Previous Research A Global Economic Snapshot With PMIs
The world of economics is a fascinating realm where seemingly unrelated factors often intertwine in unexpected ways. One such captivating relationship exists between heavyweight truck sales in the United States and the 10-year Treasury yield minus the 3-month Treasury yield (10Y-3M). Although these variables may initially appear unrelated, a closer examination reveals an intriguing correlation that warrants exploration.
Understanding Heavyweight Truck Sales:
Heavyweight trucks, defined as trucks with a gross vehicle weight of over 14,000 pounds, serve as the backbone of the transportation industry. These trucks predominantly undertake long-haul freight transportation, efficiently carrying goods across vast distances. As a result, their sales figures act as a reliable indicator of the overall health and vitality of the commercial transportation sector, making them a crucial economic barometer.
The Significance of Treasury Yields:
Treasury yields hold great significance within the financial market. They represent the interest rates at which the United States government borrows money by issuing Treasury bonds. The 10Y-3M yield curve inversion, specifically, has gained attention as a notable predictor of recessions. Historically, every recession in the past seven instances has been preceded by a 10Y-3M inversion, making it the sole indicator with a flawless track record in forecasting economic downturns.
The Relationship Unveiled:
Given that both heavyweight truck sales and the 10Y-3M yield curve measure economic activity, a theoretical connection between them exists, and indeed it does. In previous instances, every reversion to normalcy of the 10Y-3M yield curve has been preceded by a decline in heavyweight truck sales. Currently, truck sales have yet to decrease, leading to the belief that the yield curve has not yet begun its journey towards normalcy.
Another intriguing observation is the historical pattern where truck sales surpassing the 550,000 mark have consistently led to a subsequent decline & a recession. As of May 2023, sales stood at 558,000, surpassing this critical threshold. Does this indicate an impending decline in sales, or will this time prove to be an exception to the pattern?
Can US Skip the Recession?
The most recent labor market data paints a concerning picture of overall weakness. Typically, the effects of changes in interest rates take some time to ripple through the economy. Historically, this lag has been around 18 months. Interestingly, this pattern held true as, precisely 18 months after the initial rate hike in March 2022, we are now witnessing the visible impact this month. The Federal Reserve consistently raised rates throughout 2022, suggesting that the consequences of these consecutive hikes will continue to materialize as the year unfolds.
SP500 & Inflation Update: Aug 2023
Airtham Macro Research: The July headline CPI release followed predictions of a slight increase, yet the actual magnitude was less significant than anticipated. This outcome sparked optimism within the market, leading to a surge in activity and speculation of a potential pause in rate hikes. However, this optimistic rally was short-lived as market participants quickly adjusted their expectations. The weaker-than-expected inflation reading meant a potential decline in economic demand. This perspective gains support from jobless claims data released a few days back, that showed claims rising to a 1.5-year high. Consequently, there's now a debate over whether further inflation reduction is beneficial or detrimental to the markets.
What’s Happening to US Tax Receipts?
One of the most crucial indicators for gauging the health of a country lies in its government tax receipts. When tax receipts rise in tandem with economic growth, it signals a thriving nation. Conversely, economic downturns often witness an accompanying decline in tax receipts. However, what's truly concerning is when tax receipts decline despite a healthy and expanding economy.