Macrodials Documentation

The Macro Composite is a tool used to assess the overall health of the US economy. It combines a variety of economic indicators like employment, interest rates, housing, transportation, and inflation into one score. This score helps investors understand the direction of the economy and what phase of the economic cycle we’re in.

 

Updated monthly, the composite score reflects the latest economic data and trends. Think of it like a gauge on a dashboard, showing whether the economy is trending up or down. The regime classification below the score indicates the momentum of the economy based on the composite score.

 

 

While the composite score typically shows stability, it can also vary greatly from month to month. To smooth out these fluctuations and identify the overall trend in economic indicators, a 6-month moving average is used. When this average dips below 0, it signals a shift from economic strength (Risk-On) to weakness (Risk-Off). However, because this model operates on a monthly basis and aims to steer clear of economic downturns, it may not react quickly enough to major market crashes like the one in March 2020. This limitation means it may not always capture sudden and severe economic downturns.

The FRED Macro Data Monitor offers an objective overview of current economic indicators compared to past trends and a predictive variable. For your convenience, this section features a curated set of charts covering economic, inflation, employment, financial, and housing indicators. Additionally, by navigating to the Custom tab, you can connect to the FRED API and build your own charts to analyze virtually any indicator tracked in their database.

These visualizations facilitate comprehensive analysis of economic variables by addressing questions such as:

  1. Is the economic indicator behaving as expected for this stage of the macroeconomic cycle?
  1. Given our current position in the cycle, how might the economic indicator behave in the future?
 

For instance, consider the chart above depicting the U.S. Unemployment Rate following the First Monthly Inversion of the 10Y-3M yield curve spread. The X axis represents months since the inversion, ranging from 0 to 18 months, while the Y axis normalizes the metric at the start date to 100 percent. As of Marcg 2024, 12 months have elapsed since the first monthly inversion. Notable observations from this chart include:

  1. Early post-inversion, the Unemployment Rate fluctuates widely between maximum and minimum bands due to the low base unemployment rate relative to historical periods.
  1. The unemployment rate is below the mean unemployment rate 12 months after the first 10Y-3M inversion.
  1. Most importantly, 12 months and beyond is when the unemployment rate starts to increase meaningfully following the 10Y-3M inversion, indicating a significant shift in economic conditions.
 

Trigger Events

Trigger events provide a method for organizing the starting points of historical data in the FRED Macro Data Monitor based on the onset of specific macroeconomic events. The four trigger event options include:

  1. The First Monthly Inversion of the 10Y-3M spread.
  2. The First Monthly Reversion of the 10Y-3M spread.
  3. The Start of a Recession
  4. The End of a Recession.

 

Data Transformation Options

Exploring a dataset from various angles can help you better understand just how recent data aligns with historical trends. Our Macro Data Monitor charts provide several transformation options for this purpose:

  1. View by Individual Date: This option allows users to see each individual signal throughout history, providing a more detailed view than a simple distribution. It also allows users to see how many signals have occurred throughout history.
 
 
  1. View by Inflation Regime: Economic indicators can behave differently in inflationary or deflationary environments, such as interest rates. The “View Inflation Regime” option enables users to filter signals based on the inflationary environment. For instance, the Federal Funds Effective Rate is depicted below. Given the current inflationary environment, it’s expected that the Federal Funds Rate aligns with the peak of previous cycles.
 
 
  1. Remove 2020 Recession: The 2020 recession, caused by a pandemic, has distorted the distribution of many economic indicators in the FRED database. By default, we normalize data sets by excluding the 2020 recession data, facilitating a clearer comparison between current and past conditions. The screenshot below illustrates the Unemployment Rate with and without the 2020 recession included.
 
  1. Year over Year view: This option transforms the raw data into year-over-year changes. Instead of tracking the current Unemployment Rate, it compares the rate to its value one year prior.



This section enables users to examine the correlation between any variable tracked on FRED and subsequent returns of the S&P 500 index. The forward-looking output generated by the Macro Data Monitor is reported in units of time consistent with the default units determined by the FRED database for any given dataset. For instance, variables like UNRATE (Unemployment Rate) are analyzed against monthly returns, while CCSA (Continuing Claims) are assessed against weekly returns, and T10Y2Y (10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity) are evaluated against daily returns.

To avoid any bias stemming from the reporting date, weekly and monthly data are lagged by one month. However, daily data is not lagged. By default, all data plotted in scatter plots and distributions overlap.

