Economic, Fundamental and Monetary Environment


Chart 1

Chart 2

The U.S. economy is humming along. The pace of growth is not brisk or very satisfactory but it is also not alarming. The real GDP, total non-farm payroll and retail sales are maintaining their growth trajectory. The unemployment level continues to decline and the industrial production has seemingly arrested it decline and is levelling off if not rising (Chart 1).

Industrial Production index (base 2007=100) reached a high of 101.2 in November 2014. It then declined to 97.3 by March 2016. Since then it has generally maintained a level near 98, which is still below 2007 level. The year-over-year growth turned positive in December 2016. It fell below zero in January but has been above zero for the last three months.

The year-over-year retail sales has stayed steady and above zero after falling to 0.06% in January 2014. The Leading Index is also steady during this time. Before a recession these three indicators trend down (Chart 2), which is not happening at the moment. This means that though the economy is sluggish, it is in no danger of getting into recession in the near future.

No Danger Of Recession

Chart 3

Chart 4

We previously noted that few months before the onset of any recession in the U.S.A., the spread between the 10-Year Treasury Constant Maturity and the 2-Year Treasury Constant Maturity turns negative.

This spread is still above zero, thigh it has been on a downtrend since early-2014 (Chart 3). Generally speaking, a declining spread means that the 2-year yield is rising faster than 10-year yield.

This shows mixed expectations by the market. The Fed has raised base rates three times since  the financial crisis. It has also hinted ate least two more rate hikes. The rising 2-year Treasury rates are based upon this expectations. The longer term, 10-year Treasury yields are focusing on inflations expectation, which hasn’t moved much and are at the same level that they were in December 2014 (Chart 4).


IMF World Economic Outlook

  • Growth projected to pick up in 2017 and 2018 – especially in emerging markets and developing economies
  • Estimated World GDP growth: 2016 – 3.1%; 2017 – 3.4%; 2018 – 3.6%
  • Risks:
    • Protectionism
    • Geopolitical tensions
    • China slowdown
  • U.S. GDP growth: 2016 – 1.6%; 2.3% – 2017; 2.5% – 2018;

NYSE Margin Debt



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