February 20, 2016

Economic Indicators

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St. Louis Federal Reserve Monetary Base - According to Investopedia, the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically only includes the most liquid currencies.

St. Louis Federal Reserve Monetary Base Percent Change from Year Ago Vs S&P-500 Percent Change from Year Ago - According to economist Mr. Paul Kasriel at Northern Trust, values of the CPI Adjusted Monetary Base Rate of Change less than 0% indicate increasing likelihood of a recession.  This chart isn't adjusted for CPI because the CPI data is typically a month delayed which would give us information possibly a month too late.

S&P-500 Percent Change from a Year Ago minus St. Louis Adjusted Monetary Base Percent Change from a Year Ago - When the S&P rate of change greatly outpaces the rate of change in the monetary base by a large amount, a correction in S&P-500 typically comes soon after.

 

30-Year Minus 2-Year US Government Treasury Yield Curve - Values less than 0% (the inverted yield curve) indicate a potential recession.  With a typical yield curve, interest rates increase as you move further out in time. Banks make money by being on the other side of this set of trades (lend long, borrow short, pocketing the difference in the interest rates).  Normally More on the implications of the yield curve here on Investopedia.

10-Year Minus 3-Month US Government Treasury Yield Curve - Values less than 0% (the inverted yield curve) indicate a potential recession.  With a typical yield curve, interest rates increase as you move further out in time. Banks make money by being on the other side of this set of trades (lend long, borrow short, pocketing the difference in the interest rates).  Normally More on the implications of the yield curve here on Investopedia.

Initial Claims (data released every Thursday) - Initial claims increasing and becoming greater than 300,000 indicate a weakening economy.  Higher initial claims correlate with a weakening economy.

 

Merrill Lynch High Yield Master II vs. S&P-500 - According to Wikipedia - "the Merrill Lynch US High Yield Master II Index (H0A0) is a commonly used benchmark index for high-yield corporate bonds. It is administered by Merrill Lynch. The Master II is a measure of the broad high yield market, unlike the Merrill Lynch BB/B Index, which excludes lower-rated securities.

The BofA Merrill Lynch US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $100 million."

Typically bond markets, especially high yield, are a good barometer for risk appetite for investors.  They will typically "lead" the equity indexes, such as the S&P-500, as shown in this chart.

Merrill Lynch High Yield Master II Percent Change vs. S&P-500 Percent Change - Same as above, but reflected as percentage changed instead of index values

BofA Merrill Lynch High Yield Master II Percent Change vs. S&P-500 Percent Change vs  BoFA Merrill Lynch US Corp Master Total Return Index Percent Change

BoFA Merrill Lynch US Corp Master Total Return Index Percent Change minus BofA Merrill Lynch High Yield Master II Percent Change vs. S&P-500 Percent Change - A good way to compare the risk appetite of investors.  When investment grade credit outpaces high yield credit, investors are more risk-averse which may translate into weak stock performance