Qualitative Fundamental Analysis of US Economy Oct.2023
The most important factor for the economy is the behaviour of GDP. Several economic indicators are tracked to determine the overall economic situation and GDP growth.
A technical recession is defined as 2 consecutive quarters of negative real GDP.
If GDP grows less than 3% on average for the year, the economy is not growing fast enough and this will lead to unemployment.
At its core, the Federal Reserve has dual mandate policy: price stability(2% inflation for a year) and maximum employment (max Unemployment rate 4%) .
CPI Inflation projection: inflation is forecast at 4.7% in 2023 and is expected to further slow down to 3.0% in 2024.
Actual CPI : 3.7 %
PCE Inflation projection: inflation to be 3.3 percent in 2023, 2.6 percent in 2024, and 2.2 percent in 2025, and the Federal Reserve expects a similar outlook of 3.3 percent, 2.5
Actual PCE : 3.5%
Unemployment rate projection: The unemployment rate reaches 4.1 percent by the end of 2023 and 4.7 percent by the end of 2024 before falling slightly, to 4.5 percent, in 2025.
Actual: 3,8%
GDP Growth projection: Real GDP increases by 1.5 percent in 2024 and by 2.4 percent in 2025.
Actual: 2,4%
Interest rates projection:The Fed now expects its benchmark federal funds rate to close out 2024 at an effective rate of 5.1%, which is higher than its June forecast of 4.6%
Interest rates: 5.5%
MONEY MARKET
Yields
From the chart above we can see when the recession is coming. The 10Y-2Y has already fallen below 0 and we should prepare for a recession when it comes above 0.
The yield curve (all yields) is slightly inverted, but only because of the 20-year yields. The overall curve is normal, which means that investors are not worried about the future, at least for now and they invest more in long-term bonds.
According to the FED, we should expect a mild recession at the end of this year.
The SP500 seems to be consolidating for the next few months.
Corporate Bonds and Credit Spread
Spreads are relatively stable. They do not point to a recession.
Money Supply M2
The money supply is also stable, which means that the printer is not running. This is a good sign considering the banking crisis.
interest rates
The last time IR was so high was during the last recession in 2008. History could repeat itself. At the last FOMC meeting, the FED paused rates but said they would remain high. This could be exactly what happened in 2007. FED paused after aggressive hike and recession came.
SERVEYS
ISM PMI, NMI
The historical correlation between real GDP growth and the ISM PMI/NMI is 85%. PMI/NMI are leading indicators and they will predict how GDP will move. It is a short to long term prediction (within 12 months).
The reading continued to point to another albeit smaller deterioration in the manufacturing performance, as contractions in output and new orders softened. Meanwhile, sufficient stocks of inputs and finished items, alongside still subdued demand, led firms to reduce their purchasing activity sharply again and firms continued to work through inventories in lieu of expanding their input buying, which contributed to a further improvement in supplier performance.
Consumer Sentiment Index(UMCSI)
The level of consumer confidence in stability and future prospects can be used to understand the overall trend in the economy.
Still, consumers are unsure about the trajectory of the economy given multiple sources of uncertainty, for example over the possible shutdown of the federal government and labor disputes in the auto industry.
From a technical perspective the chart looks very suspicious. Like bullback before the new swing. Will see.
Building Permits
The jump in permits suggested that new construction continues to thrive, driven by a shortage of homes available in the market, despite the dampening effect of rising mortgage rates on housing demand.
NFIB Business optimism index
Twenty-three percent of small business owners reported that inflation was their single most important business problem, up two points from last month. Also, the number of small business owners expecting better business conditions over the next six months declined (seven points from July to a net negative 37%). “With small business owners’ views about future sales growth and business conditions discouraging, owners want to hire and make money now from strong consumer spending,” said NFIB Chief Economist Bill Dunkelberg. “Inflation and the worker shortage continue to be the biggest obstacles for Main Street.
Overall the business is not optimistic for the near future.
Leading Economic Index
The Leading Economic Index provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term.
The US LEI continues to signal a recession. Combined with the yield curves, it looks like a recession could be coming very soon.
INFLATION
Total Inflation = 30% CPI (demand) + 40% PCE(supply) + 30% other factors)
CPI
The FED's target may be 2%, but the reality is that inflation is between 2-4%. Inflation has risen again in recent months and current oil prices suggest that it will remain high.
Investors are worried about future prices. The same thing happened in the 80s. The FED does not want the same to happen today, which is why they have been so hawkish recently.
Core CPI
This projection is very scary, but if the economy goes crazy, it can happen, just like in the 80s. I am not predicting that core CPI will rise that much, just pointing out the similarity.
PCE Inflation
The US personal consumption expenditure price index rose 3.5% year-on-year in August 2023, the most in four months, after an upwardly revised 3.4% rise in July and in line with market expectations.
