Macro-economic indicators

Inflation data

Consumer price index (CPI / CPI core)

CPI measures the average changes in prices paid by consumers for a basket of goods and services over a specific period. It is a key indicator of inflation and reflects the cost of living for households.

CPI tracks price changes for a wide range of goods and services, including food, energy, housing, transportation, healthcare, education, and entertainment. It is used to assess the purchasing power of the currency and to adjust wages, pensions, and other incomes to compensate for inflation effects.

CPI Core measures price changes for the same basket of goods and services as the CPI but excludes certain categories with volatile prices, such as food and energy.

This index provides a more stable and predictable picture of long-term inflation. CPI Core is often used by central banks to make monetary policy decisions.

Producer price index (PPI / PPI core)

PPI measures the average changes in prices that producers receive for goods and services at the production level. It is an important indicator of inflation, reflecting production costs and changes in the selling prices of goods before they reach consumers.

PPI tracks price fluctuations for goods and services sold by producers. It includes prices of raw materials, intermediate products, and final products.

PPI Core is a version of the PPI that excludes certain categories of volatile prices, such as food and energy, to provide a more stable picture of inflationary trends.

This index provides a clearer assessment of underlying inflation trends in the production sector. PPI Core is important for assessing production cost stability and for economic and financial planning.

Labor market data

Non-farm payrolls (NFP)

An increase in the number of jobs suggests economic expansion and overall good health of the labor market, while a decrease may indicate an economic slowdown or issues in the labor market. NFP is used to assess overall economic health and is an important indicator for monetary and economic policy decisions.

Frequency: Published monthly, usually on the first Friday of each month.

Unemployment rate

The unemployment rate provides an overview of the health of the labor market. A high rate may indicate problems in the economy, such as a lack of job opportunities or economic difficulties. On the other hand, a low rate suggests a healthy labor market and an expanding economy.

Importance

• Economic Indicator: It is a key indicator of the state of the economy. Changes in the unemployment rate are closely monitored by economists, investors, and policymakers to assess economic conditions and make political and economic decisions.
• Economic Policies: The unemployment rate influences government policies and monetary policy decisions. For example, a high rate may lead to stimulus measures by central banks or governments to boost the economy and create jobs.

Influencing Factors

• Seasonality: The unemployment rate can vary depending on the season, with fluctuations in certain industries (e.g., tourism or agriculture).
• Economic Cycles: The unemployment rate tends to rise during recessions and fall during periods of economic expansion.

Unemployment claims

Unemployment claims are a weekly indicator that shows the number of people who have applied for unemployment benefits within a week. Generally, the higher the number of claims, the weaker the labor market is considered to be.

Economic growth

PMI Data

PMI data is essential for measuring the strength and weakness within an economy.

The acronym PMI stands for Purchasing Managers Index, and it is divided into categories of services and manufacturing. In a survey conducted with a sample of 300 purchasing managers, they are asked about current business conditions, and the result is displayed as a number between 0 and 100. Any value above 50 suggests overall economic expansion, while any value below 50 indicates contraction.

Services PMI measures economic activity and conditions in the services sector, which includes healthcare, education, finance, tourism, and others. This index analyzes aspects such as business volume, new orders, and the level of economic activity in the services sector.

Economic Impact: It is important for evaluating the state of the economy, especially in service-oriented economies where the services sector can represent a significant part of GDP.

Manufacturing PMI evaluates economic activity and conditions in the manufacturing sector, including the production of tangible goods. It focuses on aspects such as production volume, new orders, raw material deliveries, and inventories.

Economic Impact: It is often considered an indicator of the overall health of the economy, as the manufacturing sector can reflect consumer and investment demand.

Retail Sales

Retail sales of goods to the end consumer are another indicator of inflation, as well as consumer demand for finished goods. Higher retail sales typically indicate strength in U.S. stock indices but also suggest that inflation may be rising.

Interest rates

Interest rates refer to the percentage you pay or earn on loans or deposits. It is the cost of borrowing money or the reward for saving, expressed as a percentage of the principal amount. Interest rates can influence savings and investments, as well as the overall economy, by affecting consumption and borrowing costs.

