As we concluded investing in the first half of the year, we note that most of the discussion so far in 2022, for both consumers and investors, has revolved around inflation; however, the story may be changing. More and more consumers, companies, and investors are beginning to worry more about layoffs, inventories, and economic growth. Over the last six to eight weeks, the economic data has continued to disappoint. The Citi Economic Surprise Index measures how economic data has been reported relative to expectations. What it is trying to assess is whether the data is better or worse than expectations. One of the arguments from some market participants was that the economy would slow and bring down inflation with it. That may be happening.

Figure 1: Citi U.S. Economic Surprise Index

Figure 1:  Citi U.S. Economic Surprise Index
Source: Bloomberg

Right before the long weekend, there were some important data releases.  The Institute for Supply Managers PMI Index came out before the weekend. While the headline was weaker than expected, it was still above the 50 level that distinguishes between growth and contraction. However, the real story is the data within. Looking at the ratio of New Orders to Inventories, one can get a measure that anticipates where the headline ISM will go. Remember, this ISM headline leads the GDP data and tends to be coincident with the Equity market. Being able to anticipate this data may be helpful. In Figure 2, this ratio is in white, which has been anticipating a slowdown in the headline (orange) for a year. Another corroborating data point is the ratio of copper to gold. Within the commodity market, this is a metal that is linked to economic growth (or contraction) versus a store of value. Again, the ratio may help anticipate the direction of the global economy. This ratio in blue had been holding up until very recently. However, it has now fallen. The last measure overlaid here is the 10-Year Treasury Yield. Historically, it follows all three of these measures.  It has disconnected of late, as perhaps the market (and the Fed) was more worried about inflation. It may be that this is about to change.

Figure 2: ISM and 10-Year Treasury Yields

Figure 2: ISM and 10-Year Treasury Yields
Source: Bloomberg

Most people reading this would probably suggest it’s about time for investors and policymakers to understand the risks of recession. Lately, a popular chart on Twitter is the Google Trends data of searches for recession. This data shows Google users have been increasing for the better part of the last few months and are getting close to the level they hit before the 2008 and 2020 recessions. It would seem the masses may be onto the economy before the experts.

Figure 3: Google searches for recession

Figure 3: Google searches for recession
Source: Google

Figure 4: Fed Funds future 18 months less six months

Figure 5: SOFR futures term structure

Figure 6: Federal Reserve dot plots

Figure 7: July 27 FOMC meeting expectations

Figure 8: September 21 Fed expectations

Figure 9: SOFR implied volatility term structure

Figure 10: SOFR September futures price

SOFR Call option diagonal example

Figure 11: SOFR call option diagonal