It’s important to note that economic data tracked by FRED is subject to frequent revisions, and the revised data is typically displayed by default on the FRED website. This may introduce a look-ahead bias in the observed data. To mitigate this bias, the application includes an “Unadjusted Data” toggle. When toggled “on,” this feature displays the initial prints reported rather than the revised data. However, it’s essential to understand that this does not apply to daily datasets like yields.

SPX Mean Returns Across Indicator Deciles

The Bar Chart displays the relationship between the deciles of a given FRED dataset (as shown on the X axis) and the subsequent average performance of the S&P 500 (as shown on the Y axis, across a defined time horizon (the time period to test).

Indicator Values vs. SPX Returns

This Scatter Plot displays the relationship between the value of a given FRED dataset (as shown on the X axis) and the subsequent performance of the S&P 500 (as shown on the Y axis, across a defined time horizon (the time period to test). The tool divides the FRED dataset into deciles, highlighting how groups (as shown by the dot color) of higher or lower values within the dataset may correspond to different S&P returns within your specified time horizon. The data on this plot is overlapping by default.

In the chart below, the 10 Year – 3 Month Yield Curve spread is used to analyze subsequent S&P 500 3-Year returns. Several key observations can be made from this chart:

  1. The 10Y-3M Yield Curve spread sits at the 1st decile – indicating an inverted curve.
  2. The first decile exhibits the weakest 3-Year mean returns (-2.46%) compared to other deciles where returns range from highly positive to highly negative.
  3. As the curve steepens, moving to higher deciles, the dispersion of returns narrows.

Indicator Values vs. SPX Returns by Decile

The peaked distributions compare the returns of the S&P 500 based on the current decile of the FRED dataset to the S&P 500 returns that occur at any time. This comparison enables the visual identification of any biases in returns or volatility as implied by the current decile (or chosen decile).

 

The chart below illustrates the following points:

  1. In comparison to anytime 3-Year returns on the S&P 500, the current decile (1) predominantly shows data clustered around the -20% mark.
  2. There is no data between -20% and approximately +19%.
  3. Data resumes at around +20%.
  4. This differs significantly from anytime 3-year returns on the S&P 500, where the majority of data clusters around the +30% mark.

SPX Returns vs. Indicator Heatmap

The relative returns heatmap compares each decile of the FRED dataset (on the X axis) to S&P 500 forward returns over multiple timeframes (on the Y axis). The current decile is highlighted by the thick vertical line within the heatmap grid. Red zones mark periods when particular dataset values have corresponded to negative relative subsequent S&P 500 returns. In contrast, green zones highlight historical periods linked to positive relative subsequent S&P 500 returns. Subsequent Relative returns are defined as returns implied by anytime S&P 500 returns subtracted from returns implied by the dataset decile.

 

The chart below illustrates that the first decile exhibits the weakest relative returns. This trend is noticeable from around 250 days forward up to 700 days forward. The chart analyzes S&P 500 forward returns based on their relative mean. For instance, on day 700, the S&P 500 averages a return of approximately 30%. In decile one, however, the relative mean return is around -30%, effectively close to 0%.

This section presents a series of charts offering insights into the current position of the US economy within the macroeconomic cycle, along with details about potential recession durations and equity drawdown depths.j

VIX-Yield Curve Cycle

 

This chart, first devised by the CME Group, provides a more comprehensive view of the relationship between the yield curve, equities volatility, and the economic cycle, which is split into the following four phases which each relate to specific quadrants in the visualization:

Bottom-Right Quadrant: Recession

During this phase, the yield curve begins to steepen, and average equity volatility remains high.

Top-Right Quadrant: Early Stage Recovery

The yield curve maintains a steep profile, while average equity volatility starts to decline.

Top-Left Quadrant: Mid-stage Expansion

In this phase, the yield curve flattens out, and average equity volatility remains low.

Bottom Left Quadrant: Late-stage Expansion

The yield curve continues to flatten, and average equity volatility increases further.

Recession Duration Chart

This chart illustrates the connection between the duration of an inversion in the 10-year Treasury yield and the Federal Funds Rate, and the length of the ensuing recession. Generally, the longer the inversion persists, the longer the recession is likely to endure.

Recession Drawdown Chart

This chart demonstrates the correlation between the duration of a recession and the decline in the S&P 500 index. Typically, the longer a recession persists, the greater the decline in the S&P 500 can be anticipated.