Friday, August 14, 2020

Macro Update: The Begging Question

Our PWA Macro Index overall score jumped a notable 7.84 points this week to -19.61. Five of our inputs improved enough to warrant positive score changes, while one dropped a notch.

While none of the five improving data points made it into the green (+1), that many moving from negative (-1) to neutral (0) in one week is indeed significant. Of course the huge question at this point is whether or not we'll see further improvement going forward amid the latest developments around COVID and the intransigence in Washington around the next round of stimulus? Suffice to say, regardless, we've quite the tough road left to hoe. 

22% of our data points presently score positive, 41% negative, 37% neutral...

Here's where the boost came from:    click each insert below to enlarge...

Small Business Capex Plans:

While positive responses to month-on-month questions coming off of the worst macro conditions in a century are to be expected, and put into context, this month's small business capex response was nevertheless enough to move the needle within our index.

Core CPI:

When we think of inflation as "cost of living", one might question why we'd view a pickup amid present conditions as a net positive. Well, when we consider how deflationary a deep recession "should" ultimately be, seeing prices rise can be viewed as reflecting a consequential pickup in demand.

That said, the jury remains way out on this one, as rising prices right here could very well be reflective of supply chain disruptions and massive artificial pump-priming (and, not to mention, an aggressive devaluation of the dollar). The next chart, while also reflecting a net positive, pours a bit of cold water on the prospects for what we're seeing amounting to what might be considered legitimate demand-pull inflation:

Capacity Utilization:

Yes, seeing US factories ramp up to 70% of capacity coming off of literally a historic low is worthy of a positive score change in our analysis. However, save for early-on during the recovery from the '08 recession, last month's reading still reflects historically dire conditions and, per the green circles below, far from levels where we've ever seen inflation (via core CPI [blue line]) emerge from the ashes -- where, that is, capacity gets stretched to the point of necessitating an increase in the price of the goods produced. I.e., there's much more left to develop before we can decisively characterize the nature of rising inflation, should it persist, going forward:

An unambiguously positive development comes from the equity market. The graphs below feature the ratio of the 3-month return for each major sector versus the S&P 500 Index. A score above 100 for the economically-sensitive sectors speaks positively about market-based economic expectations going forward. Scores of below 100 for the economically defensive sectors does as well.

Sector/SP500 Ratios

Translation: Tech 104, Financials 99, Consumer Discretionary 105, Materials 103, Energy 103, Commodity Stocks 86, Industrials 107, Consumer Staples 96, Utilities 93, Healthcare 92.

While the rate of return ratio for the S&P 500 versus Treasury Bonds has a long way to go before signaling the all-clear, a near-term higher high merits a positive score adjustment within our index:

SP500/Treasury Bond Ratio

Brick and Mortar Retail Sales was the only input this week that contracted to an extent that resulted in a negative change in score. While month-on-month sales did increase, they missed expectations markedly, and, per the yellow line below, saw a notably negative rate of change from the prior reading:

In closing this week, I must pose the begging question; to what degree (any or all) -- given the far-and-away record-breaking level of fiscal and monetary largess being thrown at the economy -- is the improving macro trend we've seen the past few weeks the result of massive borrowing of economic activity from the future? It's a legitimate question, if not a foregone conclusion. 

Time will tell... Much left to play out, I suspect...

Have a nice weekend!

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