July Quick Read on the US Economy

The economic news improved somewhat from my last update.  The labor market looks more solid than it did a month ago and there are some signs the manufacturing sector may have found it footing.  I believe the Brexit vote will likely have only a modest direct impact on the US, but will make all observers less confident of their predictions for global growth.  This summer, the fed may try to convince the market that it will hike again in September, but my guess is that the December will be the earliest.

 

Our latest reading for the Astor Economic Index® (“AEI”) is higher than last month, and at near the highest level posted this year.  I still see the US as currently growing above average. The AEI is a proprietary index that evaluates selected employment and output trends in an effort to gauge the current pace of US economic growth.

Source: Astor calculations

The labor market has been doing its noisy best to upset the stomachs of economists.  June’s payroll number showed a solid recovery from the weak numbers posted for April and May.  That being said, smoothing the series somewhat by looking at year over year percentage change shows that the US economy is still adding jobs but at a somewhat slower pace than has prevailed over the last few years.

The nowcasts produced by the Federal Reserve banks of Atlanta and New York are both still showing stronger growth in the second quarter than the first.  The Atlanta Fed is currently estimating 2.3 SAAR and the New York Fed 2.1.  These are both slightly weaker than last month’s estimate.  Both have been updated since the employment report.

 

The biggest economic surprise of the year has been the vote for the UK to leave the European Union.  At Astor, we were pleased to provide rapid reaction to this event on our blog on the morning and afternoon of the vote.  I think our analysis holds up well: see CEO Rob Stein’s take here and mine here.   As some of the dust has settled, short term implications for the UK economy are seen as dramatic by many economists.  For example, the panel of economists surveyed by Consensus Economics is now forecasting 1.1% growth in 2017, down from a 2.1% forecast last month.  Reductions for growth in the Eurozone are smaller.  Consensus Economics now forecasts 1.4% in 2017 down from 1.6%.  These same economists are not currently seeing significant direct effects on the US or the rest of the world.  The swift resolution of the UK leadership contest (with a new Prime Minister this week as opposed to the September time table originally announced) may offer grounds for optimism that a deal may cut short the period of uncertainty.

 

I see Brexit uncertainly leading to reduced investment by both firms and households as the primary channel affecting UK GDP.  To the to the extent that the uncertainly will have sustained spillovers into the financial markets it could have indirect effects on the US.  For example, the dollar initially rallied after the vote, but is now about the level that obtained in early June.  Should the dollar appreciate against our trading partners, it would be expected to make exporting more difficult.  In my opinion, the largest effect, however, seems to be in government bond yields.  US ten year yields have moved down 25 basis points to a yield of around 1.50% as this note is being written.  While, some of this may be safe haven demand that one can hope will be reversed as a path forward emerges, there are few of the other typical signs of investor fear.  Investors willing to take 1.5% for 10 years may be foreseeing long spell of a worrying lack of attractive opportunities for investment in the US and abroad.

 

When last we heard from the fed, their rate-raising plans were put on hold by the poor payroll numbers in April and May.  Does the decent report for June portend another hiking scare?  I think it is too soon to tell.  My interpretation of their speeches is that for the fed to raise rates they need to be convinced that the labor market is at full employment and that inflation will return to target in the medium term.  The last report has some points for both sides.  If the decision was finely balanced before, then in my opinion the Brexit vote strengthened the doves’ position.  Neither inflation nor the labor market are likely to see a boost because of it, and I imagine the decline in yields has the fed’s attention.  My guess is that a few hawks will try to make the case for a hike over the summer but that the fed will not hike before December.  For what it’s worth, the most common interpretation of rates implied by fed fund futures market sees only a small chance of a hike before the end of the year, as opposed to the situation in January when more than one additional hike was priced in.  A sustained return to the relatively robust labor market we saw over 2014-2015 would increase the likelihood of a hike.

 

Overall, I am relieved the labor market seems to have bounced back from a weak April and May, but I will feel better about the economy if we see this strength confirmed over the next few months.

 

 

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

 

“The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.”

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Brexit Fallout Puts Next Round of U.S. Economic Data in Spotlight

As fallout from the Brexit vote continues to be felt—most acutely in currency and confidence—attention on this side of the pond turns to the next round of economic reports for clues as to how the U.S. economy will withstand the inevitable headwinds from the event.

From a market perspective, Brexit is best understood as an event—one that has sent the stock market down sharply and caused bond yields to plunge. Our research has shown that markets tend to recover from “events” if economic fundamentals are solid. This “if” is putting even more emphasis on upcoming data on employment, GDP, and manufacturing.

