Macro Economy Weekly | Bitmidas
2023–07–03
Early Signs of Stagflation
One of the Fed’s favorite inflation indicators, the US core PCE price index annual rate in May recorded 4.6%, lower than market expectations of 4.7%, but the improvement is limited and still at a relatively high level, while the Dallas Fed manufacturing index has entered a long-term negative value range and falls below the threshold of recession. On the whole, early signs of stagflation have appeared…
Important Data of the Week
In June, the Dallas Fed Manufacturing Index recorded -23.2, which was better than the previous value of -29.1, indicating that the manufacturing industry has picked up, but it is lower than market expectations of -20. The overall trend of the data is below the standard of economic recession. It’s similar to that in the period of the 2008 financial crisis.
In June, the Richmond Fed Manufacturing Index in the United States recorded -7, higher than the previous value of -15 and the predicted value of -12, showing that the manufacturing industry has picked up in this period.
The monthly rate of durable goods orders in the United States recorded 1.7% in May, higher than the revised previous value of 1.2% and the forecast value of -1%, showing that manufacturing and terminal consumption have picked up.
The US real GDP annualized quarterly rate in the first quarter was revised to 2.0%, the market expected an increase of 1.4%, and the initial value was an increase of 1.3%; the US Bureau of Economic Analysis reported that the updated forecast mainly reflected in the upward revisions on exports and consumer spending, and the offset partly by the downward revisions to nonresidential fixed investment and federal government spending.
The number of initial jobless claims in the United States for the week ended June 24 was 23.9, lower than the revised 26.5 and the market forecast of 26.5, indicating that the job market continues to strengthen and still needs to cool down.
The U.S. PCE price index recorded an annual rate of 4.616% in May, slightly lower than expected and the previous value of 4.679%; the U.S. May core PCE price index recorded a monthly rate of 0.3%, in line with expectations of 0.30%, slightly lower than the previous value of 0.40%, the PCE data showed a limited decline, suggesting a very little easing of underlying price pressures.
U.S. personal spending fell to 0.1% in May, below expectations for 0.20% and the previous reading of 0.80%, as consumer spending stagnated, suggesting the main engine of the U.S. economy is starting to lose momentum.
The initial value of the CPI annual rate in the Eurozone in June was recorded at 5.5%, which was lower than the previous value of 6.1% and was expected to be 5.6%. Inflation in the Eurozone has also stagnated.
Federal Reserve Balance Sheet
Following the control of the bank’s problems, the Federal Reserve has shrunk its balance sheet for 10 consecutive times and expanded its balance sheet by US$3.471 billion by the time of the bank run, and then shrunk its balance sheet again. Balance sheet reduction is going as originally planned.
Recession Indicator — U.S. Debt Inversion
The important data on this issue shows that the probability of the Fed continuing to raise interest rates is relatively high, and the economy is showing signs of stagflation. As of the time of this report, the 2/10 inversion has expanded to 105.21p, and the market’s worries about the U.S. falling into an economic recession have risen sharply.
Market Performance
Interest rate hike expectations strengthened the US dollar, but the signal of economic stagnation weakened the support of the US dollar. This week, the US dollar once broke through 103.35 under hawkish remarks of the Fed officials and then fell back due to the signal of economic stagnation. The US dollar will go sideways for a period of time in the future.
This week after the Federal Reserve officials continued to be hawkish and revised the GDP data, gold continued to fall sharply. With the PCE and personal consumption data failing expectations, gold stabilized at $1,900 and showed a slight decline and then rebound. The long-term trend of gold is still bullish, but under pressure in the short term.
The U.S. stock market has experienced a major correction after the main rise last week, but it is still in the upward channel, and the long-term sentiment continues. The S&P 500 continues to fluctuate and rise and will challenge the target resistance of the 4500 area again (4549 ).
Finding the support at $24803, BTC is going independently against the macro, and this week is under the resistance of the $31.2k~$31.4k area, trying to effectively stabilize at $30k. Bulls and bears battle fiercely before the data update in July.
Summary
After the U.S. GDP data has been revised up significantly, the possibility of the Federal Reserve raising interest rates twice this year has risen to 80% compared with that before the release of the data, and the possibility of the Fed turning to lower interest rates within this year has basically faded away. In the face of the daunting challenges, the risk of recession has likewise increased.
The Dallas Fed manufacturing index recorded a long-term negative value. The overall trend of the data is below the standard of economic recession, and it is very similar to the 2007~2008 financial crisis period. The PCE index has limited improvement and consumer spending has stagnated. A number of data show that the United States has emerged early signs of stagflation.
The current problem facing the Fed is that the economy and inflation have been tied together, forming a delicate balance. Raising interest rates will certainly curb inflation, but at the same time, it will also cause the economy to fall into recession. The current bond market’s inversion reflects an unprecedented worry about the U.S. recession. If the interest rate remains at the current level, stagflation will make the situation worse. Between chronic and acute pain, the Fed will most likely continue to raise interest rates — the follow-up monetary policy will be guided by data.
Completion of this report: 2023–0630–22:55 (UTC+8)
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