US Treasury Yield Curve

Yield curve inversion is typically a negative signal for the stock market. Historically, since World War II, an inversion has been followed by a recession within 6 to 18 months. The yields used in the inversion chart are the difference between the 10-year and 3-month U.S. Treasury yields. The difference is simply calculated as the 10-year yield minus the 3-month yield to obtain the spread. When the chart is below the red line, it indicates that yields are currently inverted. A lower negative number suggests that the spread is more overvalued. As a leading indicator of economic recessions, this chart is closely monitored by many investors.

Reference: 

• https://www.currentmarketvaluation.com/models/yield-curve.php

• Tradingview: Indicator – Yield Curve => usually used on bonds (US10Y, US02Y)

Monetary Indicators

Monetary indicators are tools used to analyze and monitor the state of the economy and a country’s monetary policy. They provide important information about the amount of money in circulation and its impact on the economy.

M1: Represents currency in circulation and demand deposits (checking accounts). It is the most narrow measure of the money supply and reflects money immediately available for transactions.

M2: Includes M1 plus savings deposits and time deposits (which are less liquid than demand deposits). It is a broader measure of the money supply that covers money that can be relatively easily converted into cash.

M3: Includes M2 plus large deposits and other financial assets with lower liquidity. This indicator provides a complete picture of the money supply in the economy, including funds that are not immediately accessible.

Interest Rates: The cost of borrowing and the return on savings. Central banks use interest rates to influence the economy.

Reserve Requirements: The percentage of bank deposits that banks are required to hold as reserves and not lend out. Changes in this rate affect banks’ ability to make loans and, consequently, the money supply.

Reference: https://fred.stlouisfed.org/categories/24

Monetary Policies

Monetary policies refer to the actions taken by a central bank or monetary authorities to control the money supply and interest rates in an economy. The primary goal of monetary policies is to maintain price stability, promote employment, and ensure stable economic growth.

Monetary Policy Tools

Interest Rate: The main tool through which central banks influence economic activity. Changes in this rate affect the cost of loans and, consequently, consumer and investment demand.

Open Market Operations: Involves buying or selling government securities in the open market, thereby influencing liquidity and interest rates.

Reserve Requirements: The proportion of commercial bank deposits that must be held at the central bank. Changes in this requirement affect the amount of money banks can lend.

Categories of Monetary Policies

Conventional Monetary Policies

Conventional monetary policies are traditional tools used by central banks to influence the economy by controlling the money supply and interest rates. These policies are typically applied in normal economic conditions and focus on adjusting key economic variables to maintain price stability, promote employment, and ensure stable economic growth.

Interest Rate Adjustment: The central bank sets the policy interest rate, which affects short-term borrowing costs for commercial banks.

Open Market Operations: Involves buying or selling government securities and other financial assets in the open market by the central bank.

Reserve Requirements: The percentage of customer deposits that commercial banks must hold as reserves at the central bank.

Expansionary Monetary Policy: During economic recessions, central banks may lower the policy interest rate, purchase government securities, and reduce reserve requirements to stimulate the economy. Effects: Increased consumption and investment, depreciation of the national currency, potential rise in inflation.

Restrictive Monetary Policy: During periods of rapid economic expansion and high inflation, central banks may raise the interest rate, sell government securities, and increase reserve requirements to temper economic growth and control inflation.

Effects: Reduced consumption and investment, appreciation of the national currency, potential slowdown in economic growth.

Unconventional Monetary Policies

Unconventional monetary policies refer to measures adopted by central banks when conventional monetary policies, such as adjusting interest rates, become ineffective or insufficient.

Quantitative Easing (QE)

Quantitative Easing (QE) is generally used during severe economic crises or stagnation. QE focuses on stimulating the economy by increasing liquidity and reducing borrowing costs through the central bank’s purchase of financial assets. It is often employed when interest rates are already very low or negative and conventional monetary policies are insufficient to boost the economy.

Impact on the Economy: Lowers interest rates and injects liquidity into the financial system, which can stimulate lending, consumption, and investment. QE effects are often inflationary and may lead to asset price appreciation.

Economic Cycle Phase: Associated with economic expansion phases or required stimulus during recession or stagnation. It serves as support in the face of a weak economy.

Quantitative Tightening (QT)

Quantitative Tightening (QT) is used when the economy begins to stabilize, and central banks aim to withdraw the additional liquidity introduced through QE. QT focuses on reducing the central bank’s balance sheet and tightening liquidity in the economy, either by selling assets or by ceasing to reinvest funds obtained from maturing securities.

