There are certain indicators investors can watch to help make sense of the current economic environment.
However, while these indicators can help inform tactical decisions, they are of little consequence in the longer run, according to Kristina Hooper, chief global market strategist, Invesco, and over the longer run, maintaining portfolios diversified across and within the three major asset classes in order to help meet investment goals is key.
Chinese Economic Indicators
China’s manufacturing Purchasing Managers Index (PMI) for March clocked in at 49.5 – which is technically contraction territory, according to Hooper – down from 50.2 in February, as the economy has come under pressure recently as a result of COVID lockdowns.
Following the PMIs closely, including the sub-indexes, can provide additional color on economic activity, as well as economic data.
European Economic Data
The euro area Economic Sentiment Indicator reflects the eurozone economy is at an increased risk of recession. It dropped 5.4 points in March, largely due to a substantial drop in consumer confidence.
“We will want to follow European economic data, especially consumer spending since that appears to be an area of real weakness,” Hooper wrote.
In addition, the Economic Uncertainty Indicator rose abruptly in March (up 10.7 points to 25.8). According to Hooper, typically when economic uncertainty goes up, capital spending decreases. And so, we will want to follow these sentiment indicators and business investment closely.
Geopolitical Developments Related to Energy Production
The prices of oil and natural gas are front and center in the minds of economists and strategists right now because they’re having such an impact on the global economy.
“One way to increase supply is through geopolitical negotiations, and so we will want to follow such developments closely,” Hooper wrote. “While geopolitical developments could push energy prices up — for example, if the European Union (EU) makes the decision to no longer purchase Russian energy or if Russia refuses to sell to the EU — they can also cause them to fall by increasing supply.”
Supply Chain Disruptions
The New York Fed recently created a Global Supply Chain Pressure Index. Its most recent reading, for February, shows an easing in global supply chain pressures since December 2021. However, Hooper wrote she anticipates the March reading will show a worsening situation, reflecting the invasion of Ukraine and the COVID-related lockdowns.
According to Hooper, this is a helpful metric to get a sense of how much disruption is occurring in supply chains – which of course has implications for inflation.
Shipping Container Prices
In addition to supply chain disruptions, there is important in paying close attention to shipping container prices.
“They reflect a variety of factors including labor costs (and labor scarcity) as well as oil prices. And they can play a significant role in inflationary pressures, as higher transportation costs can often be added to the prices that consumers pay for goods,” Hooper wrote.
U.S. Consumer Sentiment on “Big Ticket Item” Buying Conditions
The University of Michigan surveys consumers monthly on whether they believe it is a good time or a bad time to buy major household durables and vehicles (two separate survey questions).
In recent months, the index has plummeted, with an increasing number of consumers saying it is a bad time to buy such items.
“This could be a positive in terms of reducing inflationary pressures; it means that households are postponing major purchases unless necessary,” Hooper said.
U.S. Inflation Expectations.
Hooper recommends following the NY Fed Survey of Consumers and University of Michigan Survey of Consumers inflation expectations – especially longer-term expectations. As of now, Michigan consumer expectations for inflation five years ahead remain elevated but appear relatively well anchored, but that could change as time passes and inflation remains high.
The U.S. Treasury yield curve.
The 2-year/10-year U.S. Treasury yield curve inverted last week, which could be an indicator that markets expect the U.S. economy to worsen. However, other parts of the yield curve appear healthy.
Hooper recommends paying close attention to the 3-month/10-year U.S. Treasury yield curve, as historically some economists have relied on that metric to predict recessions.
U.S. Employment Situation
Any significant weakness in employment could be a reason for the Fed to slow down its plans to continue to raise rates later in the year, so Hooper advised paying close attention to see if the strength we saw in March persists or reverses.
“Conversely, if wages were to continue to grow at a fast pace, the Fed could become concerned about the potential for a wage-price spiral, which could cause it to get even more aggressive in tightening,” Hooper wrote.
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