The January edition of Macrogram highlights the current state of the economy. The chart-based newsletter shows the weakness in manufacturing, calls attention to the current slope of the yield curve and covers key macroeconomic indicators. Macroeconomic insights at-a-glance.
Highlights
- Low inflation and sluggish growth in the Eurozone have prompted the European Central Bank to set interest rates at a negative 0.50%. The U.S. fed funds rate, currently at a target range of 1.5% - 1.75%, is widely expected to remain at that level for the coming months.
- The yield curve 'un-inverted' in October. A yield curve inversion is often associated with a looming recession; however, the interest rate picture may be distorted by the unprecedented amount of negative-yielding debt in parts of the world, which entice investors to purchase long-term U.S. treasuries in search of safety and yield.
- The economic activity indicators continue to present a mixed picture. While manufacturing remains weak, consumer spending, employment and housing indicators point to a resilient U.S. economy.
- The uncertainties surrounding tariffs disrupt supply chains, stifle business investment and slow down global manufacturing and trade.
- The OECD expects world real growth to be 'stuck at 3% over the next two years'. For the U.S., the OECD forecasts real growth of around 2% for 2020 and 2021.
Maycrest Capital’s Investments in the Current Environment
Maycrest Capital invests in the U.S. stock market following its long-bias tactical ETF strategy. Asset allocation decisions are based on signals provided by the firm's proprietary BearCasting® model, which incorporates economic, sentiment, and technical indicators. Maycrest Capital’s BearCasting® model indicates that the firm's equity strategy should currently remain invested in the U.S. stock market.
Indicators and Trends to Watch
Interest Rates
Fed Meeting December 10-11, 2019 - With inflation under control and a tight labor market, the Fed maintained the target range for the federal funds rate at 1.50 - 1.75%, as widely expected. Fed Chair Powell cited 'persistent' and 'significant' inflation as potential trigger for future interest rate hikes. The market was pleased with the message.
10-year Treasury vs. 3-month Treasury rate - Yield curve is no longer inverted. An inverted yield curve has historically been a precursor of recessions.
Economic Activity Indicators
Consumer Price Index - Inflation is close to the Fed's 2% target rate.
Unemployment Rate - Remains at 3.5% in December, its lowest level in the last 50 years.
Initial Jobless Claims - Made a bottom in April 2019. While inching up slowly, initial jobless claims are still at low levels and indicate a strong labor market.
Real Gross Domestic Product - Shows a steady, albeit modest year-over-year growth rate.
Industrial Production - Year-over-year levels show weakness. The Institute for Supply Management's (ISM's) purchasing managers index (not pictured), which is widely regarded as a key U.S. manufacturing gauge, has been in contraction territory since August. The services sector remains resilient.
Capacity Utilization - Weak ever since reaching a peak in 2018 but may be bottoming out.
Average Hourly Work Week Manufacturing - Struggles to find a bottom, with hours worked even lower than in the 2016 manufacturing soft patch. The effect of tariffs is taking hold. Staff at the Federal Reserve conclude in a white paper that the tariffs 'are associated with relative reductions in manufacturing employment and relative increases in producer prices.'
Real Household Income - Climbs to new highs; should provide liquidity for continued consumer spending.
Retail Sales - Growing at a decent clip and being the main driver for the continued GDP growth in the U.S.
New Building Permits - Show a rebound in the housing market in response to lower interest rates.
Corporate Debt/GDP Ratio - Reaches record highs. Large percentage of leveraged loans and 'barely investment grade' debt securities give cause for concern.
Recession Watch
University of Michigan: Consumer Sentiment - Rises again in December (graph not yet updated for December) amidst expectations for improving incomes and low inflation.
St. Louis Fed Financial Stress Index - Levels are not elevated.
New York Fed - The forecast for Q1/2020 shows the U.S. economy limping along.
Disclosures
This is Maycrest Capital’s current assessment of the economy and the market and may be changed without notice. The visuals shown are for illustrative purposes only and do not guarantee success or a certain level of performance. This material contains projections, forecasts, estimates, beliefs and similar information (“forward looking information”). Forward looking information is subject to inherent uncertainties and qualifications and is based on numerous assumptions, in each case whether or not identified herein. This information may be taken, in part, from external sources. We believe these external sources to be reliable, but no warranty is made as to accuracy. This material is not financial advice or an offer to sell any product. Maycrest Capital’s investment strategy may not be suitable for all investors. Before investing, consider your investment objectives and Maycrest Capital’s charges and expenses. All investment strategies have the potential for profit or loss. There is no guarantee that our investment strategy will perform as designed or that the strategy will be profitable. Investors should expect unprofitable periods. Past performance is not indicative of future performance. Maycrest Capital is a registered investment adviser. Registration does not imply a certain level of skill or training. Maycrest Capital may only conduct business in states where it is properly registered to do so. More information about Maycrest Capital including its advisory services and fee schedule can be found in Form ADV Part 2, which is available upon request.
All FRED graphs have been retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org. The Nowcasting Report has been retrieved from the Federal Reserve Bank of New York. The following data series have been used in this issue of Macrogram: Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [DGS10] Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity [T10Y3M] U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items [CPIAUCSL] U.S. Bureau of Labor Statistics, Civilian Unemployment Rate [UNRATE] U.S. Bureau of Labor Statistics, Average Weekly Hours of Production and Nonsupervisory Employees, Manufacturing [AWHMAN] U.S. Employment and Training Administration, 4-Week Moving Average of Initial Claims [IC4WSA] U.S. Bureau of Economic Analysis, Real Gross Domestic Product [A191RL1Q225SBEA] Board of Governors of the Federal Reserve System (US), Industrial Production Index [INDPRO] Board of Governors of the Federal Reserve System (US), Capacity Utilization: Total Industry [TCU] U.S. Bureau of Labor Statistics, Employed full time: Median usual weekly real earnings: Wage and salary workers: 16 years and over [LES1252881600Q] U.S. Census Bureau, Retailers Sales [RETAILSMSA] U.S. Census Bureau and U.S. Department of Housing and Urban Development, New Private Housing Units Authorized by Building Permits [PERMIT] Board of Governors of the Federal Reserve System (US), Nonfinancial corporate business; debt securities and loans; liability, Level [BCNSDODNS] University of Michigan, University of Michigan: Consumer Sentiment [UMCSENT] Federal Reserve Bank of St. Louis, St. Louis Fed Financial Stress Index [STLFSI] Federal Reserve Bank of New York, Nowcasting Report; https://www.newyorkfed.org/research/policy/nowcast.html.
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