Economic Updates for March 2023


Late Cycle Blues - this is the gist of the current state of markets.

We have witnessed the fastest rate hikes in the last half a century. As has always been the case, these rate hikes precipitate certain events that shine the light on deep cracks in the financial systems. This time, it is the banking sector once again. Banking can be seen as the circulatory system of the economy. Once that has been affected, it is very easy to see how various other sectors can get impacted, particularly real estate and other high capital expenditure oriented sectors.

In the past week or so, we have seen the short term bond yield fall by about one percentage point while the MOVE index has made yet another record! While the bond market is signalling risk off, the stock market is dashing for trash stocks. The long duration, high growth, no earnings part of the stock market is leaping to the moon.

Typically, this battle between the bond and the stock market ultimately yields to the commands of the FED. This time, their decision is complicated by the unrelenting inflation dynamics at one end and deflationary forces from the banking sector at the other end. Our guess is that they will attend to the acute ailment at the cost of the chronic ailment aka inflation.

Broad Indicators

Move Index - Merrill Lynch Option Volatility Estimate

The story of this month in one chart is the MOVE Index. It measures the market's expectation of implied volatility of the US bond market using 1-month Treasury options.
It recorded the highest value in its history since its inception in 2019. The banking crisis after the Silicon Valley Bank saga has pushed the short term Treasury yields to fall by about a percentage point.

Atlanta GDP NowCast

GDP is currently projected to be 3+% for Q1 2023. Even the blue chip consensus forecast have climbed higher. It remains to be seen if the recent banking crisis puts a dent in this optimism.

US Dollar Index

The rise in the dollar index during February has stalled a bit in the last week or so.


The easing in commodity prices continue from last month. Increase in yields over the past month as well as the uncertain demand in the future as the economy slows both dampen the spirits in energy prices.


In the last week or so, we have seen a sharp decline in yield and real rates. This has caused a spike in Gold and BitCoin prices. The fallout of Silicon Valley Bank and subsequent generosity from the FED and Treasury has also led to a decliene in 2-year Treasuries by about 100 basis points. This risk off trade has acted as a tailwind for Gold and BitCoin.


The recent divergence in BitCoin prices is seeing company in Gold. Even the Nasdaq is following the move upwards!
We attribute this to the recent banking crisis. In the last week or so, we have seen a sharp decline in yield and real rates. This has caused a spike in Gold and BitCoin prices. The fallout of Silicon Valley Bank and subsequent generosity from the FED and Treasury has also led to a decliene in 2-year Treasuries by about 100 basis points. This risk off trade has acted as a tailwind for Gold and BitCoin.


CPI Month over Month

In the month of February, inflation climbed by 0.6%. This has been in line with consensus expectations.

PPI Month over Month

PPI, however, has remained muted with a 0% rise in February.

NYFed Global Supply Chain Pressure Index

If you believe the rise in inflation was transitory, here is a comforting chart. Many believe the cause of inflation was due to supply side constraints caused by COVID shutdowns across the world. This chart tracks the pressure on global supply chain. Clearly, according to this data, the pressures have been coming down and are now close to 0
see wikipediastandard deviation
of the normal pressure.

This chart has continued its trajectory downward.

Reported Year over Year Inflation Rate

This is the headline inflation number that everyone talks about. Currently, for February 2023 we are at 6.0%. Inflation is known to be sticky. The current trajectory is still promising and there is no need to give up hope yet.

Inflation NowCast

Inflation Nowcast is built using other economic indicators besides the Inflation report to come up with the latest CPI number. Thus, it gives a more up-to-date picture on what the CPI is at any given time. Per the Nowcast, it is interesting to see that headline CPI has remained below core CPI for two months in a row indicating the cooling in gas and food prices while the core part of the inflation has remained fairly sticky.

CPI Components

CPI Components Last Month
CPI Components This Month
Food and energy inflation has come down significantly. Energy inflation is now gone below inflation on all other items as the oil prices have continued their decline. (Please note that the y-axis in both the graphs have different scales).

One Year Inflation Expectations

This survey data shows that inflation one year from now is expected to be 3.8%, a good decline from the reading last month of 4.2%.

5 Year, 5 Year forward Inflation Expectations

This is a market based indicator showing the inflation in 5 year forward interest rate, 5 years, is in a 2
handleIf a measure such as stock price ranges in 35.01 through 35.99, the stock price is said to have a handle of 35.
. This indicates the current inflation bout is just a blip in the radar and not an indicative of a structural change in the economy.