Impact on the Economy: Reduces liquidity in the economy, which can lead to higher interest rates and falling asset prices. QT effects are often deflationary and can negatively impact lending conditions and investments.

Economic Cycle Phase: Associated with economic normalization phases when the economy starts to stabilize, and the central bank seeks to restore more normal monetary policy conditions after a period of excessive stimulus.

Activity Sectors

The performance and state of activity sectors can be quickly assessed using the tickers associated with their respective ETFs.

Reference: https://finviz.com/map.ashx

Seasonality

The economic cycle represents fluctuations in economic activity over time, characterized by a sequence of phases that follow a predictable pattern. The main phases are:

1. Expansion: The economy is growing, with positive growth leading to increased production, job creation, and rising prosperity.
2. Peak: The highest point in the cycle, where the economy operates at or near its maximum potential. Growth may start to slow down, but prosperity remains relatively high.
3. Contraction (Recession): After the peak, the economy begins to slow down. Economic growth turns negative or significantly reduced, leading to decreased consumer spending, lower business investments, job losses, and reduced production.
4. Trough: The lowest point in the cycle, where the economy reaches its minimum. Economic indicators may show very poor performance during this phase.

Economic cycles impact each sector differently. For example:

• Defensive Sectors: During a recession, defensive sectors such as Consumer Staples, Utilities, and Health Care tend to be more resilient. These sectors provide essential goods and services that remain necessary regardless of economic conditions.
• Cyclical Sectors: Sectors like Industrials, Financials, and Consumer Discretionary (e.g., automobiles and electronics) generally perform better during economic expansions, when consumption and investment increase.

General economic indicators (such as interest rates, inflation, and GDP) affect sector performance. For instance, financial sectors are highly sensitive to changes in interest rates.

Reference: https://cssanalytics.wordpress.com/2023/08/12/business-cycle-sector-timing/

Economic Dynamics

Hyperinflation

Hyperinflation refers to an extremely high and usually accelerating rate of inflation, where prices rise rapidly and uncontrollably. Typically, hyperinflation exceeds 50% per month and can lead to the collapse of the currency’s value.

• Definition: A condition where the inflation rate increases dramatically, causing prices to rise at an unsustainable pace. This extreme form of inflation erodes the value of money so quickly that normal economic transactions become nearly impossible.
• Causes: Common causes include excessive money printing by the government, loss of confidence in the currency, political instability, and severe supply shortages. Hyperinflation usually follows a period of economic mismanagement or crisis.
• Effects: Hyperinflation leads to rapid loss of purchasing power, making everyday goods and services inaccessible for most people. It destroys economic stability, savings, and investments, and can cause social and economic turmoil. In extreme cases, it can lead to the abandonment of the national currency in favor of foreign currencies or barter systems.
• Historical Examples: Notable examples include the Weimar Republic in Germany during the 1920s, Zimbabwe in the late 2000s, and Venezuela in recent decades.
• Conclusion: Hyperinflation is one of the most severe economic phenomena and requires significant interventions and stabilization measures to restore order and economic confidence.

Stagflation

Stagflation is an economic situation where inflation and economic stagnation occur simultaneously. This is a problematic combination because inflation (rising prices) and economic stagnation (slow or zero economic growth) are usually considered opposing phenomena.

• Definition: Stagflation is characterized by a combination of high inflation and economic stagnation. While inflation erodes the currency’s purchasing power, economic stagnation is marked by slow or stagnant economic growth, often accompanied by high unemployment.
• Causes: Causes of stagflation can include external shocks, such as a sudden increase in raw material prices (e.g., oil price hikes), which can lead to higher production costs and simultaneously slow down the economy. Other causes may include inefficient economic policies and structural problems in the economy.
• Effects: Stagflation creates difficulties for economies, as measures to combat inflation (e.g., increasing interest rates) can worsen economic stagnation, while measures to stimulate the economy (e.g., lowering interest rates) can exacerbate inflation. This paradox makes economic policy formulation particularly challenging.
• Historical Example: A notable example of stagflation occurred in the 1970s when the oil crisis led to rapid increases in oil prices and other goods, while many countries’ economies suffered from economic stagnation and rising unemployment.

Depression

An economic depression is an extremely severe and prolonged period of economic contraction, characterized by a deep and enduring decline in economic activity. It is more severe than a typical recession and has devastating effects on the economy.

