Economic Indicators

The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for May 2025. The actual total (core) inflation rate is lower than (lower than) forecasted.

What are current estimates of equity risk premiums (ERP) and risk-free rates around the world? In their May 2025 paper entitled “Survey: Market Risk Premium and Risk-Free Rate Used for 54 countries in 2025”, Pablo Fernandez, Diego Garcia and Lucia Acin summarize results of an April 2025 email survey of international finance and economic professors, analysts and company managers “about the Risk-Free Rate and the Market Risk Premium (MRP) used to calculate the required return to equity in different countries.” Results are in local currencies. Based on 2,749 specific and credible premium estimates spanning 54 countries for which there are at least six estimates, they find that: Keep Reading

How and how much does the Federal Reserve Open Market Committee (FOMC) affect the overall stock market? In their April 2025 paper entitled “The Effect of the Federal Reserve on the Stock Market: Magnitudes, Channels and Shocks”, Benjamin Knox and Annette Vissing-Jorgensen survey studies of Federal Reserve effects on the stock market, focusing on three items:

1. FOMC monetary policy surprises – effects of short rate surprises on stock market return in a half-hour window around FOMC announcements (10 minutes before to 20 minutes after).
2. Pre-FOMC announcement drift – stock market return in the hours leading up to scheduled FOMC announcements.
3. FOMC cycle – stock market return patterns between FOMC meetings.

They discuss directions/magnitudes of impacts, types of shocks (pure monetary policy or sentiment reactions to information about economic outlook) and explanations of impacts. Based on the body of relevant research, they conclude that: Keep Reading

Does the level of, or change in, the annual U.S. federal surplus/deficit systematically influence the U.S. stock market, perhaps by affecting consumption and thereby corporate earnings or by modifying inflation and thereby discount rates? To check, we relate annual stock market returns to the annual surplus/deficit (receipts minus outlays) as a percentage of Gross Domestic Product (GDP). We align stock market returns with surplus/deficit calculations (federal fiscal years, FY) as follows: (1) prior to 1977, we calculate annual returns from July through June; (2) we ignore the July 1976 through September 1976 transition quarter; and, (3) since 1977, we calculate annual returns from October through September. Using surplus/deficit data and monthly returns for the S&P 500 Index (SP500) as a proxy for the U.S. stock market during FY 1930 through FY 2024 (about 95 years), we find that: Keep Reading

The “Simple Asset Class ETF Value Strategy” (SACEVS) seeks diversification across a small set of asset class exchanged-traded funds (ETF), plus a monthly tactical edge from potential undervaluation of three risk premiums:

1. Term – monthly difference between the 10-year Constant Maturity U.S. Treasury note (T-note) yield and the 3-month Constant Maturity U.S. Treasury bill (T-bill) yield.
2. Credit – monthly difference between the Moody’s Seasoned Baa Corporate Bonds yield and the T-note yield.
3. Equity – monthly difference between S&P 500 operating earnings yield and the T-note yield.

Premium valuations are relative to historical averages. How might this strategy react to changes in the Effective Federal Funds Rate (EFFR)? Using end-of-month values of the three risk premiums, EFFR, total 12-month U.S. inflation and core 12-month U.S. inflation during March 1989 (limited by availability of operating earnings data) through February 2025, we find that: Keep Reading

Does the M2 measure of money supply reliably drive bitcoin and/or gold prices at a monthly horizon? To investigate we relate monthly change in M2 to future monthly bitcoin and SPDR Gold Shares (GLD) returns. Using monthly data for M2, bitcoin and GLD from September 2014 (inception of bitcoin price series) through February 2025, we find that:

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Does economic history rhyme in that similar economic/financial conditions precede similar equity factor performance? In their March 2025 paper entitled “Regimes”, Amara Mulliner, Campbell Harvey, Chao Xia, Ed Fang and Otto Van Hemert present a way to characterize the current economic/financial regime and relate this characterization to future factor returns. They consider seven input variables: (1) S&P 500 Index level; (2) 10-year U.S. Treasury note yield minus 3-month U.S. Treasury bill (T-bill) yield; (3) WTI crude oil price; (4) copper price; (5) T-bill yield; (6) VIX level; and, (7) U.S. stocks-bonds 3-year daily correlation. Specifically, they each month:

