Economic Indicators Dashboard – Contradictory signals

For many investors, February was a tale of two halves: stocks¹ declined in the first half of the month, only to return close to their starting point again by month-end. This sort of whirlwind seems to be par for the course at the moment as market signals and economic indicators have been sending somewhat conflicting messages to investors so far this year. Let’s take a look at how some of the most important economic and market indicators that are tracked in the Economic Indicators Dashboard fared in February – and what they might foretell for investors in 2016. After all, navigating these seemingly contradictory signals will be one of the keys to success for investors in 2016. Accessed on March 22, 2016. This dashboard is intended as a tool to set context and perspective when evaluating the current state of the economy. For each indicator, the horizontal bar shows four things.

• A blue color band represents the typical range for this indicator. +/- 1 standard deviation of historical values for the indicator fall in this range.
• An orange marker shows the most recent value – the closer the marker is to the blue bar, the closer it is to historically typical conditions.
• A grey area outside of the blue band which shows the range actual conditions.
• An arrow shows the most recent three-month trend indicating if it is moving toward or away from the typical range

Market indicators

10-year U.S. Treasury Yield – By the end of February, the 10-year U.S. Treasury Yield had dropped to 1.74%, down 20 basis points from where it stood at the end of January. Despite being well below its historically typical range of 3.31%-8.81%, the yield on the 10-year U.S. Treasury topped that of many foreign government bonds, some of which are currently offering negative yields. The spread between U.S. Treasuries and other government bonds – and ensuing demand for Treasuries – also partially explains why the yield on the 10-year U.S. Treasury has declined in the first three months of 2016, despite an increase in the federal funds rate in December of 2015. Strong demand has pushed up the price of the 10-year U.S. Treasury and depressed its yield. Yield spread – Theyield spread – the difference in yield between the 10-year U.S. Treasury Note and the 3-month U.S. Treasury Bill – continued to tighten in February, falling to 1.42%. This spread can be used as an indicator of the market’s outlook for future interest rates. A widening spread typically indicates that the market expects rates to go up; conversely, a tightening spread indicates that the market expects rates to stay constant or decline in the future. In February, the falling spread highlighted the market’s expectation that any interest rate increases in the U.S. will be small and slow. What the current reading of these market indicators suggests: Taken in isolation, the 10-year U.S. Treasury yield and yield spread suggest that interest rates in the U.S. are likely to remain low and steady going forward

Economic Indicators

Inflation – Inflation (as measured by CPI year over year % change) decreased to 0.97% in February, down from the previous month’s reading of 1.34%. However, the three-month trend points towards rising inflation which will be one of the main watch points for the U.S. Federal Reserve as they evaluate the strength of the economy. Unemployment – The unemployment rate stayed constant at 4.9% in February with the addition of 242,000 jobs during the month. Even though the unemployment rate didn’t fall during the month, it did reflect an improvement in the job market since the labor force participation rate increased. February marked the 65th consecutive month of net job growth in the U.S.  The eventual outcome of low, sustained unemployment is higher wages which will encourage further increased inflation. What the current reading of these economic indicators suggests: Taken in isolation, inflation and unemployment suggest the U.S. economy continues to show signs of strength.

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¹ Represented by the Russell 3000® Index as of February 29, 2016The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.