Pretiorates' Thoughts 36 - The potential for interest rate cuts is still alive
Published on June 25th, 2024
In our analyses, we regularly examine current movements, identify possible influencing factors and assess the general market situation. However, these are not recommendations, but merely opinions and food for thought.
Hello dear readers!
The question of the potential for interest rate cuts in the USA remains open. Let's therefore take another look at the charts of the US economy. One of the most important long-term economic indicators is the Conference Board US Leading Index (LEI). Over the last 35 years, this has usually provided a very good indication of the trend in the US stock market. Interestingly, for around a year now the LEI has been telling a different story to the US stock market...
The Citi US Economic Surprise Index is keeping hopes of interest rate cuts alive. The Citi US Economic Surprise Index measures whether the published economic data has been published as expected – or not. A mood-maker – or mood-killer... Recently, it has been more the latter...
The 'Real US Economic Indicator' is an index calculated from the ISM Total Manufacturing and Non-Manufacturing Index, US GDP and the spread of the US Treasury with a maturity of 2 and 10 years. It is no surprise that this 'Real US Economy Indicator' shows a high correlation with the ratio between the S&P500 Index and the index of the economically sensitive stocks of the Russell 2000 Index. However, the pessimism of the cyclical stocks of the Russell 2000 seems to have overreacted.
The Real US Economy Indicator also has a high correlation with the Gold/Silver ratio, which reflects the relationship between the economically sensitive Silver and Gold, which tends to be in demand in times of economic difficulty. According to this correlation, the Gold/Silver ratio seems to be rather low (shown inversely)...
According to the 'Macro Fever Curve', the risk of recession remains at 100%, but it has been doing so for almost two years...
The somewhat more sensitive 'Heart Beat' currently indicates a recession risk of 74% - it has also been clearly higher...
The ISM Manufacturing Index is also important. A precursor, the Philly Fed Order Intake Index, does not bode well for the coming months...
The ISM Services PMI Report itself is a good precursor for inflation...
And US inflation has once again confirmed its 5.31-year cycle, which has been working for more than 50 years...
When we talk about inflation, the topic of commodities comes to the fore. For well over a decade, there has been a high correlation between the two ratios of Gold and commodities, as well as the yield difference between high-yield bond yields and those of the best medium-term credit rating. It is clear that commodities and high-yield bonds perform better when the economy is doing better. However, the correlation has not been visible for a year now...
It can therefore be assumed that economic fears will tend to increase again in the coming weeks. This also increases the chances of interest rate cuts...
That’s it for today!
Remember, we are not making any recommendations for investments, we are just giving you ideas for your own analysis and decisions! Do your own due dilligence!
We wish you successful investments!
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