Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Chart of the Week: The Chicago Fed National Activity Index
Christopher Dembik
Head of Macroeconomic Research
Summary: Our 'Macro Chartmania' series collects Macrobond data and focuses on a single chart chosen for its relevance.
Click here to download this week's full edition of Macro Chartmania.
Today’s edition will focus on the state of the U.S. economy ahead of the presidential election. A few hours ago, the Chicago Fed National Activity Index, which is the broadest measure of the U.S. economy, has been released. It is based on 85 indicators mostly related to consumption, income, employment, production and real estate. It is updated on a monthly basis and lags surveys, but it is highly-watched by economists as it is perfect mirror of the real state of the business cycle. It is of common use to refer to the three-month moving average to filter out false signals that may be generated by monthly data.
When the three-month moving average is below -0.70 following a period of economic expansion, there is high likelihood that a recession has started. Conversely, when it is above -0.70 following a period of economic contraction, there is a high likelihood that recession has ended.
In its latest update, the three-month moving average index is out at +0.27 in September, which is slightly lower than in August (+1,11), thus suggesting slower but still moderately above-average growth. Three of the four main categories of indicators made positive contributions in September, namely employment, personal consumption and housing, and sales, orders and inventories. In contrast, production and income are still in contraction, at -0,24. The current level of the index is consistent with our view that despite direct government transfers, continued central bank interventions and huge borrowing from future generations, the economy has showed signs of slowdown in August/September due to stronger COVID-19 spread and new restrictions. Looking ahead, we think risks are tilted to the upside in Q4. Without further stimulus this quarter to support consumption and given the increased risk that some states decide to reimpose lockdowns, we anticipate a slight QoQ contraction that could quickly degenerate into a new recession. Pressure is very high on Congress to enact fresh coronavirus relief but given the current state of politics in the United States, the likelihood that a bipartisan agreement will be found before the presidential election is close to zero.
The below chart includes an overlay of GDP over the past few months:
From a broad historical context, this is the complete series from 1967 including recession bands:
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