Before Brexit, our proprietary Astor Economic Index® (AEI) has shown growth in the U.S. economy, although there has been some minor slowing over the past several months. Obviously the Brexit vote, itself, has not had any fundamental effect on the economy; the process of Britain’s exit will be both complicated and prolonged. However, there have been undercurrents of concern voiced about the recent pace of U.S. economic growth, including by  Federal Reserve Chair Janet Yellen in her recent testimony before Congress.

To be clear, our AEI reading has not signaled any warnings about an economic downturn or recession. The economic “arrows” have been pointing upward, although to a lesser degree than in previous months. Any significant change in the angle of those arrows going forward, indicating the economy is slowing further, would mean the market likely faces a much tougher time recovering.

Rather than dwell in the land of “what-ifs,” economic data gives concrete evidence of what is happening now, which is far more significant for the nearly $18 trillion U.S. economy than any projection. Data will help clear the uncertainty that has swirled in the wake of the Brexit vote, the results of which took many by surprise and triggered a wave of remorse, as more than 3 million British people signed an official online petition for a “do-over” vote. Amid shaken confidence, investors and business leaders alike are raising questions about a slowdown and even a possible recession in Britain, the impact on the European economy, and fears for global economy overall.

On the currency side, since the Brexit vote the British pound has come under intense pressure, as the sterling has fallen to its lowest level versus the U.S. dollar in more than three decades. The British government announcement that it has put in place “robust contingency plans” to deal with the financial aftermath of the Brexit vote thus far has done little to stop the sterling’s decline.

If the U.S. dollar resumes its rally from 2015, that could cause an additional slowdown in U.S. exports. Likewise, a strong dollar would further pressure U.S. manufacturing—which brings us to the economic data to be released starting later this week.

The manufacturing sector has been faring somewhat better since its downturn last fall and winter, with May logging the third consecutive month of growth. Whether June has continued that growth will be closely watched when the Institute for Supply Management (ISM) manufacturing report is released on Friday, July 1.

Also in the spotlight will be the Employment Situation for June, scheduled to be released on Friday July 8. The big question here is whether hiring has picked up after May’s disappointing report that showed nonfarm payroll employment increased by only 38,000. The Federal Reserve, in its decision not to increase rates at its June meeting, has trained its sights on the employment number, as has much of the market.

Later in the month, on July 29, we will get a first look at Q2 GDP with an advance reading for the quarter. This will be eagerly awaited given the slowdown in Q1 to 1.1%, the weakest pace in a year. While slow, Q1 output was raised from earlier readings for the quarter of 0.5% (advance) and then 0.8% (second estimate).

Amid the uncertainty and speculation about various “what-if” scenarios—from whether the British will have a “re-do” vote, to whether there will be other “exit” referenda in the EU—economic data provide the proverbial ground to stand on. That’s why our investment philosophy is grounded in assessment of economic fundamentals, to determine the appropriate weighting of risk assets (i.e. equities) within a portfolio given the current state of the economy. It makes far more sense in our view to deal in the reality of economic fundamentals than to rely on projections of what might occur, when and how.

Rob Stein is the CEO of Astor Investment Management LLC, a registered investment advisor that provides advisory services to approximately $1.9 billion (as of March 2016) in client assets across various product channels, including separately managed accounts, mutual funds, and model delivery arrangements. Astor’s investment philosophy is based on the belief that diligent analysis of economic data can provide valuable signals for longer-term financial market allocations.

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.

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Second Fed Rate Hike? Much Ado About Not Very Much

Imagine this scenario: You are at the next regular board meeting at Apple, Microsoft, Tesla or some company of your choosing. As you glance down the agenda, where do you picture the discussion of the Federal Reserve’s expected interest rate hike? At the top? Somewhere near the bottom?

My guess is that it isn’t mentioned at all. The reason? The widely anticipated 25 basis point hike in the fed funds rate, whether it happens in June or, barring that, then most definitely before the labor day weekend (read: end of summer).

A June or July increase would be only the second rate rise in six months. The previous move in December—a 25 basis point hike that inched the fed funds rate to the current range of 0.25-0.50%—was the first in 10 years.

Personally, although to be clear I don’t have a vote, lean toward a small hike occurring in June and possibly another hike later in the year. The Fed’s habit is to lower rates in response to events, while it raises them according to plan. The Fed’s plan has been obvious. Recently, Federal Reserve Chair Janet Yellen said that “in the coming months, such a move would be appropriate,” given the Fed’s plan to “gradually and cautiously increase our interest rate over time.”

