Economic Updates for May 2023


Calm before the Storm - when do we start seeing the volatility?

There has been a number of market moving news in the last week or so. Yet, the markets have been benign and fairly calm. The big news that awaits the markets now is on how the debt ceiling gets resolved. The bond market volatility is currently limited to the very short end of the curve. Would this also trigger volatility in the equity markets?

Economic news over the month has been faily positive or neutral. Some of the factors of production such as the manufacturing and services PMIs have been inching upwards. The inflation numbers are inline with expectations. The non-farm payroll numbers are healthy and positive. These are indicating optimism for soft landing.

Where can the surprise come from? Debt ceiling debate is an obvious candidate. The last time that this debate got so heated was in 2011 when the markets saw higher volatility and equity markets sold off. There was a coincident sovereign debt crisis in Europe. This time, we don't seem to have many complications outside the debt ceiling debate. Perhaps the can just gets kicked down the road making this a problem to be solved some other day in the future.

The real surprise is likely somewhere hidden in the credit markets. The regional banking crisis seems to be still simmering, potentially tightening up lending and impacting the commercial and industrial refinancing market. This is evident in the Senior Loan Officer Opinion Survey. While most loans are coming due in 2025, if a few large real estate firms default, it is easy to see how it can trigger a domino effect impacting the broader labor markets. Whether such an event happens or when it is likely to happen is anyone's guess.

Broad Indicators

Senior Loan Officer Opinion Survey

The story of this month in one chart is the SLOOS report (Senior Loan Officer Opinion Survey). The number of respondents tightening standards for lending C&I loans is inching towards recession levels seen in 2001, 2008 and 2020.

Atlanta GDP NowCast

GDP is currently projected to be 2+% for Q2 2023. Even the blue chip consensus forecast have climbed higher not withstanding the deposit crisis in banking. Clearly, this is in spite of the deposit crisis at regional banks and the subsequent tightening in credit. The economy seems resilient at least so far.

US Dollar Index

The dollar has continued to soften. More likely than not, it is attributable to the hint of FED pause as other central banks around the world still continue to tighten policy rates.


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


Gold and Bitcoin have continued their climb. The FED pause and rates peaking has certainly helped. The market may be acknowledging the potential of a slowing dollar. Another key influencer is the debt ceiling debate which help to provide a solid floor for Gold and Bitcoin prices.


Same comment as above in Gold.


CPI Month over Month

In the month of April, inflation climbed by 0.4%. This has been in line with consensus expectations.

PPI Month over Month

PPI, however, has followed CPI up by 0.2% in April. PPI has been bobbing in the positive and negative territory lately.

Reported Year over Year Inflation Rate

This is the headline inflation number that everyone talks about. Currently, for April 2023 we are at 4.9%. We are certainly going in the right direction. This does not give FED any reason to hike next month.

CPI Components

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 again this month! (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 4.5%. This is the same as where the inflation is right now. So, does it imply inflation remains flat from here on? We doubt that, perhaps the survey data may moderate the inflation expectation in the coming months.


Consumer Sentiments

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.

Investor Sentiments

The last few weeks have seen many market moving news with FED decision, non-farm payrolls report, CPI/PPI report and so on. Yet, the markets have been rather calm and mildly selling off. The debt ceiling debate is probably weighing in on the markets.
The earning season has been pretty mild. We expected earnings to fall a lot, but they only fell by around 2%. Once the debt ceiling debate is behind us, perhaps the market may turn optimistic. We hope so and so does this indicator.

GDP Factors

Manufacturing PMI

Manufacturing PMI reading bounced a bit from last month now moving above 50 indicates an expansion and shares the Atlanta FED's optimism on GDP growth. Perhaps this is indicating the soft landing we all desire.

Services PMI

Services PMI reading has pushed past 50 and continues the trend from last month. This is again supporting the soft landing thesis that the economy may not see a serious recession.

Industrial Production

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

Retail Sales

Retail Sales has remained negative in the last three months in a row. It is still mildly negative and does not indicate the kind of major dips we see when there are pervasive job losses.

Non-farm Payrolls

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month the jobs number was inline with expectation but too high to indicate any slowdown in job growth. However, the revisions for the previous months have been negative indicating that jobs are not as healthy as one would see during the growth phase of an economy. Over the next few months, things will become more clear.

Total Vehicle Sales

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

Manheim Used Car Index

The used car prices dipped 4% lower last month.

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.
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.

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 as recession becomes imminent.

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. 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.
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 Bureau of Labor Statistics (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 4.9%. 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.

Market Indicators

Yield Curve Inversion

The excitement last month on the inversion in the yield curve reverting did not last long. The short and long term yields continue to rise.

Yield Curve - then and now

Yield curve - Then
Yield curve - Now
At the very short end, you can see the 1 month bill yielding close to 6%, due to the debt ceiling debate and the fear that US may touch technical default.

Market Sectors

Year to date, technology and communication sectors and back to being the leaders. The S&P 500 index is taken for a ride by the top 5 tech mega cap stocks. The market breadth is still weak.

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.

The spreads have been very tame and no observation of spikes in spreads yet indicating a credit crunch.

Put Call Ratio

A spike in put / call ratio indicates that investors are very apprehensive about a sudden fall in the equity markets. In April, the activity has been quite well behaved in the overall market (SPY) in spite of the turmoil in the banking sector. Perhaps this looks too muted for the kind of news events in the horizon such as the debt ceiling. We may be in for a surprise and volatility could pickup all of a sudden.

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 18 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 -2.5%.


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