Zero Indicators In A Recession
With the Atlanta Fed GDP Now forecasting 2.7% GDP growth in Q4 and the blue chip signaling a similar result, it’s not surprising to see the chart below show that 0% of indicators are in a recession. The net percentage of indicators which are accelerating has improved after a modest downturn in the middle of last year. The fact that the black line went down in 2017 even though it was a great year, shows how high its beta is. Since the presidential election, the indicators in recession went from about 70% to zero and have stayed there. Don’t get too complacent. The next time the economy flirts with danger, I expect it to fall into a recession. The higher the inflation gets this year, the more likely the next downturn will be worse than the previous ones within this cycle. As of January 5th, the 10 year breakeven inflation rate was 2.01%, so there’s still room for inflation to increase without a problem.
Non-Manufacturing ISM Shows Another Good Result
Last week the non-manufacturing ISM report signaled the economy had a good December just like the manufacturing ISM showed. The PMI was 55.9 which was 1.5 points below the report in November. This was slightly below the 12 month average of 57. It represents 2 straight months of weakening. This report is consistent with 2.7% annualized real GDP growth which is exactly in tune with expectations. As I stated at the beginning of the year, the actual results are coming in line with expectations. The business activity index fell from 61.4 to 57.3. As you can see from the chart below, most of the indicators showed growth slowing. Price were up 0.1 to 60.8 signaling a slight pickup in inflation.
Make no mistake about it, this was a solid report. A finance and insurance company said: "Ending the year with profits and business levels on track. 2018 is projected to be as productive with an optimistic outlook." Financial stocks reflect this positivity as the XLF financial sector ETF is up 9.12% since November 27th. An ‘other services’ company said: "We are seeing a resurgence in the business activity of our oil and gas customers, in a positive direction that is impacting our sales." It’s not surprising to see oil services doing well since American production is about to hit a cycle high this year. Production in 2018 is expected to be over 10 million barrels per day. Finally, an accommodation and food services company said the following: “Many suppliers are proposing price increases, but few are being implemented. Increases in volume and efficiencies seem to be outperforming commodity pricing.” This shows price increases are going to come on line shortly. We’ve seen grocery price inflation recently start to pick up. The CRB commodities ETF is up slightly this year from $193.86 to $194.16.
The Producers Are Hedging Prices
Besides the fact that the net long position in oil is at a record high, the producers locking in these current oil prices has caused the NYMEX crude swap by dealers to have a record low net position as you can see in the chart below. These two indexes have been going though secular trends. It’s possible that the number of frackers increasing causes more producers to hedge. I look at these two indicators as a signal the oil price has gotten slightly ahead of itself. The price of oil hit a 3 year high of $62.96 as it increased 2% on Tuesday. If this uptrend continues, expect consumer spending to take a dip.
Savers Taking A Hit With The Rate Hikes
Speaking of consumer spending, savers are being hurt by these recent rate hikes. That’s because the rates banks were paying on savings accounts were too high when the Fed had rates at zero. The banks weren’t about to start charging people for savings accounts, so they took the hit on net interest margins. Now the savers are losing that benefit. As you can see from the chart below, the Fed target rate has gone up about 125 basis points, but interest on checking accounts, money markets, and savings accounts has barely moved since the rate hikes started. Since the bottom in mortgage interest rates in July 2016, the average 30 year fixed mortgage rate has gone from 3.41% to 3.95%. If interest rates continue in this uptrend, there’s a good chance the homeownership rate will fall to a new cycle low as the affordability plummets. The housing market will need the labor market to maintain its strength to keep prices at these levels.
Schedule Of ECB Meetings And EU Political Events
The image below shows the key dates investors should watch out for when studying the EU’s fiscal and monetary policy. As you can see, the next ECB meeting is on January 25th. Interestingly, Draghi’s term ends in late 2019. It will be just like America if the ECB has a new head just after it ends QE and starts raising rates, since the ECB is expected to end QE this year and start raising rates in 2019. The most important date of the year is probably the Italian elections on March 4th. The latest poll which was published on January 8th has the 5 Star Movement up by 7.4 points. The 5 Star Movement has 28.1%, the Democrats have 20.7%, the Forza Italian party has 18% and Lega Nord has 12.6%. These results are remarkable. The People’s Democrat Party hasn’t had a poll go that low since May 2013. This shows signs the right wing is taking votes from the establishment left.
Conclusion
Technically, the ISM report has gone from great to good in the past few months, but I wouldn’t worry about it that much because most indicators are signaling the economy is healthy. If the indicators, as a whole, start all showing growth is going from great to good, it’s a major problem for risk assets. On the other hand, S&P 500 earnings have gone from bad in 2016, to good in 2017, to potentially great in 2018. Solid earnings, optimistic sentiment, and low inflation keep the bull market going.
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