Will Economic Data Show Signs of Stagflation

12/05/2022

4 minutes read

2022.12.05 06:00

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There will be plenty of economic data this week, but Fed commentary will be absent. The Fed is in the middle of its blackout period so we won’t hear from it again until Dec. 14 at the FOMC meeting.

I think the significant number of the week comes on Friday, the expectations for one year and 3-5 years; estimates are for 4.9% and 3%, respectively. I think consumer expectations are essential, hitting a peak of around 3.1% and falling through most of the summer and then into the fall has now reversed higher. It raises the question of whether this is a series trending lower, making lower lows and lower highs, or a series making higher lows and higher highs. It matters because if the expectations are for inflation to rise in the future, it could suggest that inflation will be much harder to bring down.

University Of Michigan Inflation Expectations

Today’s report will also be critical. That is estimated at 53.3, down from last month’s 54.4. The report suggested the economy is inching towards an actual recession, and the services sector could confirm or deny whether that is happening. It would probably take a reading below 52 to signal the potential for a recession.

ISM Manufacturing Report

I think if we were to get a cooler-than-expected ISM report and a hotter University of Michigan report, coupled with the hot wage growth from Friday’s job report, it would suggest that we have entered a period of stagflation. A time of slowing economic growth, but rising wages and high prices. The reason wages could be increasing is due to the size of the labor force shrinking and the number of people not in the labor force rising. The data show that the number of people not in the labor force has pushed back above 100 million, while the population has declined, and the number of people working has declined.

US Jobs Index Chart

Add that there are nearly 10.7 million job openings and just 6 million people unemployed. You can see why wages are rising and why consumers expect inflation to be higher over the long term.

JOLTS Index

So it seems more than likely that we will see slower growth at some point, and prices will remain high as wages keep rising. It will create a terrible environment for businesses, forcing them to keep raising prices or see margins and profits deteriorate. So the data this week is essential.

S&P 500

The gapped lower on Friday by more than 1%, rallied back to fill the gap, and closed down by just 12 bps. Now, depending on how you want to look at things, the S&P 500 is inching closer to the large trend line which started in January and needs to close above 4,150 for an official break out.

S&P 500 Index Daily Chart

Or it has tested that trend line at 4,100 and failed. Now you ask how there can be two trend lines that can be so different. Well, the top chart is based on closing highs, and the bottom chart is based on Intraday highs, and it does make that much of a difference.

In this type of environment, it is pretty easy to be faked out, and for me, I have a few criteria to determine whether or not a move above the trend line is real. First, I want to see the index gap above the trend line and, more importantly, close above the closing trend line.

SPX Daily Chart

What I do know so far is that neither has happened. The index rose to the Intraday high trend line at 4,100 and has thus far failed, which matters most. It may have even risen enough to fill the gap from September 13. So instead of trying to predict where the index will head, it is worth waiting a day or maybe two to find out what it wants to do. But my gut says it will not break the closing trend line.

SPX 15-Min Chart

One reason is that I think there is a diamond reversal pattern on the Intraday chart, which usually results in the index returning to its origin, which would be at 3,950.

SPX 5-Min Chart

VIX

The other reason I feel this way is that the spot minus the VIX 3-month generic futures contract fell to -5.78, and this year when the number has fallen below -5, it has told us we are in a region of a market top, and once it gets below -5.7, it suggests we are at a market top. It doesn’t mean the indicator has to work again this time, but that is what has happened in the past.

VIX Chart

Nikkei

Meanwhile, the has turned lower in recent days, and this is important because if the Nikkei continued to fall, it would be a negative indicator for the . The Dow Jones has been moving with the Nikkei for some time, and this is the first time the two have diverged recently.

Nikkei Daily Chart

Dow Jones

Additionally, the Dow has a rising flag pattern present, and those are bearish reversal patterns. It would suggest the Dow is near or at a peak, and a break of 33,500 would signal a trend reversal.

DJIA Daily Chart

Energy

Meanwhile, the Energy ETF (NYSE:) has diverged from , and that divergence probably isn’t going to last much longer. The XLE has formed a diamond reversal pattern, indicating that the XLE could be heading lower to $78.50.

XLE Daily Chart

Goldman Sachs

Goldman Sachs (NYSE:) has also formed a diamond reversal pattern, and if that plays out as I expected, it could result in Goldman falling back to support at $352.

Goldman Sachs Daily Chart

Exxon

Exxon Mobil (NYSE:) has the same diamond pattern formed as in the XLE and Goldman. If it is the case that it is a diamond pattern, it would probably mean Exxon falls back to $102.

Exxon Mobil Daily Chart