10 Year breakeven Inflation Expectations

This is another market based indicator showing the inflation 10 years from now is in a 2
handleIf a measure such as stock price ranges in 35.01 through 35.99, the stock price is said to have a handle of 35.
. This indicates the current inflation bout is just a blip in the radar and not an indicative of a structural change in the economy.

Real Yield - 10 year Treasuries

It is great to see real yields in the positive territory after a long period of being on the negative side. This indicates the optimism in bonds where you can make some positive
carryYield on the investment.
. Also, you can notice the sharp turn down in the last week since the banking crisis got started. We hope it holds the resistance level slightly above 1%.


Consumer Sentiments

The survey indicator for consumer sentiments remains just fine. It is good to see it has not declined considerably after the January effect last month.

Investor Sentiments

The investors have remained bearish for a while. The new facilities at the FED to backstop the banking crisis could act as a shot in the arm and lead to a dash for trash stocks. Our opinion is that it would be short-lived as we see strong signs of a slowing economy.

GDP Factors

Manufacturing PMI

Manufacturing PMI reading indicates a contraction (below 50) which is not great and does not share the Atlanta FED optimism on GDP growth. More so, this may indicate the slowdown in the economy that is yet to come. However, this month, we are seeing a bump to the positive side and we hope it builds up.

Services PMI

Services PMI reading has pushed past 50. Many are jumping to the conclusion that this may indicate a soft or no landing scenario, essentially implying that we may avoid a recession.

Industrial Production

Industrial Production has turned negative this month, but close to zero.

Retail Sales

Retail Sales has also turned negative. Perhaps the holiday sales lacuna is a reason.

Non-farm Payrolls

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month again, the jobs number broke the consensus expectation by a good margin. While there are layoffs taking place in Tech land, the economy quietly has been adding so many jobs! If jobs are plenty and unemployment is record low, there can be no recession. This just makes FED's job so much harder.

Total Vehicle Sales

Total Vehicle sales continues to be within its trend band higher.

Manheim Used Car Index

The used car prices are starting to inch up again seemingly the demand is coming back up.

US New Home Sales

New home sales are starting to tick up again. Perhaps new buyers are feeling courageous to take on the higher mortgage rates thinking it may only go higher in the coming months.

30 Year Fixed Mortgage Rates

The mortgage rates are stabilizing and buyers have been coming back to the market. The housing market is showing signs of thawing as spring has arrived.

Employment Indicators

Historical Unemployment Rate

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 in the months to come.

Unemployed to Job Openings Ratio

There are about 2 job openings for every unemployed person looking for a job.

US Jobless Claims

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.
Source Continuing Jobless Claims

Indeed Job Postings

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 BLS report on job openings to unemployed, we expect to see some sharp corrections if a recession is imminent.

Wage Growth Tracker

This month, the wage inflation is exceeding the headline inflation as it recorded a reading of 6.1% compared to the headline inflation of 6%. 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.

Market Indicators

Yield Curve Inversion

This is the big story of this month - the inverted yield curve is now suddenly trying to un-invert! Events following the Silicon Valley Bank fallout has caused a run to haven Treasury bonds that 2-year Treasury yield have dropped by about a percentage point in just a few days! Jeffrey Gundlach, the bond king, in his recent Total Return Macro Webcast is predicting that a sharpe steepening of the yield curve after remaining inverted for some time implies that recession has almost begun.

Yield Curve - then and now

Yield curve - Then
Yield curve - Now
Within a week's time, we are witnessing the yield curve dropping by about a percentage point around the 2-year point! As many market participants have noted, the short term bonds have rallied more than the long term bonds and this does not happen very often. This is seen as the last stage of the FED hiking cycle. Due to increasing interest rates, something in the system starts breaking (read banking crisis) which inevitably leads to tightening of credit and sharp slowing of the economy. This forces the FED to ease policy rates. The market is seeing through this dynamic and acting accordingly.

Equity Markets

The markets have done well year to date. The earnings season has not been as dismal as expected. The companies seem to have kicked the recession can down the road. The sectors that did badly last year have been outperforming this year.

Market Sectors

Year to date, technology and communication sectors and back to being the leaders. Is this a dash for trash, long duration trade back on again? Or is this for real this time? The developments in the banking sector foretells this move is short-lived.

High Yield Index Options-Adjusted Spread

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.
In the last few days, the credit spread has widened by 100 basis points. If this marks the start of a recession, it is likely to widen further.

Put Call Ratio

A spike in put / call ratio indicates that investors are very apprehensive about a sudden fall in the equity markets. In March, the activity has been quite well behaved in the overall market (SPY) in spite of the turmoil in the banking sector.

S&P 500 Current Valuations

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 17.1 at the current S&P 500 price level. This is just below 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 -6.1%.


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