Those who like to worry about the Fed’s actions have voiced concerns such as what would happen to the stock market. Would higher interest rates put a damper on the economy, hurt capital-goods investment, or slow the housing market? Or maybe their concerns are more philosophical, such as whether a 25 basis point hike would be premature with inflation below the Fed’s 2 percent target. Or maybe they fret about a stagnant global economy or the outcome of the “Brexit” vote over whether Britain should leave the European Union.

All of these worries are much ado about not very much. First of all, the Fed has stated it does not want the international picture to be too much of an influence in making its decisions. (For the record, a U.S. rate hike would not be particularly constructive for the rest of the world.) Rather, the Fed is focusing on the U.S.—the driver of the world economy.

And the U.S. economy is certainly strong enough to handle one or two modest rate hikes. Employment trends are strong: the four-year moving average of unemployment claims is at the lowest rate since the 1970s. We’re starting to see signs of tightening in the labor market, with wages on the service side up about over 6 percent, year over year—albeit slightly offset by the manufacturing sector. GDP growth over the past 12 months is running at about 2 percent, which is not out of bounds from what the Fed said it needs to see in a healthy economy. Furthermore, the still-strong dollar will likely become a tailwind for the U.S. economy as the rest of the world bottoms out (We’re seeing signs of green shoots in Europe, and Latin America has probably troughed.) and the dollar continues to stabilize.

Beyond these statistics, the bigger reason a rate hike of 25 or even 50 basis points won’t hurt the economy is it will remove uncertainty. For consumers, knowing where rates are likely to be over the next six to eight months helps them make decisions about such big-ticket purchases as a home or a car. Corporations do better with rate certainty as does the overall stock market.

Take away the uncertainty of rates, growth and elections and you have a support beam in the market that may be the catalyst for a surprise!!

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

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June Quick Read on the US Economy

The economic news softened somewhat from my last update.  The payroll numbers for May were especially weak, following a modest April.  However, we should not exaggerate one reading of a volatile series Overall the economy still looks like it is on a decent heading, but evidence has accumulated of at least a small pause in growth.  This is likely to make the FOMC  put off rake hikes.

 

Our Astor Economic Index® (“AEI”) shows growth is lower than last month, though slightly above this year’s lows posted in February.  However, I still see the US as growing above average today. The AEI is a proprietary index that evaluates selected employment and output trends in an effort to gauge the current pace of US economic growth.

usei.png

Source: Astor calculations

 

In remarks made on June 6th, Federal Reserve Chair Janet Yellen called the May jobs report “disappointing and concerning”  but she still believed that the fundamentals of the economy are strong.  I tend to agree with the Chairman.  How weak was the jobs report?  In the chart below, I averaged the last three month’s increase in payrolls to smooth out the numbers.    As a result, the increase in payrolls has dropped to an average of 116,000 jobs over the last March-May period.  For most periods since 2012, the increase in payrolls has been in the 175,000-250,000 range, though it has printed this low a few times.  At this stage in the recovery, the s that it will take only 70,000-90,000 jobs a month to keep the unemployment rate stable.  In my opinion the current jobs  report is poor but we need to see additional signs of weakening before we move from concerned to alarmed.

 

payroll.png

Source:Bureau of Labor Statistics

 

It is not just Astor Investment Management who is still seeing the growth picture as somewhat positive.  The nowcasts maintained by the Federal Reserve Banks of Atlanta and New York both show stronger growth than the first quarter.  The Federal Reserve Bank of Atlanta is currently estimating 2.5% and the Federal Reserve Bank of New York is estimating 2.4%.  Both have been updated since the employment report.

 

Where does this leave the Federal Reserve?  The market no longer believes that the June meeting is a real possibility for a rate hike anymore.  I agree.  In Ms. Yellen’s speech, mentioned above, she gave cases both for and against another hike.  The main case for hiking rates is that as long as inflation is expected to return to its target of 2%, in the medium term the Federal Reserve should soon raise rates slightly, so as not to have to raise them a lot later.  The case against another hike is that there is probably still additional labor market slack beyond the 4.7% unemployment rate and that inflation has spent very little time above what is supposed to be a symmetric target in the last ten years.  In addition, the inflation expectations seem to be drifting down slightly, something Ms. Yellen said she will be watching closely.

