Monday, April 17, 2023

Morning Note: Clearly, We're Not There Yet

As we perpetually assess general conditions we pay close attention to the highly/globally-respected Sentix Economic Sentiment Surveys.

The following describes their usefulness (click here for more):

The sentix economic index is, on the one hand, a leading economic indicator that can be used to forecast the economic development of various countries and regions, measured in terms of gross domestic product. It reflects investors' perception of the economy. Therefore, on the other hand, the sentix Economic Index can also contribute to a better understanding of developments on the financial markets. This is because it provides indications as to whether or not the motive of the economy at a certain point in time is decisive for the actions of market participants and thus determines prices. For example, rising share prices could also result from excessive liquidity alone - or be the consequence of expected real economic dynamism, which is then expressed in a rising sentix business cycle index. The latter could be interpreted as a sign that the development is more sustainable or less risky than in a purely liquidity-driven market.

Like other sentix indicators, the sentix economic index uses its lows and highs - usually with a lead time - to indicate reversal points in both economic and financial market trends. The sentix economic index can thus provide entry and exit signals for markets and serve as an (additional) instrument for timing capital market investments. It also indicates when trends (in the economy or on the markets) are intact and can be followed. In addition, the sub-indices of the sentix economic index provide information on the maturity of a trend: Especially with regard to expectations, the developments of institutional investors usually run ahead of those of private investors: Consequently, a trend reversal is usually first announced via the time series of the institutional investors.

Here are the US highlights from the latest report:

"In the international context, the picture is basically the same. While the situation scores mostly improve moderately, expectations remain negative. For the USA we even measure a clear decline in expectations to -12.5 points. This should give cause for concern. In Eastern Europe, the situation and expectations are improving against the trend."

"Contrary to the general trend in the sentix economic indices, the situation and expectations assessments in the USA are declining. The situation index fell moderately to 8.5 points, while the expectations index plummeted to -12.5 points. The shock of the bankruptcy of the Silicon Valley Bank was apparently less well digested here than the takeover of the CS Group in Switzerland. But the first weak data are also coming from the US labour market, as well as from other economic data. It seems that the sharp rise in interest rates is having a broader negative impact after all."

Note the 6-month US outlook (green line) in our Sentix graph below:

Per Bloomberg yesterday, Diesel is flashing a warning sign as well:

Emphasis mine:
"In China, the number of trucks running on highways is noticeably down in recent weeks. In Europe, diesel’s premium to crude futures recently plunged to the lowest level in more than a year. In the US, demand is on track to contract 2% in 2023, S&P Global Inc. says. Excluding 2020, when much of the economy briefly came to a standstill, that 2% slump would be the biggest drop in America’s diesel use since 2016.

We are “assuming one of the worst economic climates in recent memory outside of the 2008-2009 financial crisis and the pandemic,” said Debnil Chowdhury, S&P’s head of Americas fuels and refining.

No matter how you crunch it, demand for the heavy-machinery fuel that powers everything from commercial trucking fleets to construction equipment is weakening in many of the world’s largest economies. Viewed as an early signal of weaker industrial activity and reduced consumer spending, the pullback has recession-watchers on high alert."
“Diesel demand can act as a leading indicator for broader growth as an early sign that spending by households is waning,” said Ben Ayers, a senior economist in the US with Nationwide Economics. “An expected drop in diesel demand fits with building recession risks across the economy.”
Another item that jumped off the screen in last week's macro dive was the Kansas City Fed US Financial Stress Index:

Like we keep saying, we'll no doubt get there (when the equity markets gibe with general conditions)... But, clearly, we're not there yet.

Stay tuned...

Asian stocks mostly green overnight, with 11 of the 16 markets we track closing higher.

Europe's in the green so far this morning as well, with 13 of the 19 bourses we follow trading up as I type.

US equity averages are mixed to start the session: Dow up 9 points (0.03%), SP500 down 0.04%, SP500 Equal Weight up 0.01%, Nasdaq 100 up 1.35%, Nasdaq Comp down 0.13%, Russell 2000 up 0.32%.

The VIX sits at 17.61 up 3.16%.

Oil futures are down 0.61%, gold's down 0.32%, silver's down 0.28%, copper futures are down 0.10% and the ag complex (DBA) is up 0.41%.

The 10-year treasury is down (yield up) and the dollar is up 0.34%.

Among our 36 core positions (excluding options hedges, cash and money market funds), 14 -- led by Albemarle, Amazon, VWO (emerging market equities), XLK (tech stocks) and DBA (ag futures -- are in the green so far this morning... The losers are being led lower by AMD, XLC (communications stocks), FEZ (Eurozone equities), SLV (silver) and TLT (long-term treasuries).

“If you don’t know who you are, the market is a tough place to find out.” —Adam Smith

Have a great day!

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