Article / 24 August 2015 at 5:06 GMT

3 Numbers: Hopes pinned on Chicago Fed, US 10-year yield, crude price

editor/analyst /
United States
  • Today’s Chicago Fed index update should show growth for the US in July
  • Will the 10-year Treasury yield slide below 2% this week?
  • Oil prices will have a tough time breaking free of bearish momentum

By James Picerno

Demand has soared for fresh macro perspective in the wake of last week’s selling wave. Unfortunately, there’s an acute shortage of new numbers for Monday. One exception is the monthly update on the US economic trend via the Chicago Fed National Activity Index. While we’re waiting for more data in the days ahead, keep your eye on the benchmark 10-year Treasury yield and oil prices for a real-time proxy of the crowd’s expectations for the global economy.

US: Chicago Fed National Activity Index (1230 GMT)
Is the US slipping into a recession? The dramatic slide in the US stockmarket last week suggests as much. The S&P 500's year-on-year change slipped into negative territory for the first time in three years. An infallible sign of economic contraction? Hardly, although sometimes it is.


In line for a slowdown .. the worrying drop in China's manufacturing PMI for August is the biggest contraction in six years, and supports bearish views on world growth. Photo: iStock

Using the numbers available at the moment, however, suggests that Mr. Market’s latest swoon is overdone, at least from the perspective of anticipating an imminent US recession. Indeed, the macro profile still looks encouraging, as today’s monthly update from the Chicago Fed is expected to reaffirm.’s consensus forecast for the July data calls for a modest rise in the Chicago Fed’s index, which is a broadly defined measure of the macro trend. The monthly estimate is expected to rise to 0.20 for July, up from 0.08 in the previous month.

The prediction for July translates to a projected three-month average of 0.07. If it holds, the three-month average will advance to its highest reading since January. Keep in mind that any reading above zero reflect above-average growth relative to the historical trend. Only negative values below -0.70 indicate an “increasing likelihood” that a recession has started, according to the Chicago Fed.

The bottom line: today’s report is expected to tell us that the US economy was expanding at a solid pace through last month. As such, last week’s selling wave from a US perspective is a bet that new macro challenges are lurking. Perhaps, but for now the big picture review still looks relatively bright in the rearview mirror.


US: 10-Year Treasury Yield Recent data for the US economy is still trending positive overall, but worries about the outlook for the global economy have inspired a new rush into safe havens. A key recipient of last week’s risk-off trade: the benchmark 10-year Treasury Note. Thanks to a burst of new demand that sent prices higher, the yield dropped to 2.05% on Friday, according to data - the lowest since late April.

As recently as June, the 10-year yield was pushing up against the 2.50% mark. The sharp slide in subsequent weeks suggests that the odds have fallen that the Federal Reserve will begin raising interest rates next month.

The market’s implied inflation forecast - the nominal 10-year yield less its inflation-indexed counterpart - is another clue for wondering if tighter monetary policy is just around the corner. This measure of expected inflation fell to 1.53% last week - close to a five-year low.

Slowing growth in China is weighing on sentiment. “I still expect the Fed to go next month and maybe another” in December, the chief global strategist for interest rates and currencies told Bloomberg on Friday. “However the outlook in 2016 is probably more important, and it looks like the Fed is going to be hamstrung by the US dollar and events overseas.”

For a real-time update on that outlook, keep your eye on the 10-year yield this week. If it continues to slide, the battered case for a rate hike will continue to fade further with the price of money.

Crude Oil Another benchmark of global economic activity - the price of oil - continued to stumble last week. The question is how much of this is due to excess supply against faltering demand, which is a proxy for the macro trend. Recent history suggests both factors are in play.

The outlook is widespread for continued weakness, with concerns about emerging markets at the core of the bearish forecasts. Last week’s drop in China’s factory activity in August marks the biggest contraction in over six years, based on the flash reading of the Caixin Purchasing Managers’ Index (PMI). The index’s drop to 47.1 this month suggests that “the economy is still in the process of bottoming out,” said the chief economist at the Caixin Insight Group, which publishes the data.

Negative price momentum suggests that a trough is nowhere in sight. Consider the US benchmark, West Texas Intermediate (WTI). The 50-day moving average remains well below the 100-day and 200-day counterparts. Until that bearish trend shows some signs of stabilising, the potential for further declines will continue to lurk.

To the extent that upbeat economic numbers from China could change the crowd’s outlook, the potential for a positive spin is on holiday this week. The next round of updated figures arrive next week, when revised manufacturing PMIs for China are scheduled. Meantime, oil prices will have a tough time breaking free of the bears’ clutches.

– Edited by Robert Ryan

James Picerno is a macro analyst/editor at Follow James or post your comment below to engage with Saxo Bank's social trading platform.

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