1. GDP Estimates
GDP forecasting is an art, not a science. The differences and divergence between the two indicators highlight the differences in calculation methodology. The NYFRB model uses “dynamic factor modeling” while the Atlanta model is regression-based.
Why it Matters
The Atlanta Fed’s real-time GDP estimate (GDP Now for Q3 growth is coming in at 4.6%. The New York Fed’s estimate (Nowcast) is estimating 2.0%. That is a massive difference between the two, and economic data released last week caused one to increase and the other to decrease. Crazy.
2. Agriculture Slump
The Bloomberg Agriculture Index, which is comprised of commodities such as coffee, soybeans & wheat) is retesting the mid-July lows. The trade war on the eastern front (China-US) is causing most of the damage. The index has lost 10.9% YTD.
Why it Matters
The Trump administration just detailed its plans for the $4.7 billion bailout to help farmers affected by the tariffs. If commodity prices don’t rebound in the next couple of months, it could have an impact on the mid-term elections. Republican support from the farmers will be crucial.
3. US 10Y Term Premium
The yield curve keeps flattening and recession calls are getting louder. Are the differences in term-premium are enough to “Make this time different?” The Fed’s measure of term premium introduced Adrian, Crump & Moench, is -0.60% today– much lower than before prior recessions.
Why it Matters
If the yield curve does have some sort of magical predictive power, the concept of term premium has to play a role. The last 7 recessions may have been preceded by a yield curve inversion, but they were NOT preceded by $4 trillion in QE.
4. S&P Margins
US equity markets set a new high yesterday and appear to have regained positive momentum. Corporate fundamentals keep improving. Operating margins for S&P 500 companies hit a 20-year last quarter, rising to 11.6%.
Why it Matters
Margin expansion is a major factor contributing to profit growth, which is driving the market higher compared to international markets. I’m not sure if we are at peak margins yet, but we have to be getting close.
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