Every week at Narwhal, we post our “Macro Balance Sheet,” a curation of economic data and indicators that we use to inform our understanding of market trends. Below, you’ll find commentary on the takeaway points of the week, followed by definitions for each of the indicators that we use. If you have questions on the interpretation of this data please reach out to Luke Burton ([email protected]) for more information.
Macro Balance Sheet - Week of June 14th, 2021
On the employment side, weekly jobless claims are declining rapidly which is a good sign for the health of businesses because people are not being fired as much as they have been over the past few months. However, though the unemployment rate continues to decline, that decline remains slow compared to what we saw last year. The increase in labor force participation rate is encouraging, although it, too, is increasing at a slow pace. Ultimately, the first and last data points (Weekly Jobless Claims and JOLTS Job Openings, respectively) provide a fairly comprehensive overview of the employment sector. We see that jobless claims are decreasing, which tells us that less people are being fired on a weekly basis, and we see that job openings are increasing, which means that companies are finding it harder to find employees. Therefore, we see demand for labor is rising, which should help elevate employment and wages.
On the consumer spending side, there has been a lot of activity recently. In the past few weeks, there has been a slight decline in consumer spending, which is likely because the previous numbers were unusually high, so these numbers are not worth considering too heavily.
For investing, the numbers are encouraging overall. The increase in pending home sales has begun to decline; however, the price/list ratio continues to be high and accelerating rapidly, indicating that demand for homes continues to be at an all-time high, and, therefore, it can be implied that the supply of homes is still very weak. This weak supply is likely a result of lumber prices continuing to be high, which has halted the building of new houses. Capital spending optimism is also high, which is encouraging because it indicates that people are eager to invest in their own businesses. This combined with the CEO confidence and CFO Optimism also being high provides a favorable outlook for US investing futures.
Inflation, as we all know, continues to accelerate upward. All data points in the report are indicative of this rapid increase, except perhaps ISM prices on the manufacturing side, where inflation is accelerating slower than in other areas. This is not something to read into much for now, but rather something to keep an eye on in the future. The weakening US dollar is likely responsible for why inflation is increasing so rapidly; however, it is interesting to note that the market indicator for inflation (Fed 5-year inflation break-evens) is not increasing as rapidly compared to other indicators, and it may even begin to decline in the coming weeks. This also is worth keeping an eye on because it may be the most important indicator of inflation moving forward as the direction in which it continues to go will determine if the Fed will decide to raise interest rates or continue to keep them low.
In terms of equities, the Bull/Bear indicator has fallen over the past few months, which means that market sentiment is not particularly strong, even though equities continue to be high. This could indicate that there is pent-up demand for equities if we continue to see good news in the area.
Perhaps the biggest indicator of interest rates to watch is the Yield Curve 2s/10s, which is now has begun to decline slightly over the past three months as inflation expectations continue to climb. Interestingly, however, 30-year mortgage rates have remained steady, the German 10-year bund is still negative, and short-term interest rates are exceedingly low. Again, like inflation, this will be interesting to continue to watch, especially within the context of the Fed 5-year inflation break-evens.
People remain willing to take on significant credit risk due to the large supply of cash in the economy. US credit card delinquencies are very low, indicating that people paying back debt rapidly and not taking out much debt on their credit cards. Corporate bond spreads are low because they don't have high balances of debt.
On the commodities side, there are signs of continued inflation, particularly in oil prices and natural gas prices. Gold prices also continue to increase, and copper prices are fairly strong as well.
On the logistics side, trucks are continuing to be heavily utilized at capacity, and even though the Truck Loading Index has begun to decline slightly, it remains considerably high. Thus, truck rates continue to be high despite high oil prices, which should be interesting to watch within the context of supermarket prices.
DEFINITIONS: EMPLOYMENT
Weekly Jobless Claims
- Weekly jobless claims are a statistic reported by the U.S. Department of Labor that counts the number of people filing to receive unemployment insurance benefits. Jobless claims are an important leading indicator on the state of the employment situation and the health of the economy.
Unemployment Rate
- The official unemployment rate is known as U3. It defines unemployed people as those who are willing and available to work, and who have actively sought work within the past four weeks.
Participation Rate
- The labor force participation rate measures an economy’s active workforce. It is calculated by dividing the sum of all workers who are employed or actively seeking employment by the total noninstitutionalized, civilian working-age population.
ISM Employment (Services)
- The ISM Services Index (or the ISM Non-Manufacturing Index) is an economic index based on surveys of more than 400 services firms’ purchasing and supply executives. As a part of the ISM Report on Business, the ISM Services index measures the level of business activity for the overall economy related to the services sector. A value greater than 50 indicates economic growth in the sector, and a value less than 50 represents economic contraction.