 

Should the payroll weakness continue or inflation expectations drift down further, rate hikes would likely be off the table.  If, on the other hand, those indicators show renewed signs of a strong economy then the Federal Reserve may finally make the second hike.  Will the election delay things?  The Federal Reserve wants to be seen as divorced from the political scene. The Federal Reserve moved rates in the summer or early fall in 3 of the last 6 presidential elections, not including the crisis year of 2008.  September 21st is another press conference FOMC so expect speculation to be attracted to that meeting, assuming no dramatic surprises in the economy.

 

Overall, I am concerned about the state of the economy and while I expect the last, weak payroll to be an aberration, I will be watching the numbers with more than usual interest next month.

 

 

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. The investment return and principal value of an investment will fluctuate and an investor’s equity, when liquidated, may be worth more or less than the original cost.


The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.

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May Quick Read on the US Economy

Economic news softened somewhat from my last update.  The most recent readings for employment (as measured by the non-farm payrolls report) showed a slightly weaker pace of growth.  Additionally, much of the bounce in the Institute for Supply Management’s Manufacturing Index was given back last month.  However, we should not exaggerate the weakness.  The current situation in the US economy seems to be self-sustaining demand in the US but with ongoing weak international growth.

 

Our Astor Economic Index® (“AEI”) shows growth levels marginally above the recent lows posted in February, though a bit weaker than a month ago.  The AEI is a proprietary index that evaluates selected employment and output trends in an effort to gauge the current pace of US economic growth.  The chart below shows the last few years of this gauge which has been in a trendless range over that period.usei

The GDP print at 0.5% for the first quarter was weak.  We trailed this possibility last month based on predictions from the nowcasting models published by the Federal Reserve Banks of New York and Atlanta.  These models, with very little live data, are currently showing only modest improvement in the second quarter, about 0.8% at an annual rate.

 

The headwinds from abroad continue.  The chart  below shows the year-over-year percentage change in the volume of world industrial production (as calculated by the CPB Netherlands Bureau for Economic Policy Analysis).  That is, this index is supposed to ignore currency changes so it should be a bit more steady than market prices.  The deterioration in the last few years is obvious but, as of now, has avoided the unremitting declines associated with the 2001 and 2008 recessions and is still showing that world industrial production is increasing year on year.  However, stagnant growth combined with the strong dollar makes for an external environment unlikely to boost growth this quarter.

world.prod.cng

The lack of follow-through from the previous month may make it difficult for the Fed to raise rates again at their June meeting, but expect speeches from FOMC members to try to keep the dream of hiking alive.  However, the market is having none of it as Fed Funds futures are currently forecasting no change in June.

Overall I expect more of the same positive but tepid growth in the weeks ahead.

 

 

 

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. The investment return and principal value of an investment will fluctuate and an investor’s equity, when liquidated, may be worth more or less than the original cost.


The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.

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April Quick Read on the US Economy

The latest numbers on the US economy were positive. As a promising sign for the future, the global manufacturing environment may be showing signs of stabilizing – coincident with a stabilizing of commodity and international equities prices. I still believe the Fed will continue to hold and will not raise rates in April.

Our Astor Economic Index® (“AEI”) shows growth somewhat above the recent average and stronger than last month. The AEI is a proprietary index that evaluates selected employment and output trends in an effort to gauge the current pace of US economic growth.

Source: Astor calculations

Source: Astor calculations

The employment report (nonfarm payrolls) for March was broadly positive. The number of new jobs was again quite close to its two-year average. We can see no sign of broad based weakness in the economy within the payroll numbers. The tick up in the unemployment number was welcome as it represents more people looking for work who were previously on the sidelines of the labor market. The prime age employment-population ratio has improved markedly in the last quarter, though it is still lower than the previous expansion.

Despite this good news on the employment front, the preliminary release for GDP for the first quarter of 2016 – due at the end of April – is likely to be weak. The chart below shows the Atlanta Fed’s current estimate of first quarter GDP calculated via their GDP Now methodology. The weakness – if it materializes in the final numbers – can partially be put down to a higher trade deficit and an inventory drawdown both of which can be transitory. Weaker consumer expenditures is more concerning.
It is also worth noting the BEA is considering a secondary seasonal adjustment to try and account for the pattern of unusually weak first quarters which economic observers have been subjected to over the last few years.

The Atlanta Fed's GDP Now

The Atlanta Fed’s GDP Now

For several months we have been highlighting the weak international manufacturing environment. This weakness is most easily seen in the chart below of global manufacturing purchasing managers indexes. which have shown sharp deterioration over the last year. The latest numbers show a bit of an improvement so perhaps we can be hopeful, though careful readers will recall similar optimism in February’s read. If this bounce continues, it is possible that some of the external weakness in the US will begin to be reversed.

