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Macro Monday 31 ~ Dallas Fed Manufacturing Index (Key Levels)Macro Monday 31 U.S. Dallas Fed Manufacturing Index This Index is compiled from a monthly survey conducted by the Federal Reserve Bank of Dallas to assess the health of manufacturing activity in the state of Texas. It provides insight into factors such as production, employment, orders, and prices, offering a snapshot of economic conditions in the region. Why is the Dallas Fed Manufacturing Index Important? ▫️ As stated above the index covers manufacturing activity in the state of Texas, the state of Texas ranks 2nd only to California in factory production & comes in at 1st as an exporter of manufactured goods, thus Texas is an important state for gauging manufacturing & production in the U.S. economy. ▫️ Texas also contributes an incredible c.10% towards the U.S. Manufacturing gross domestic product making the index an important metric to consider towards potential GDP trends in the U.S. ▫️ The Dallas Fed Manufacturing Index (DFMI) is one of several regional manufacturing surveys that feed into the national Purchasing Managers Index (PMI). The PMI is released later this week on Thursday 1st Feb thus the DFMI on Monday will give us an early indication of the potential direction of the PMI later in the week. FYI, I will be covering the PMI for you on Thursday so stay tuned for that. How to read the index? A reading above 0 indicates an expansion of the factory activity compared to the previous month; below 0 represents a contraction; while 0 indicates no change. The Chart The chart only dates back to 2005 so we have a limited dataset however we can still see definitive levels of importance and trends over this shorter historic backdrop. A few findings from the chart: The + 36.8 Level Since December 2005 any time we have hit the +36.8 level on the chart it has typically represented a peak in manufacturing and production signaling that a decline would likely follow. This has occurred 3 times and each time within 20 – 23 months of this +36.8 peak we had a recession or a financial crisis. 1) December 2005 21 Months later we had the Great Financial Crisis. 2) June 2018 20 months later we had the COVID-19 Crash. 3) April 2021 23 months later the U.S Banking Crisis occurred in March 2023 resulting in 3 small to mid size banks failing. - The remaining banks being saved by the Bank Term Funding Program (BTFP) which appears to have successfully contained the contagion for now. The BTFP is ceasing in March 2024 👀 ▫️ We can see above that in the event we reach the +36.8 level in the future, history informs us that within 20 – 23 months major economic issues will likely present. If we had known this back in April 2022. After April 2022 the S&P500 fell 15% to its recent lows. ▫️ The National Bureau of Economic Research (NBER) could declare the current period we are in as a soft recession. For the last six recessions, on average, the announcement of when a recession started was declared 8 months after the fact meaning we will would only get confirmation of a recession once we are 6 - 8 months into it. Its worth noting that some recessions were confirmed by the NBER after the recession was over. - 36.8 Level A reading below the -36.8 level has historically confirmed a recession. We have not hit this level since the COVID-19 Crash with May 2020 being the last time we have been at this level. Periods in Contractionary Territory There have been 2 previous periods where we have remained in contractionary territory for greater than 6 months. These are worth reviewing as we have been in contractionary territory for the 20 months now (April 2022 - Present). 1) Sept 2007 – Nov 2009: We fell into contractionary territory during the Great Financial Crisis for 26 months. From 2009 to 2016 the index seemed week oscillating around the 0 level and not really breaking out into persistent expansionary territory until 2017 forward. 2) Jan 2015 – Oct 2016: We fell into contractionary territory for 21 months however there was no recession. 3) Apr 2022 – Present: We are currently on month 20 of contraction. Now this could be just like point 2 above whereby we recover to expansionary territory in month 21 or 22 (Jan - Feb 2024) however if we do not, we are moving towards a timeline similar to point 1 which was the 26 month Great Financial Crisis. Q1 of 2024 will be very revealing in terms of what we can expect next. In the event we end up in contraction for 26 months or if we hit the -36.8 level we can presume, based on history, that we likely have a recession on our hands. And, if we recover into expansionary territory maybe we have got away with it this time 🙂 You can clearly see that the Dallas Fed Manufacturing Index is significant for assessing the U.S. economy because it provides timely insights into the health of one of the nation's key economic sectors: manufacturing & production. Since Texas is a major hub for manufacturing activity, trends observed in the Dallas Fed index can offer valuable indications of broader economic trends. It is one of several regional indices that contributes to a comprehensive understanding of the manufacturing landscape, aiding policymakers, investors such as ourselves, and businesses in making informed decisions about the state of the economy. The current economic environment just gets more and more interesting every week Thanks for coming along again folks 🫡 PUKA