• Definition: An economic depression represents an extreme phase of the economic cycle, marked by a significant and prolonged decrease in Gross Domestic Product (GDP), severe declines in income, rising unemployment, and a general worsening of economic conditions.
• Causes: Causes can vary and may include major economic shocks, severe financial crises, poor economic policies, financial market collapses, or global conflicts. Economic depressions are often preceded by a deep and prolonged recession or persistent economic instability.
• Effects: Economic depression leads to:
  • Significant drops in GDP and industrial production.
  • Significant increases in unemployment and bankruptcy rates.
  • Dramatic reductions in income and consumer spending.
  • Declines in purchasing power and living standards.
  • Severe social impacts, including increased poverty and social tensions.
• Historical Example: The most well-known example of an economic depression is the Great Depression of the 1930s, which began with the stock market crash of 1929 and severely affected global economies, causing a deep and prolonged economic crisis.
• Conclusion: Economic depression requires extensive economic interventions and government policies to stimulate growth and restore economic stability.

Recession

A recession is a period of temporary and significant economic decline, characterized by a decrease in economic activity, usually measured by a decline in Gross Domestic Product (GDP) for two consecutive quarters or more.

• Definition: A recession is a phase of the economic cycle in which the economy contracts, leading to a decrease in GDP, lower income, higher unemployment, and a general reduction in economic activity.
• Causes: Causes of a recession can vary and may include:
  • External Shocks: Global economic crises, sudden increases in raw material prices, or geopolitical events.
  • Economic Policies: Inadequate fiscal or monetary measures that can cool the economy or restrict consumption and investment.
  • Demand Decline: A reduction in demand for goods and services, leading to decreased production and job losses.
  • Financial Issues: Financial crises, market crashes, or problems in the banking sector.
• Effects: A recession can have significant effects on the economy, including:
  • Decreased GDP: A reduction in Gross Domestic Product, indicating a general contraction of the economy.
  • Increased Unemployment: Job losses and difficulties in finding employment.
  • Reduced Income: Lower incomes for individuals and companies.
  • Reduced Consumption and Investment: Decreased consumer spending and capital investment.
  • Spending Cuts: Governments may cut spending and implement austerity measures to address budget deficits.
• Historical Example: A well-known example of a recession is the Global Recession of 2008-2009, triggered by the global financial crisis and having a significant impact on economies worldwide.
• Conclusion: Recession is a normal part of the economic cycle and is often followed by a period of recovery and expansion as the economy starts to rebound and grow again.

Disinflation

Disinflation refers to a decrease in the rate of inflation, meaning a slowing of the rate at which prices for goods and services rise within an economy. It is important to distinguish between disinflation and deflation:

• Definition: Disinflation is a situation where inflation slows down, but prices continue to rise, just at a slower pace. Unlike deflation, which represents an absolute decrease in prices, disinflation means only that the rate of price increase is reduced.
• Causes: Disinflation can be caused by various factors, including:
  • Monetary Policies: Measures such as raising interest rates by the central bank can reduce inflationary pressures.
  • Demand Reduction: A decrease in demand for goods and services can lead to slower price increases.
  • Supply Improvements: Increases in the supply of goods and services, due to technological advancements or lower production costs, can contribute to disinflation.
• Effects: Disinflation can have both positive and negative effects on the economy:
  • Positive: Reduces pressure on consumer budgets and may improve consumers’ purchasing power. Can contribute to economic stability.
  • Negative: If disinflation is caused by weak economic demand, it can be a sign of a struggling economy and may lead to economic stagnation or recession.
• Historical Example: An example of disinflation can be seen in the period following the global financial crisis of 2008-2009, when many economies experienced a slowdown in inflation amid a global economic recession.
• Conclusion: Disinflation is an important concept in economic analysis, as it reflects changes in inflation dynamics and can influence economic policy decisions and investment strategies.

Inflation

Inflation is the economic phenomenon referring to the generalized and continuous increase in the prices of goods and services within an economy. In short, inflation represents a decrease in the value of money, meaning that the same amount of money buys fewer goods and services than before.