PPI / Core PPI
The producer price inflation in the United States accelerated to 1.6% year-on-year in August 2023. This is the second consecutive month.
GOVERNMENT
Balance sheet
The balance sheet is falling, which is deflationary. On the one hand, this is good and gives us an indication that inflation should be contained, but on the other hand, it is a sign of recession.
[b]Cyclical Commodities
Trade weighted US Dollar Index
Rising trade indices are actually deflationary for the economy.
Commodities
They stable prices do not give us a clear picture of the near future.
Stocks
The benchmark indices are falling. The failed to make new HH, suggesting that the will consolidate or fall.
Sometimes they are seen as a leading indicator of future GDP and recession.
Summery
The current pause in interest rates, with the hawkish narrative that rates will stay high for a long time, could be the second phase of the business cycle. The next one is recession.
Yield curves have also suggested that the recession is not as far away as we think.
The surveys are relatively stable, but the overall picture is not so optimistic.
Inflation is on the rise again, which may lead the FED to be more aggressive. They have said many times that they would rather have a recession than a price explosion. They have even warned about a mild recession, how mild we will see.
The unemployment rate is still below 4%, but in recent months it has risen from 3.5% to 3.8%. Rising unemployment is a sign of recession.
Stock indices have risen in recent months, but future expectations of a new recession, combined with high interest rates and business optimism, are bearish factors for the stock market.
A technical recession is defined as 2 consecutive quarters of negative real GDP.
If GDP grows less than 3% on average for the year, the economy is not growing fast enough and this will lead to unemployment.
At its core, the Federal Reserve has dual mandate policy: price stability(2% inflation for a year) and maximum employment (max Unemployment rate 4%) .
CPI Inflation projection: inflation is forecast at 4.7% in 2023 and is expected to further slow down to 3.0% in 2024.
Actual CPI : 3.7 %
PCE Inflation projection: inflation to be 3.3 percent in 2023, 2.6 percent in 2024, and 2.2 percent in 2025, and the Federal Reserve expects a similar outlook of 3.3 percent, 2.5
Actual PCE : 3.5%
Unemployment rate projection: The unemployment rate reaches 4.1 percent by the end of 2023 and 4.7 percent by the end of 2024 before falling slightly, to 4.5 percent, in 2025.
Actual: 3,8%
GDP Growth projection: Real GDP increases by 1.5 percent in 2024 and by 2.4 percent in 2025.
Actual: 2,4%
Interest rates projection:The Fed now expects its benchmark federal funds rate to close out 2024 at an effective rate of 5.1%, which is higher than its June forecast of 4.6%
Interest rates: 5.5%
MONEY MARKET
Yields
From the chart above we can see when the recession is coming. The 10Y-2Y has already fallen below 0 and we should prepare for a recession when it comes above 0.
The yield curve (all yields) is slightly inverted, but only because of the 20-year yields. The overall curve is normal, which means that investors are not worried about the future, at least for now and they invest more in long-term bonds.
According to the FED, we should expect a mild recession at the end of this year.
The SP500 seems to be consolidating for the next few months.
Corporate Bonds and Credit Spread
Spreads are relatively stable. They do not point to a recession.
Money Supply M2
The money supply is also stable, which means that the printer is not running. This is a good sign considering the banking crisis.
interest rates
The last time IR was so high was during the last recession in 2008. History could repeat itself. At the last FOMC meeting, the FED paused rates but said they would remain high. This could be exactly what happened in 2007. FED paused after aggressive hike and recession came.
SERVEYS
ISM PMI, NMI
The historical correlation between real GDP growth and the ISM PMI/NMI is 85%. PMI/NMI are leading indicators and they will predict how GDP will move. It is a short to long term prediction (within 12 months).
The reading continued to point to another albeit smaller deterioration in the manufacturing performance, as contractions in output and new orders softened. Meanwhile, sufficient stocks of inputs and finished items, alongside still subdued demand, led firms to reduce their purchasing activity sharply again and firms continued to work through inventories in lieu of expanding their input buying, which contributed to a further improvement in supplier performance.
Consumer Sentiment Index(UMCSI)
The level of consumer confidence in stability and future prospects can be used to understand the overall trend in the economy.
Still, consumers are unsure about the trajectory of the economy given multiple sources of uncertainty, for example over the possible shutdown of the federal government and labor disputes in the auto industry.
From a technical perspective the chart looks very suspicious. Like bullback before the new swing. Will see.
Building Permits
The jump in permits suggested that new construction continues to thrive, driven by a shortage of homes available in the market, despite the dampening effect of rising mortgage rates on housing demand.
NFIB Business optimism index
Twenty-three percent of small business owners reported that inflation was their single most important business problem, up two points from last month. Also, the number of small business owners expecting better business conditions over the next six months declined (seven points from July to a net negative 37%). “With small business owners’ views about future sales growth and business conditions discouraging, owners want to hire and make money now from strong consumer spending,” said NFIB Chief Economist Bill Dunkelberg. “Inflation and the worker shortage continue to be the biggest obstacles for Main Street.