ECONOMICS:USDFMI
by PukaCharts
GBP/USD slips on GDP, US confidence data nextThe British pound is in negative territory today, after a contraction in UK GDP. In the European session, GBP/USD is trading at 1.2126, down 0.61% on the day. The British pound posted dazzling gains on Wednesday, surging 1.19%. The impressive climb was, however, a case of US dollar weakness, rather than any newfound strength in the pound. Inflation in the US was unexpectedly weaker than forecast, which raised market hopes that the Fed will ease policy. This led to the US dollar being less attractive and the currency took a nasty spill against all the majors. Sterling hasn't fared as well after the UK posted the second-quarter GDP report. The economy fell in July by -0.1% QoQ, following a 0.8% gain in June (-0.2% exp). On an annualized basis, GDP growth slowed to 2.9%, within expectations but sharply down from 8.7% in Q1. The outlook does not look good as we head towards winter, with UK households about to be hit with sharp increases in energy prices. Consumers are already struggling with a nasty cost of living crisis, and as they tighten the purse strings, the spectre of a recession will become that much more likely. Another key indicator, Manufacturing Production, came in at -1.6% MoM, down from a 1.7% gain in May (-1.8% exp). This was the fourth decline in five months, pointing to a worrying downtrend in manufacturing. The week wraps up with UoM Consumer Sentiment, a key confidence indicator. With the cost of living crisis in the US, it's no surprise that the index has tumbled - falling from 65.7 in March to just 51.5 in June. This points to weak expansion, just above the neutral 50.0 line. The July forecast calls for a slight improvement to 52.5 points. GBP/USD continues to test resistance at 1.2241. Next, there is resistance at 1.2361  There is support at 1.2123 and 1.2061
by OANDA
Sterling pares losses after US CPI jumpsThe British pound has taken investors for a ride today, as GBP/USD dropped sharply but has since recovered. In the North American session, GBP/USD is trading at 1.1856, down 0.28%. It has been a busy day on the economic calendar, with a host of UK releases and the US inflation report. In the US, the long-sought-after inflation peak remains as elusive as ever. The June inflation report showed headline inflation rising to 9.1% YoY, up from 8.6% and above the 8.8% estimate. Core CPI ticked lower to 5.9%, down from 6.0%. Still, this was higher than the forecast of 5.7%. With inflation remaining at high levels, the path is clear for the Fed to fire at will in order to curb inflation. Just a few days ago, CME's FedWatch pegged a 75bp hike at 93%, with a 7% chance of a 100bp move. The June inflation release has dramatically changed the FedWatch assessment, with a 53.6% of a 75bp move and 46.3% likelihood of a 100bp hike. The British pound took a tumble immediately after the US inflation release, falling 0.76%. The pound has managed to claw back most of these losses, but the risk of the US dollar moving higher remains elevated, as a massive 100bp increase has become a very real possibility at the Fed meeting in late July. Overshadowed by the dramatic US inflation report, UK indicators enjoyed a good day. GDP for May rose 0.5% MoM, bouncing back from a -0.2% reading in April and beating the estimate of 0.1%. Industrial Production and Manufacturing Production both ended a 3-month skid with monthly gains of 1.4% and 0.9%, respectively. Still, the bigger picture for the UK economy is not a rosy one, as a Bloomberg poll of economists indicated a 45% likelihood of the UK economy tipping into a recession in the next 12 months. GBP/USD tested support at 1.1876 earlier in the North American session. Below, there is support at 1.1736  GBP/USD faces resistance at 1.2025 and 1.2175
by OANDA
1