• Definition: Inflation is the general increase in prices over time, often measured by the Consumer Price Index (CPI). It indicates a decrease in the purchasing power of money.
• Causes:
  • Excess Demand: When demand for goods and services exceeds available supply, prices tend to rise. This type of inflation is called “demand-pull” inflation.
  • Production Costs: Rising production costs (e.g., wages, raw materials) can lead to higher prices as producers pass on these higher costs to consumers. This is known as “cost-push” inflation.
  • Monetary Factors: Excessive money printing by monetary authorities can lead to an increase in the money supply in the economy, which can drive up prices. This is known as “monetary” inflation.
  • Inflation Expectations: Expectations of future inflation can lead both consumers and producers to act in ways that contribute to rising prices.
• Effects:
  • Positive: Moderate inflation can stimulate consumption and investment, as consumers and businesses may be more inclined to spend now rather than wait for a decrease in purchasing power.
  • Negative: High inflation can erode income purchasing power, create economic uncertainty, reduce real savings, and lead to increased living costs. Galloping inflation can severely damage economic stability and confidence in the currency.
• Historical Example: A notable example of high inflation occurred in the 1970s when oil crises led to rapid price increases. Currently, inflation can be observed in various economies with varying rates depending on the global and local economic context.
• Conclusion: Inflation is an important economic indicator that influences monetary and economic policy, financial planning, and business strategy.

Technical Recession

A technical recession is a lighter and shorter form of recession, characterized by a decrease in Gross Domestic Product (GDP) for two consecutive quarters. Typically, a technical recession is considered a short-term economic downturn that may signal a decline but is not as severe as a full recession.

• Definition: Technical recession refers to a situation where an economy experiences two consecutive quarters of negative GDP growth. This form of recession is often seen as a preliminary sign of economic trouble but is not necessarily indicative of a more severe and prolonged economic downturn.
• Causes: Causes of a technical recession may include temporary economic disruptions, short-term declines in consumer spending, or fluctuations in business investment. It can also be triggered by seasonal factors or one-off events that temporarily impact economic activity.
• Effects: A technical recession may lead to:
  • Reduced Economic Activity: Temporary declines in economic output and business activity.
  • Increased Unemployment: Short-term increases in job losses as businesses react to decreased demand.
  • Consumer Confidence: Potential impacts on consumer confidence and spending, even if the overall economy is not deeply affected.
• Historical Example: An example of a technical recession is the economic downturn in the U.S. during the early 2000s, which experienced two quarters of negative growth due to the bursting of the dot-com bubble but did not result in a prolonged economic decline.
• Conclusion: While a technical recession may indicate potential economic issues, it does not always translate into a severe or extended economic downturn. It often requires further analysis to determine the underlying causes and potential impacts on the broader economy.

Economic Boom

An economic boom is a period of rapid and robust economic expansion, characterized by significant increases in economic activity, production, and prosperity. During this phase, the economy reaches a high level of performance and is often marked by positive economic indicators such as rising GDP, decreasing unemployment, and increasing confidence among consumers and investors.

• Definition: An economic boom represents the peak phase of the economic cycle, where the economy operates at maximum capacity, and economic activity and Gross Domestic Product (GDP) experience significant growth. It is a time when resources are utilized to their fullest and economic indicators are favorable.
• Causes:
  • Increased Demand: High demand for goods and services can stimulate production and investment. This demand often leads to higher levels of economic activity and growth.
  • Favorable Economic Policies: Stimulative fiscal and monetary policies, such as tax cuts or interest rate reductions, can encourage spending and investment.
  • Innovation and Investment: Technological advancements and investments in infrastructure and development can contribute to economic expansion.
  • Stability and Confidence: Political and economic stability, along with confidence in the national economy, can attract investors and consumers.
• Effects:
  • Rising GDP: Strong economic expansion, with increased production and economic activity.
  • Decreasing Unemployment: Creation of jobs and reduction in the unemployment rate.
  • Increased Income and Spending: Higher incomes for consumers and businesses, leading to increased spending and investment.
  • Inflation: In a boom phase, increased demand can lead to rising prices, causing inflation.
• Historical Examples: Notable examples of economic booms include the expansion period in the United States during the 1990s, known as the “Dot-Com Bubble,” and the rapid economic growth in China over the past two decades.

An economic boom is a favorable phase of the economic cycle that can bring prosperity and development. However, if not managed properly, it can lead to overheating of the economy and the accumulation of imbalances, which may contribute to a subsequent recession.

Extras

TradingView Indicators

• UNRATE: Unemployment rate
• USINTR: US Interest Rate
• USM1: US money supply M1 (Liquidity)
• USM2: US money supply M2 (Savings, short-term deposits)