Economic Updates for June 2023

GDP is currently projected to be 2+% for Q2 2023.The economy seems very resilient to recession at least so far.

The dollar has continued to soften. Recently, it seems to have hit some support and has bounced off the support.

Broadly, commodities remain flat to down this month as well. Energy continues to contribute constructively to bring inflation down.

Gold and Bitcoin have taken a pause in their climb.It is widely believed that inflation is on its way down. If inflation bounces back or if we see chances of a FED pivot, it might give another push to these asset classes upwards.

Same comment as above in Gold.

In the month of May, inflation climbed by 0.3%. This has been in line with consensus expectations.

PPI, however, has declined by 0.3% in May. PPI has been bobbing in the positive and negative territory lately.

This is the headline inflation number that everyone talks about. Currently, for June 2023 we are at 4.0%. We are certainly going in the right direction. It makes sense why FED skipped the hike this month. They are likely to raise again next month.

CPI Components Last Month

CPI Components This Month
All components of inflation are seen moderating. As mentioned earlier, energy's contribution to inflation is negative three months in a row now! Even food inflation has moderated compared to last 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 3.3%. This has taken a sharp dive from 4.5% last month. Perhaps more of the survey participants are getting convinced that the inflation will abate sharply.

It is great to see the consumer sentiments still holding on strong above 60 consistently. As long as the consumer is strong, it is hard to make a case we are in recession.

As we expected last month, many of the worries have been resolved. The debt ceiling debate concluded without much volatility. Also, the FED skipped rate hike this month following a mellowing CPI data. On the other hand, the optimism in the job numbers continued. All this has led to the narrow rally in Nasdaq tech stocks to broaden into cyclicals. Certainly, the investors have taken notice and are participating.

The markets are now at the high end of the trading range. The support from here on for continued progress looks dubious. We are still in the late cycle, with high interest rates that puts pressure on credit growth. It would be no surprise if the market takes a pause or a short correction here as the Q2 earnings start pouring in.

Manufacturing PMI reading has failed to hold up above 50. We do need to see this strongly above 50 to conclude we have a soft landing.

Services PMI reading has been steadily above 50 over that last few months. This is very encouraging for a soft landing.

Industrial Production refuses to show the optimism seen in the manufacturing and services PMI numbers. It is still close to 0.

Retail Sales has bobbed up into the positive territory this month and also last month after revisions. It is still not indicating a robust consumer.

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month the jobs number exceeded expectation and too high to indicate any slowdown in job growth. Many are focused on the average weekly hours which has moderated a bit. This they infer is where the softness in the job market is being expressed.

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

The used car prices have been declining over the past few months.

New home sales saw a large jump in this month. 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 not just thawing but even heating up this summer.

While stabilizing, the current rate level at around 7% is causing many families wanting to trade-up, to instead stay put in homes that have mortgages at rates in the low 3% range. This is causing some uncertainty when reading housing activity statistics, as this rise in mortgage rates is the fastest on record, with no exact historic precedent.

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 lower. Looking at my LinkedIn feed, I see many starting new positions. Another indicator for soft landing, but it is probably premature to make that claim with this indicator.

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 Bureau of Labor Statistics (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 6.0% compared to the headline inflation of 4.0%. 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 and makes it likely to keep rates higher for longer.

After the debt ceiling event, the very short term rates came down a bit. However, this has not helped the yield curve inversion at all. The inversion is just getting a bit deeper by the day.

Yield curve - Then

Yield curve - Now
The short term rates including the 2year rate is now above 5%!

Year to date, technology, consumer discretionary, industrials and communication sectors have been the leaders. Lately, the breadth in the markets has been widening followed by a strong performance by tech earlier in the 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 so far.

The spreads have been very tame and no observation of spikes in spreads yet indicating a 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 June, the activity has been quite well behaved in the overall market (SPY) in spite of the debt ceiling standoff. The VIX index has also remained very quiet.

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 18.5 at the current S&P 500 price level. This is just below the 5 year average and above 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 -4.8%.

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