Source: Markit, NAPM, Bloomberg, Astor Calculations

Source: Markit, NAPM, Bloomberg, Astor Calculations

The Federal Reserve chose not to raise rates in March and statements since lead me to believe the hawks on the committee have become somewhat convinced the prospect of a weaker economy poses a greater danger than the specter of run-away inflation. The official stance is the FOMC wants to be convinced inflation is heading back to its target – somewhat above current levels. I would expect the reversal of recent trends in the dollar and crude oil prices will both tend to move inflation higher in coming months. The latest data we have shows the Fed still sees an additional two to three hikes in 2016, while the market predicts about one.

In short: The evidence today suggests to me the US continues another month of positive if somewhat tepid growth.

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. The investment return and principal value of an investment will fluctuate and an investor’s equity, when liquidated, may be worth more or less than the original cost.
The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.

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March Quick Read on the US Economy

In my opinion, the latest numbers on the US economy were positive last month. After plummeting for the first half of February, stock markets became markedly more positive over the second half. International equity prices seem to have regained their footing and oil prices are well off the lows of the year as well. I still see the global growth environment as tepid: with the US being the main bright spot. Despite the international headwinds, I expect the Fed to begin to signal it will continue to tighten according to plan.

Domestic highlights in February

Our Astor Economic Index® (“AEI”) shows growth somewhat above the recent average and slightly stronger than last month. The AEI is a proprietary index that evaluates selected employment and output trends in an effort to gauge the current pace of US economic growth.

I saw the employment report (nonfarm payrolls) for February as broadly positive. The number of new jobs was almost exactly at its two year average. I see no sign of broad based weakness in the economy when viewing the payroll numbers. Readers who want to burnish the negative case may have to dive into the weekly aggregate payroll. This number takes the number of employees and multiplies by the hours per week and again by dollars per hour. The result is something like a weekly wage bill and it posted a rare down month in February as hourly earnings and hours worked both posted modest declines.

In short: I think the pessimism in the first two months of the year were driven by fearful projections rather than data and that current views of the state of US economy are more realistic.

International environment

Last month, I was hoping for signs of strength in the world manufacturing cycle. It seems as if my hopes will have to wait at least until spring. While the Institute for Supply Management’s Manufacturing Index for the US showed a modest (but welcome!) bounce for the month, the picture in the rest of the world was not so rosy. The chart below weighs PMIs in roughly the G-20 countries, each one weighed by their GDP. This measure is looking for new low since 2012.

 

world.pmis.2016-03-04.png

Source: Institute for Supply Management, Markit, Astor calculations

The Fed

I believe the next red-letter day for the market should be FOMC Chair Yellen’s post meeting press conference on March 16th. Few expect the Fed to raise rates but many will be placing bets on the nature of the committee’s communications. Will the FOMC be hawkish or dovish? The Fed has repeatedly said they are data dependent and not tied to the calendar. However, as University of Oregon Economist Tim Duy has pointed out: we will need some clarity on which data they are dependent on.

In my view, the case for promising to raise rates again soon is that continued strength in the economy will move unemployment below the natural rate by a fair amount and perhaps for an extended period. In the view of Vice Chair Stanley Fischer for example, such labor market strength would risk setting off enough of an inflationary process that even larger rate hikes would be necessary to contain it.

However, I believe there are several complicating factors to give the Hawks a pause. First, is the tightening of financial conditions reflected in higher rates for corporate borrowers as well as the volatility and general decline of equity prices.  Second, inflation expectations, while hard to measure, may be declining. Inflation expectations derived from market prices are substantially lower than they were a year ago though survey-based expectations may have stabilized.  The chart below shows five year forward forecasts of CPI from surveys an derived from market prices.

infl.png

Source: Bloomberg, Federal Reserve bank of Philadelphia

My prediction is the Fed will raise not rates in either March or April and instead, focus on the tightening in the financial markets and weakness in inflation expectations in its released statement.  Therefore I am expecting the Fed to promise two or more hikes in 2016.   My preference (if I were a voter) would be for the Fed to make it clear that it is willing to be symmetrical around the 2% inflation target and would tolerate a year or two above the target as we have spent each of the last 8 years below it.

Conclusion

Overall, I am pleased to see continued growth in the US despite the tepid international environment. I expect the Fed to try to move back towards, but not fully achieve, its plan of four hikes this year.


All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. The investment return and principal value of an investment will fluctuate and an investor’s equity, when liquidated, may be worth more or less than the original cost.
The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.

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