ISM Employment (Manufacturing)
- The ISM Manufacturing Index (or the purchasing managers’ index) is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. As a part of the ISM Report on Business, the ISM Manufacturing Index measures the level of business activity for the overall economy related to the manufacturing sector. A value greater than 50 indicates economic growth in the sector, and a value less than 50 represents economic contraction.
JOLTS Job Openings
- The job openings and labor turnover survey (JOLTS) is a survey done by the United States Bureau of Labor Statistics within the Department of Labor to help measure job vacancies. A job vacancy is considered to be a position that is available, that starts within 30 days, and that the company is actively seeking to fill with a candidate outside the organization.
DEFINITIONS: CONSUMER SPENDING
Monthly Retail Sales
- Retail sales tracks consumer demand for finished goods, including sales from all foodservice and retail stores, by measuring the purchases of durable and non-durable goods over a defined period of time. Data on retail sales is compiled monthly by the U.S. Bureau of the Census.
Visa Credit Card Spending (Y/y)
- The Visa Credit Card Spending Y/y ratio measures the current value of the amount of money that consumers are spending with Visa credit cards against the same value from the previous year.
Visa Debit Card Spending (Y/y)
- The Visa Debit Card Spending Y/y ratio measures the current value of the amount of money that consumers are spending with Visa debit cards against the same value from the previous year.
TSA Screenings (Y/y)
- The TSA Screenings Y/y ratio measures the current value of the number of air travelers being screened by TSA against the same value from the previous year. This value can be used as an indicator of how frequently people are traveling.
DEFINITIONS: INVESTMENT
CFO Duke US Optimism Level
- The CFO Duke US Optimism Level is the average level of optimism of CFOs toward US economic prospects measured on a scale of 0-100 based on a survey conducted by Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta.
CEO Capital Spending Optimism
- The CEO Business Roundtable US Capital Spending Optimism Subindex indicates the average level of optimism that CEOs have toward US capital expenditures as measured on a scale from -50 to 150 where readings at 50 or above indicate expected expansion in capital spending, and readings below 50 indicate expected contraction.
CEO Confidence
- The CEO Confidence Index value is a rating from 1-10 based on a survey of CEOs’ expectations for overall business conditions. It captures an accurate assessment of how confident CEOs are in the economy and prospects for business over the coming year.
Redfin Pending Home Sales (Y/y)
- The Redfin Pending Home Sales Y/y value represents the number of pending offers that have been made on homes compared to the same value from the previous year. This value is conveyed as a percentage and is used to measure market activity in the housing sector.
Redfin Price/List Ratio
- The Redfin Price/List Ratio is the sale price of the home divided by the list price of the home. This value is useful for buyers and sellers when negotiating pricing.
DEFINITIONS: INFLATION
CPI all-in (Y/y)
- Consumer Price Index Y/y demonstrates changes in average prices for a consumer basket of goods and services in the specified month compared to the same month of the previous year. The index shows how prices change from the consumer perspective.
Core PCE
- The core price index is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.
Fed 5 Year Inflation Break-evens
- The breakeven inflation rate represents a measure of expected inflation derived from 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation-Indexed Constant Maturity Securities. The latest value implies what market participants expect inflation to be in the next 5 years, on average.
ISM Prices (Services)
- The ISM Services Prices Paid (or the ISM Non-Manufacturing Prices Paid) Index reflects changes in prices paid by companies to suppliers in the process of preparing services. The growth of intermediate prices in the service sector can serve as a leading inflation indicator: producers must pay more to suppliers; thus, the price of the final product is likely to grow.
ISM Prices (Manufacturing)
- The ISM Manufacturing Prices Paid Index reflects a change in prices paid by industry representatives for the products or services they receive. Index growth can serve as a leading inflation indicator: producers must pay more to suppliers; thus, the price of the final product is likely to grow.
CRB Index
- The Commodity Research Bureau (CRB) Index acts as a representative indicator of today’s global commodity markets. It measures the aggregated price direction of various commodity sectors.
USD Index
- The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.’s most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
DEFINITIONS: EQUITIES
BofA Bull/Bear Indicator
- The Bank of America Bull/Bear Indicator describes the opinion of analysts about where the market is trending on a scale from 1-10, with values less than 5 indicating a perceived bear market and values greater than 5 indicating a perceived bull market.
VIX
- The Cboe Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 index (SPX). Volatility is often seen as a means to gauge market sentiment, and in particular the degree of fear among market participants.
SKEW Index
- As a measurement for potential investment risk in financial markets, the SKEW Index can be used as a proxy for investor sentiment and volatility.
CS Fear Barometer Index
- The Credit Suisse Fear Barometer Index (CSFB) is a measure of the three-month skew in the S&P 500. A high CSFB reading signals high-cost protection relative to upside calls.
DEFINITIONS: INTEREST RATES
Fed Funds Rate
- The federal funds rate is the target interest rate set by the Federal Open Market Committee (FOMC) at which commercial banks borrow and lend their excess reserves to each other overnight. The federal funds rate can influence short-term rates on consumer loans and credit cards as well as impact the stock market.