Overall the business is not optimistic for the near future.
Leading Economic Index
The Leading Economic Index provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term.
The US LEI continues to signal a recession. Combined with the yield curves, it looks like a recession could be coming very soon.
INFLATION
Total Inflation = 30% CPI (demand) + 40% PCE(supply) + 30% other factors)
CPI
The FED's target may be 2%, but the reality is that inflation is between 2-4%. Inflation has risen again in recent months and current oil prices suggest that it will remain high.
Investors are worried about future prices. The same thing happened in the 80s. The FED does not want the same to happen today, which is why they have been so hawkish recently.
Core CPI
This projection is very scary, but if the economy goes crazy, it can happen, just like in the 80s. I am not predicting that core CPI will rise that much, just pointing out the similarity.
PCE Inflation
The US personal consumption expenditure price index rose 3.5% year-on-year in August 2023, the most in four months, after an upwardly revised 3.4% rise in July and in line with market expectations.
PPI / Core PPI
The producer price inflation in the United States accelerated to 1.6% year-on-year in August 2023. This is the second consecutive month.
GOVERNMENT
Balance sheet
The balance sheet is falling, which is deflationary. On the one hand, this is good and gives us an indication that inflation should be contained, but on the other hand, it is a sign of recession.
[b]Cyclical Commodities
Trade weighted US Dollar Index
Rising trade indices are actually deflationary for the economy.
Commodities
They stable prices do not give us a clear picture of the near future.
Stocks
The benchmark indices are falling. The failed to make new HH, suggesting that the will consolidate or fall.
Sometimes they are seen as a leading indicator of future GDP and recession.
Summery
The current pause in interest rates, with the hawkish narrative that rates will stay high for a long time, could be the second phase of the business cycle. The next one is recession.
Yield curves have also suggested that the recession is not as far away as we think.
The surveys are relatively stable, but the overall picture is not so optimistic.
Inflation is on the rise again, which may lead the FED to be more aggressive. They have said many times that they would rather have a recession than a price explosion. They have even warned about a mild recession, how mild we will see.
The unemployment rate is still below 4%, but in recent months it has risen from 3.5% to 3.8%. Rising unemployment is a sign of recession.
Stock indices have risen in recent months, but future expectations of a new recession, combined with high interest rates and business optimism, are bearish factors for the stock market.
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-Macroeconomics
-Market manipulation
-Liquidity calculation
-Economic and price action indicators
-MTF Pivot points
*Fundamental analysis
*Technical analys
*Quantitative analysis
Free group:
t.me/serpentforexclub
Two major periods of inflation (late 1970s - early 1980s and 2020-2023) were both preceded by surges in government spending and regulation that were assisted by cheap financing facilitated by the Federal Reserve. Government outlays grew by 15% (annual rate) in 1974-1975, and by twice that in 2020-2021 (Covid), compared to an average increase of 8% over the 1973-2023 period). During those periods, small firms uncharacteristically raised prices at an accelerated rate and at increased frequency.
Interest rate and inflation measures in 1980 were much higher than today even though the price behavior on Main Street looks very similar. In the 1980s, after the first plunge in price hike activity, reports of higher prices leveled out at very high rates for a significant period before capitulating to Fed pressure. If this pattern repeats, the Fed will have to maintain consistently aggressive pressure on the economy to subdue the inflation rate.
Reverse Repurchase Agreement (RRP)
When the Federal Reserve uses a reverse repo, the central bank initially sells securities and agrees to buy them back later. In these cases, the Fed is essentially borrowing money from the market, which it may do when there is too much liquidity in the system. Regular repurchase agreements (repos), in which the Fed plays the role of the lender by buying securities and then selling them back, are more common measures that the central bank uses to inject additional reserve balances into the banking system.
Major foreign holders of United States treasury securities
Japan and China are the biggest holders. Because of their monetary policy the currencies are suffering against the dollar. Thats why they are selling US treasuries to get some cash back.
For these three reasons, yields are likely to continue to rise. The higher yields will cause more problems for the banks.
Very importantly, in the past when 10Y-2Y was inverted, it steepened because 2Y Yield was falling and even more aggressively than 10Y. Right now the curve is steepening because 10Y yields are rising very aggressively. The Yields are not falling, not at all. That's something we haven't seen.
In the last two recessions, the FED turned on the printer to get out of it easily. For the time being, the FED isn't printing any more money, and it may not even start, because of the huge national debt, which continues to grow.
MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
Japan 1104.4 1076.3 1082.3 1064.4 1116.4 1196.0 1230.7 1232.7 1219.9 1215.0 1229.0 1303.0 1299.9
China, Mainland 859.4 867.1 870.2 877.9 901.7 938.6 939.2 938.8 951.8 976.0 1013.2 1028.7 1033.8