Essential adjustments in pattern within the bond and inventory markets, and a word on GDP estimates as effectively – Offended Bear

– by New Deal democrat

There’s no vital financial information at the moment, so it is a good time to put in writing about a number of vital developments within the inventory and bond markets.

To begin with, as a lot of chances are you’ll already know, a portion of the US Treasury yield curve, between the ten 12 months and three month Treasuries, re-inverted final week. Right here’s what that appears like (darkish blue), plus the same sample as to the Fed funds charge (gentle blue):

I put up a put up over at Looking for Alpha about how this isn’t unusual, and what it means going ahead (trace: not so good).

Secondly, particularly with the Administration’s newest geopolitical and financial strikes, there’s been a bit pleasure over on the inventory market as effectively. Under is a graph of the S&P 500 Index normed to 100 as of November 1, 2023. I’ve put a line by the extent as of November 6, at some point after the Election:

As you possibly can see, within the 12 months earlier than the Election, inventory costs had elevated practically 40%. That may be a enormous bull transfer. Whereas there was a 4% spurt greater on the day after the Election, and several other new all-time highs, most lately on February 19, the general pattern within the 4 months since Election Day has been flat. The truth is, yesterday through the day they briefly made a brand new 3 month low. Ought to such a low be made on the shut of the buying and selling day, that may break the long run uptrend.

UPDATE: The S&P 500 did tumble to a brand new 3+ month low on the shut at the moment, at 5778.15. This breaks the uptrend of the previous two years.

There’s additionally been fairly the hubbub in the previous few days – significantly by political activists – concerning the unfavourable GDP prints within the Atlanta Fed’s “nowcast” collection, as under:

I counsel taking this with various grains of salt.

The Atlanta Fed’s nowcast of quarterly GDP is an ongoing estimate that adjustments with every new information level, and might range extensively between the start of the Quarter and the tip. For sxample, right here is the nowcast’s document from Q3 2022, at a time when many observers have been predicting a recession:

Be aware that on the finish of August, with just one month to go within the Quarter, it was “nowcasting” a GDP print of practically 3%. Three weeks later it was barely above 0%. 

What truly occurred? It was first reported as up 2.6%, and after many revisions, it’s presently reported to have been 2.7%.

Even when the nowcast will get it “right,” because it did final Quarter, there may be nonetheless numerous variation within the estimate over the course of the three months:

The underside line is that it might not be stunning in any respect if the Atlanta Fed’s nowcast rebounded within the subsequent month simply as sharply because it declilned within the final week. 

Essentially the most up to date forecasting device I’ve is the “quick and dirty” mannequin utilizing the YoY% adjustments in inventory costs and (inverted) preliminary jobless claims:

Whereas the 4 week common of jobless claims is greater – however by lower than the ten% crucial for me even to think about it a “yellow flag,” even after their 5% sell-off, inventory costs are nonetheless greater by 14% YoY. The upturn in claims, and downturn in shares, should get significantly worse for me to concern a “recession watch,” not to mention a “warning.”

You will need to word that generally the principle elements affecting the financial system are intrinsic to it, like wage beneficial properties or commodity costs. However there are additionally particular person (or small group of) actors with singular financial energy, and the selections they make can have instant or practically instant impacts on the scenario. That was the case with the OPEC value hikes of the Nineteen Seventies, and Paul Volcker’s single-handed ratcheting up of rates of interest that brought on the 1981 “double dip” recession. 

The brand new Administration is behaving just like the proverbial “bull in a China shop,” in a approach it didn’t in 2017, as a result of at the moment T—-p didn’t know tips on how to use the levers of financial energy out there to the President. This time round he does, and is ignoring Congress, and former legal guidelines and appropriations handed by it, proper and left. Many citizens in 2024 in all probability anticipated {that a} 2nd T—-p Administration would appear to be the first, which was a standard GOP Administration when it got here to the financial system. Clearly that isn’t going to be the case.

I’m going to proceed to have a look at the info (which hopefully will stay dependable for a protracted sufficient time), and never go additional than what it tells me when it comes to forecasting the near-term pattern going ahead within the financial system.

The Bonddad Weblog

“New Administration and the return to an Inflationary Era,” Offended Bear by New Deal democrat