Pound shrugs off sharp UK dataThe British pound has posted very slight gains on Friday. In the European session, GBP/USD is trading at 1.3720, up 0.09% on the day. The pound is yawning despite better than expected UK data today. GDP jumped 0.9% m/m in November, above the consensus of 0.4%, while Manufacturing Production rose 1.1% m/m, crushing the estimate of 0.2%. Both readings were above the October releases, indicating that the UK recovery continues. GDP for Q4 is expected to reach or surpass the pre-Covid level (Q4 2019), barring a disappointing December GDP report. We continue to see a rotation out of US dollars this week, with the British pound and other majors racking up impressive gains of around 1 percent. The driver behind the US dollar's weakness has been elevated risk appetite, which has not waned despite exploding Omicron cases, a soft nonfarm payrolls report and a hawkish Federal Reserve. The markets appear to have an answer for all of these developments. The Omicron wave has not wreaked havoc on the global economy, US wage growth is strong, and Fed Chair Jerome Powell is confident that red-hot inflation in the US will ease during the year. Still, risk sentiment can change quickly, and I would not be surprised to see a US dollar comeback in the near term if Omicron is more damaging than anticipated or if inflation heads even higher. Prime Minister Boris Johnson is under intense criticism after revelations that his staff held parties during the height of the Covid lockdowns. One party was apparently held the night before the funeral of Queen Elizabeth's husband, and a poignant photo of the Queen sitting alone during the funeral has made Party-Gate look even worse. The latest political crisis has not made a dent in the pound's upswing, perhaps because Johnson is no stranger to controversy or an indication that investors are more concerned about inflation and omicron rather than partying at 10 Downing Street. There are support lines at 1.3482 and 1.3372. GBP/USD continues to test resistance at 1.3708. This is followed by resistance at 1.3818
by OANDA
2
Pound yawns after data dumpThe British pound has had a rather sleepy week, and the lack of activity has continued in Friday trade, as GBP/USD is hovering at the 1.32 line. It has been a light calendar week for the UK, and today's data dump didn't have any effect on the drifting pound. The GDP report for September came in at 4.6% y/y, well short of the consensus of 6.6%. Manufacturing Production for September y/y slowed to 1.3%, shy of the forecast of 1.7%. Investors shrugged off the underperforming data, perhaps because they are more focused on two burning issues, Omicron and the BoE rate decision next week. Omicron has caused some roller-coaster movement in the financial markets. There was a panic in late November, but risk sentiment than rebounded on reports that the variant was less severe than Delta. The World Health Organisation has said that it will have more data on Omicron in a couple of weeks. Although the symptoms appear to be relatively mild, Omicron is up to four times more contagious than Delta, and that has governments worried. The UK has responded by implementing 'Plan B', which includes some health restrictions, such as wearing masks at public venues. Omicron is spreading quickly across the UK, and it's unclear if Plan B will be enough to control the pandemic. The new health restrictions will likely cut into December/January holiday shopping and stoke inflation, as many shops will raise prices. We can expect a downgrade to Q1 2022 growth forecasts, and the wobbly pound will likely face further headwinds in the New Year. The BoE holds its policy meeting next week, and whether the bank will press the rate trigger remains up in the air. The markets have priced in a 40% likelihood of a rate hike, making this a live meeting which could have a strong impact on the struggling British pound. The Omicron crisis has dampened the likelihood of a rate hike, and it was noteworthy that Michael Saunders, a hawkish member of the MPC, has stated that it may be prudent to hold off until we have more data about Omicron. If the markets have learned anything from last month's shocker, when the BoE didn't raise rates, it is not to make any assumptions when it comes to Andrew Bailey & Company. GBP/USD has support at 1.3161 and 1.3091 There is resistance at 1.3336 and 1.3441
by OANDA
2
Pound pushes above 1.38, GDP nextThe British pound has punched above the 1.38 level in the Thursday session. GBP/USD is currently trading at 1.3858, up 0.63% on the day. After posting three straight days of losses, the British pound has rebounded strongly on Thursday. The US dollar is in retreat against the majors, despite a positive unemployment claims release earlier in the day. Claims fell to 310 thousand, down from 345 thousand a week earlier. We'll get another look at US inflation data on Friday, with the release of PPI for August expected to indicate that inflation remains red-hot. The consensus stands at 6.5% (YoY) compared to 6.2% in July. The Federal Reserve continues to insist that the surge in inflation is transitory and has been reluctant to respond with a tightening of policy, fearing that the time is not ripe for a scaling back of QE. Still, more investors are sure to join the skeptics if inflation continues to remain at high levels in the final months of 2021. In the UK, the markets will be treated to a data dump on Friday. The key events are GDP and Manufacturing Production. With the Delta variant of Covid continuing to hurt economic growth, July GDP is expected somewhere around zero, which could mean a small decline. Manufacturing Production is also expected to be sluggish with a forecast of 0.1% (MoM). We could see some strong movement from the pound, depending on the performance of these two releases. There is resistance at 1.3924. Above, there is resistance at 1.3988, just below the symbolic line of 1.40. On the downside, we have support at 1.3763 and 1.3666