1. Compute for each input variable its annual change and its z-score relative to a rolling 10-year history, constraining the z-score to a range of -3 to +3.
2. For each variable, measure the similarity of its current z-score to its past z-scores for all dates based on squared difference.
3. For each date, add the squared differences across the seven input variables to compute a global similarity score for that date (lowest values are most similar to now).
4. For each past date, measure next-month gross performance of each of six long-short equity factors (market, size, value, profitability, investment and momentum).
5. Sort past dates into fifths (quintiles) based on global similarity scores relative to the current date.
6. For each quintile of past dates and each factor, take for the current date a long (short) position in the factor if its average next-month past performance is positive (negative) and reform an equal-weighted portfolio of the resulting six factor positions for the next month.

They focus on the quintiles of past dates with the most and least global similarities to the current date. Using daily and monthly data for the seven economic/financial input variables and for the six equity factors during 1985 through 2024, they find that:

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How do returns of different asset classes recently interact with inflation as measured by monthly change in the not seasonally adjusted, all-items consumer price index (CPI) from the U.S. Bureau of Labor Statistics? To investigate, we look at lead-lag relationships between change in CPI and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

• Equities:
  • SPDR S&P 500 (SPY)
  • iShares Russell 2000 Index (IWM)
  • iShares MSCI EAFE Index (EFA)
  • iShares MSCI Emerging Markets Index (EEM)
• Bonds:
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
  • iShares JPMorgan Emerging Markets Bond Fund (EMB)
• Real assets:
  • Vanguard REIT ETF (VNQ)
  • SPDR Gold Shares (GLD)
  • Invesco DB Commodity Index Tracking (DBC)

Using monthly total CPI values and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through January 2025, we find that: Keep Reading

Does commercial and industrial (C&I) credit fuel business growth and thereby drive the stock market? To investigate, we relate changes in credit standards from the Federal Reserve Board’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices to future U.S. stock market returns. Presumably, loosening (tightening) of credit standards is good (bad) for stocks. The Federal Reserve publishes survey results a few days after the end of the first month of each quarter (January, April, July and October). Using as-released “Net Percentage of Domestic Respondents Tightening Standards for C&I Loans” for large and medium businesses from the Senior Loan Officer Opinion Survey on Bank Lending Practices Chart Data for the second quarter of 1990 through the fourth quarter of 2024 (140 surveys), and contemporaneous S&P 500 Index quarterly returns (aligned to survey months), we find that: Keep Reading

Given anxiety among investors about the rapid rise of U.S. public debt, are U.S. Treasuries fairly valued? In his July 2024 paper entitled “A Historical Perspective on US Treasuries Risk Premia”, Olivier Davanne describes factors driving the U.S. Treasuries yield curve and explains how to gauge beliefs of market participants. He extracts investor rate expectations for various horizons from the monthly Consensus Economics surveys and the quarterly Surveys of Professional Forecasters to support a model of U.S. Treasury premiums based on eight variables, four related to monetary policy (current and expected) and four related to risk pricing (current and expected), as follows:

1. Current short-term yield.
2. Expected equilibrium short-term yield.
3. Short-term yield expected in one year.
4. Short-term yield expected in three years.
5. Current short-term risk premium for 10-year U.S. Treasury notes (T-note).
6. Expected long-term equilibrium for the T-note risk premium.
7. As an indication on the expected speed of convergence between them, expected T-note risk premium in three years.
8. As a measure of monetary policy risk premium, current risk premium on 1-year U.S. Treasury notes.

Applying a standard statistical procedure to the current Federal Funds Rate, yields for 3-month, 6-month, 1-year, 2-year, 5-year and 10-year U.S. Treasury instruments and responses to the above-cited surveys during 1994 through early 2024, he finds that:

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