Deflation Probabilities – July 5, 2018 Update

While I do not agree with the current readings of the measure – I think the measure dramatically understates the probability of deflation, as measured by the CPI – the Federal Reserve Bank of Atlanta maintains an interesting data series titled “Deflation Probabilities.”

As stated on the site:

Using estimates derived from Treasury Inflation-Protected Securities (TIPS) markets, described in a technical appendix, this weekly report provides two measures of the probability of consumer price index (CPI) deflation through 2022.

A chart shows the trends of the probabilities.  As one can see in the chart, the readings are volatile.

As for the current weekly reading, the July 5, 2018 update states the following:

The 2018–23 deflation probability was 5 percent on July 3, down from 6 percent on June 27. The 2017–22 deflation probability was 6 percent on July 3, unchanged from June 27. These deflation probabilities, measuring the likelihoods of net declines in the consumer price index over the five-year periods starting in early 2017 and early 2018, are estimated from prices of the five-year Treasury Inflation-Protected Securities (TIPS) issued in April 2017 and April 2018 and the 10-year TIPS issued in July 2012 and July 2013.

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I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2733.70 as this post is written

Recession Probability Models – July 2018

There are a variety of economic models that are supposed to predict the probabilities of recession.

While I don’t agree with the methodologies employed or probabilities of impending economic weakness as depicted by the following two models, I think the results of these models should be monitored.

Please note that each of these models is updated regularly, and the results of these – as well as other recession models – can fluctuate significantly.

The first is the “Yield Curve as a Leading Indicator” from the New York Federal Reserve.  I wrote a post concerning this measure on March 1, 2010, titled “The Yield Curve as a Leading Indicator.”

Currently (last updated July 3, 2018 using data through June) this “Yield Curve” model shows a 12.5063% probability of a recession in the United States twelve months ahead.  For comparison purposes, it showed a 11.1182% probability through May, and a chart going back to 1960 is seen at the “Probability Of U.S. Recession Predicted by Treasury Spread.” (pdf)

The second model is from Marcelle Chauvet and Jeremy Piger.  This model is described on the St. Louis Federal Reserve site (FRED) as follows:

Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model was originally developed in Chauvet, M., “An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching,” International Economic Review, 1998, 39, 969-996. (http://faculty.ucr.edu/~chauvet/ier.pdf)

Additional details and explanations can be seen on the “U.S. Recession Probabilities” page.

This model, last updated on July 5, 2018, currently shows a .14% probability using data through April.

Here is the FRED chart (last updated July 5, 2018):

Data Source:  Piger, Jeremy Max and Chauvet, Marcelle, Smoothed U.S. Recession Probabilities [RECPROUSM156N], retrieved from FRED, Federal Reserve Bank of St. Louis, accessed July 5, 2018:

http://research.stlouisfed.org/fred2/series/RECPROUSM156N

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The two models featured above can be compared against measures seen in recent blog posts.  For instance, as seen in the June 8 post titled “The June 2018 Wall Street Journal Economic Forecast Survey“ economists surveyed averaged a 15.83% probability of a U.S. recession within the next 12 months.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2733.58 as this post is written

Chicago Fed National Financial Conditions Index (NFCI)

The St. Louis Fed’s Financial Stress Index (STLFSI) is one index that is supposed to measure stress in the financial system.  Its reading as of the July 5, 2018 update (reflecting data through June 29, 2018) is -1.076.

Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources.

Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).

Here are summary descriptions of each, as seen in FRED:

The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.

The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.

For further information, please visit the Federal Reserve Bank of Chicago’s web site:

http://www.chicagofed.org/webpages/publications/nfci/index.cfm

Below are the most recently updated charts of the NFCI and ANFCI, respectively.

The NFCI chart below was last updated on July 5, 2018 incorporating data from January 8, 1971 through June 29, 2018, on a weekly basis.  The June 29, 2018 value is -.78:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed July 5, 2018:

http://research.stlouisfed.org/fred2/series/NFCI

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The ANFCI chart below was last updated on July 5, 2018 incorporating data from January 8,1971 through June 29, 2018, on a weekly basis.  The June 29 value is -.51:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed July 5, 2018:

http://research.stlouisfed.org/fred2/series/ANFCI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2722.94 as this post is written

Comment Regarding The 2% Target On The Core PCE Price Index

In previous commentaries I have noted the continual shortfall between the Federal Reserve’s stated inflation target (2% (percent change from year ago) on the (Core) PCE Price Index) and the actual readings.  For years there has been a continued inability for this 2% inflation target to be achieved, which is highly notable.