2-Year Note Rate
- The 2-Year Note Rate is the yield received for investing in a US government-issued treasury security that has a maturity of 2 years.
10-Year Note Rate
- The 10-Year Note Rate is the yield received for investing in a US government-issued treasury security that has a maturity of 10 years.
30-Year Bond Rate
- The 30-Year Bond Rate is the yield received for investing in a US government-issued bond that has a maturity of 30 years.
Yield Curve 2s/10s
- The 2s/10s yield curve represents the difference between the 10-year US Treasury Note rate and the 2-year US Treasury Note rate. The 2s/10s curve is commonly used to forecast what Treasury Note rates may look like in the future.
30-Year Mortgage Rate
- The 30 Year Mortgage Rate is the fixed interest rate that US home-buyers would pay if they were to take out a loan lasting 30 years.
10-Year German Bund
- The 10-Year German Bund Rate is the yield received for investing in a German government-issued bond that has a maturity of 10 years.
DEFINITIONS: CREDIT RISK
A Credit Spread
- This data represents the Option-Adjusted Spread (OAS) of the ICE BofA Single-A US Corporate Index, tracking the performance of US dollar-denominated investment grade rated corporate debt publicly issued in the US domestic market. This subset includes all securities with a given investment grade rating of A.
BBB Credit Spread
- This data represents the Option-Adjusted Spread (OAS) of the ICE BofA BBB US Corporate Index, tracking the performance of US dollar-denominated investment grade rated corporate debt publicly issued in the US domestic market. This subset includes all securities with a given investment grade rating BBB.
Junk Credit Spread
- This data represents the ICE BofA US High Yield Index value, which tracks the performance of US dollar-denominated below investment grade rated corporate debt publicly issued in the US domestic market.
Muni/Treasury Ratio (10yr)
- The Muni/Treasury ratio is a formula used to compare the rates of municipal bonds with U.S. Treasuries (with 10-year maturities) to help an investor decide which one represents a better investment. It uses indices from the Thomson-Reuters Municipal Market Data to evaluate ad compare the bonds' performance.
Muni/Treasury Ratio (30yr)
- The muni-Treasury ratio is a formula used to compare the rates of municipal bonds with U.S. Treasuries (with 30-year maturities) to help an investor decide which one represents a better investment. It uses indices from the Thomson-Reuters Municipal Market Data to evaluate and compare the bonds' performance.
US Credit Card Delinquencies 30+
- Credit card delinquency rates, as measured by the Federal Reserve Bank of New York for accounts that are 30 days or more late in making payments.
DEFINITIONS: COMMODITIES
WTI Oil Price
- The price per barrel of West Texas Intermediate (WTI) crude oil. WTI is the main oil benchmark for North America as it is sourced from the United States, primarily from Texas.
Brent Oil Price
- The price per barrel of Brent blend, the second internationally recognized type of crude oil that is used as a benchmark for prices of crude oil. Brent blend is more than half of the crude oil traded internationally.
Natural Gas 12-month Strip Price
- The price of a futures strip contract that is used to lock in a specific price for natural gas futures for a year (12 months). This is used as an indication of the direction of natural gas prices.
Gold Price
- The price of gold has traditionally been seen as an indication of inflation, as gold functions as a good store of value (hedge) against a declining currency.
Copper Price
- The price of copper is a good barometer for the overall strength of the global economy. Because of infrastructure demands, emerging markets are a key driver of copper prices.
DEFINITIONS: LOGISTICS
FTR Active Truck Utilization
- FTR Active Truck Utilization is a measurement of the tightness of trucking capacity. It measures the number of trucks needed by the market to move the current level of freight and compares that figure to the number of active trucks (in service, manned, and ready to run) that are available.
FTR Truck Loadings Index
- FTR Truck Loadings Index is an estimate of total truckloads being moved in the U.S. This provides an estimate of the number of goods being transported by trucks.
Truck Rates less Fuel Surcharge Y/y
- Truck Rates less Fuel Surcharge Y/y measures the current average cost of shipping freight using trucks while excluding the cost of fuel and comparing it to the same data point from the previous year. Omitting fuel in this case helps eliminate changes in shipping costs that are solely related to increasing fuel prices.
Baltic Dry Index
- The Baltic Dry Index (BDI) measures the cost of shipping raw materials, such as iron, coal, cement, etc., around the world. The Baltic Dry Index is a leading indicator that provides a clear view of the global demand for commodities and raw materials.
Sources:
investopedia.com, Bloomberg Terminal, forexformation.com, www.fuqua.duke.edu, www.businessroundtable.org, www.redfin.com, www.mql5.com, www.bea.gov, www.fred.stlouisfed.org, BofA Global Research, www.ycharts.com, merrilledge.com, www.nasdaq.com, www.ftrintel.com
