

Yield curve - Then

Yield curve - Now
Notice how the 1 year part of the curve has steepened a bit. Otherwise, the curve looks fairly identical to the curve one month ago.

Year to date, enery, communications and technology sectors have been outperforming the rest of the sectors. Notice how the laggard of 2023, real estate is lagging behind again this year. The higher for longer interest rate regime explains why the interest rate sensitive sectors are lagging behind.

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 January/February, 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 $250 which translates to a price to earnings ratio of 20.5 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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