However, as seen in the Wall Street Journal article of June 29, 2018, titled “Inflation Is Here, What Will The Fed Do About It?,” this 2% target has recently been achieved.

An excerpt from the article:

The Commerce Department on Friday reported that its measure of consumer prices rose 0.2% in May from April, putting it 2.3% above its year-earlier level. More important, core prices, which the Fed follows closely, were up 2% on the year. That marked the first time core inflation, which excludes food and energy to better capture inflation’s trend, reached 2% since April 2012.

Below is a chart of the U.S. Core PCE Price Index, which shows the YoY reading to be at 2% (rounded up from 1.95526%) as of the June 29, 2018 update.  Of note, while this Index reading was above 2% in late 2011 and early 2012, the duration of such was only roughly 6 months.

Here is a long-term chart showing the readings since the year 2000:

source:  U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis on July 5, 2018:

https://fred.stlouisfed.org/series/PCEPILFE

As discussed in various posts regarding deflation, as well as other recent commentaries,  I continue to believe that significant (in extent and duration) U.S. deflation (as defined by when the CPI goes below zero) is on the horizon.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2721.48 as this post is written

VIX Weekly And Monthly Charts Since The Year 2000 – July 3, 2018 Update

For reference purposes, below are two charts of the VIX from year 2000 through Monday’s (July 2, 2018) close, which had a closing value of 15.60.

Here is the VIX Weekly chart, depicted on a LOG scale, with the 13- and 34-week moving averages, seen in the cyan and red lines, respectively:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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Here is the VIX Monthly chart, depicted on a LOG scale, with the 13- and 34-month moving average, seen in the cyan and red lines, respectively:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2726.71 as this post is written

Charts Of Equities’ Performance Since March 9, 2009 And January 1, 1980 – July 3, 2018 Update

In the March 9, 2012 post (“Charts of Equities’ Performance Since March 9, 2009 And January 1, 1980“) I highlighted two charts for reference purposes.

Below are those two charts, updated through the latest daily closing price.

The first is a daily chart of the S&P500 (shown in green), as well as five prominent (AAPL, IBM, AMZN, SBUX, CAT) individual stocks, since 2005.  There is a blue vertical line that is very close to the March 6, 2009 low.  As one can see, both the S&P500 performance, as well as many stocks including the five shown, have performed strongly since the March 6, 2009 low:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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This next chart shows, on a monthly LOG basis, the S&P500 since 1980.  I find this chart notable as it provides an interesting long-term perspective on the S&P500′s performance.  The 20, 50, and 200-month moving averages are shown in blue, red, and green lines, respectively:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2726.71 as this post is written

Major U.S. Stock Index Long-Term Price Charts

StockCharts.com maintains long-term historical charts of various major stock market indices, interest rates, currencies, commodities, and economic indicators.

As a long-term reference, below are charts depicting various stock market indices for the dates shown.  All charts are depicted on a monthly basis using a LOG scale.

(click on charts to enlarge images)(charts courtesy of StockCharts.com)

The Dow Jones Industrial Average, from 1900 – June 29, 2018:

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The Dow Jones Transportation Average, from 1900 – June 29, 2018:

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The S&P500, from 1925 – June 29, 2018:

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The Nasdaq Composite, from 1978 – June 29, 2018:

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2719.59 as this post is written

U.S. Dollar Decline – July 2, 2018 Update

U.S. Dollar weakness is a foremost concern of mine.  As such, I have extensively written about it.  I am very concerned that the actions being taken to “improve” our economic situation will dramatically weaken the Dollar.  Should the Dollar substantially decline from here, as I expect, the negative consequences will far outweigh any benefits.  The negative impact of a substantial Dollar decline can’t, in my opinion, be overstated.

The following three charts illustrate various technical analysis aspects of the U.S. Dollar, as depicted by the U.S. Dollar Index.

First, a look at the monthly U.S. Dollar from 1983.  This clearly shows a long-term weakness, with the blue line showing technical support until 2007, and the red line representing a (past) trendline:

(charts courtesy of StockCharts.com; annotations by the author)

(click on charts to enlarge images)

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Next, another chart, this one focused on the daily U.S. Dollar since 2000 on a LOG scale.  The red line represents a (past) trendline.  The gray dotted line is the 200-day M.A. (moving average):

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Lastly, a chart of the Dollar on a weekly LOG scale.  There are two clearly marked past channels, with possible technical support depicted by the dashed light blue line:

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I will continue providing updates on this U.S. Dollar situation regularly as it deserves very close monitoring…

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2716.42 as this post is written