The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to decline slightly to +0.22 in tomorrow’s update for December, according to The Capital Spectator’s median econometric forecast. In the previous release for November, the three-month average was +0.25. Values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimate, CFNAI’s three-month average is projected to remain at a level that’s historically associated with economic expansion–at a rate that’s slightly above trend (as indicated by a positive value).
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Forecasting has a battered reputation in finance and economics, and for all the obvious reasons. But that doesn’t change the simple fact that you just can’t avoid prediction when it comes to macro and markets. Thinking otherwise is delusional. Investing is inherently an act of forecasting. The only reason to buy (or sell) an asset: the presumption that the price will rise (fall) at some point in the future. That leaves us to ponder why prices might rise or fall. A reasonable place to start: the business cycle. In any case, you’ll need a model of one form or another to develop some intuition for another question: Will prices rise or fall (or will the state of macro change)? There are lots of models to choose from, but the challenge is interpreting the raw data. That’s where a probit regression (or its close cousin: logit regression) can help.
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Bonds have been widely scorned on the assumption that interest rates are set to rise for an extended period. Fair enough, but the world of fixed-income pulls in a lot of territory and so it’s a mistake to lump all corners of the planet’s bond markets into one lumpy blob.
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The economic news of late has been a bit wobbly—the surprisingly weak pace of jobs growth in December, in particular. But letting the tail end of a handful of numbers (that may or may not be revised) is a dangerous game for drawing strategic conclusions about the overall state of the economy. On that note, let’s move a bit closer to the realm of robust analytics and note that there are still no convincing signs of trouble for the business cycle when we look at the broad macro trend across a diversified set of 14 economic and financial indicators.
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● The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance
By Eswar S. Prasad
Summary via publisher, Princeton University Press
The U.S. dollar’s dominance seems under threat. The near collapse of the U.S. financial system in 2008-2009, political paralysis that has blocked effective policymaking, and emerging competitors such as the Chinese renminbi have heightened speculation about the dollar’s looming displacement as the main reserve currency. Yet, as The Dollar Trap powerfully argues, the financial crisis, a dysfunctional international monetary system, and U.S. policies have paradoxically strengthened the dollar’s importance.
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Today’s update on housing starts and new building permits is wobbly while data on industrial output looks mildly encouraging. It’s going to take time to figure out which side of this macro coin is the genuine article, but in the meantime let’s zero in on the key trends as a starting point for guesstimating how the broad trend is unfolding.
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US industrial production in December is projected to increase by 0.4% vs. the previous month in tomorrow’s release from the Federal Reserve, according to The Capital Spectator’s median econometric forecast. The projected gain represents a sharp deceleration vs. the previously reported 1.1% rise for November. Meanwhile, the Capital Spectator’s median projection for December is slightly higher than three consensus forecasts based on recent surveys of economists.
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Housing starts are expected to total 1.023 million in tomorrow’s update for December, based on The Capital Spectator’s median econometric forecast (seasonally adjusted annual rate). The projection represents a modest decline vs. the previously reported 1.091 million for November. Meanwhile, the Capital Spectator’s median estimate for December is above a trio of consensus estimates based on recent surveys of economists.
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New filings for unemployment benefits inched lower last week, dropping for the second week in a row. The decline of 2,000 to a seasonally adjusted 326,000 for the week through January 11 is a welcome sign, of course. But the trend looks a bit sluggish lately, raising questions about the potential for stronger growth in the labor market in the months ahead.
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The US stock market continues to set new highs, but the bull market in equities comes in a variety of flavors. Yes, prices are higher across the board, but there’s a fair amount of variation to the party. The implication: the opportunity to add value with rebalancing within the equity allocation is knocking. Before we open the door, let’s take a peek at the possibilities by carving up US stocks into three buckets based on market capitalization, style (value vs. growth), and sectors. Our tour guides: a set of ETFs based on the trailing 250-trading-day total return (roughly the equivalent of 1-year performance).
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