by OANDA
Pound flat after GDP data, US CPI nextThe pound is showing limited movement in the Wednesday session. In European trade, GBP/USD is trading at 1.4132, down 0.07%. On the fundamental front, US CPI is projected to come in at 3.6% year-on-year in April, up from 2.6% in March. If CPI outperforms, it could raise expectations that the Fed will move sooner to tighten policy. UK GDP numbers were a mixed bag, as the economy contracted in the first quarter of 2o21. At the same time, The monthly GDP outperformed. Analysts had expected the British economy to shrink in Q1, and this was the case, with a GDP read of -1.5%. This was slightly better than the forecast of -1.7%, but pointed to a bruising quarter, as the economy was hampered by lockdown restrictions and trade disruptions due to Brexit, such as the buildup of containers in British ports. The GDP report was also a "cup half full", as March GDP was stronger than expected, with a healthy gain of 2.1%. This easily beat the estimate of 1.3% and was well up from the February reading of 0.4%. The March expansion reflected businesses preparing for the first stage of the reopening of the economy, which occurred in early April. There was more positive news from the manufacturing front, as Manufacturing Production rose 2.1% in March, up from 1.3% and easily beating the forecast of 1.0%. The British economy is still some 8.7% smaller than prior to the Covid pandemic, but the March reading is an indication that the economy is headed in the right direction, and that bodes well for the British pound, which has been on an impressive streak. GPB/USD is up 1.13% this week and has soared in May, with gains of 2.34%. The pound avoided a potential pitfall early in the week, as the results of the Scottish election showed that the pro-independence SNP failed to garner a majority in parliament. This means that investors can count on political stability, and the pound responded with gains of close to one per cent on Monday. GBP/USD continues to test resistance at 1.4137, followed by resistance at 1.4269. There are support lines at 1.3859 and 1.3727.
by OANDA
The myth of hyperinflation series #7- Supply & productionLet's keep it simple. Increase in raw material & production cost-> Decrease in aggregate supply (Suppliers drop out as profit deteriorates)-> Decrease in total production->. If demand remains the same (most likely going to be the case unless there is another stimulus check coming in), then remaining producers/suppliers who now have more pricing power can and have to pass down the cost to consumers-> Potential supply-induced inflation happens as the same number of buyers chase after the shrinking pool of goods. However, the chart shows no such risk. As the consumption picks up, supplier/producer starts to hire more people (Manufacturing employment) and ramp up the production lvl (Manufacturing production). The increasing demand is matched by the increasing production (manufacturing production keeps up with the demand of the new order) and declining inventory (Manufacturing inventory). In other words, even though oil price and raw material cost rose (still below the historical standard), we didn't see any decrease in aggregate supply . Of course, I have simplified the matte and left out many details, but I think the only issue we have to worry about that can cause the imbalance between aggregate supply and demand is the potential supplier delivery difficulties being mentioned in the ISM report. In general, supply is elastic, meaning that the producer/supplier usually rush to increase the production/capacity as the price of good and demand go up because capital has been abundant ever since China joined WTO and the interest rate has been suppressed to such a low lvl ever since sub-prime mortgage crisis. The whole world is on the disinflationary trend as we live in a world of excess savings and insufficient demand because developing countries constantly export their savings to developed countries and because the disposable income doesn't keep up with the inflation. Such over-capacity/overproduction & over-abundance of capital and good will keep the price lvl low & affordable and the inflation lvl manageable, especially in the disinflationary environment in which there is a moderate amount of consumer demand. Next, I will talk about some of the external factors and circumstances that could influence the possibility of hyperinflation.
TVC:TRJEFFCRBEducation
by Libratus