Macro-Markets Risk Index: 8.7% | 10.8.2013

What’s the economic fallout from the ongoing budget battle in Washington? It’s hard to say at this point, although there are signs that the macro trend is wilting, according to a markets-based profile of US economic conditions. The Macro-Markets Risk Index (MMRI) closed at 8.7% yesterday, October 7. Although that’s still at a level that suggests that business cycle risk remains low, the declining trend is worrisome in the current climate. At yesterday’s close, MMRI is near the lowest level of the year. If the impasse in Congress rolls on, which may deteriorate into a Treasury default as well, it’s likely that we’ll see MMRI slip further. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply a bias for economic growth.

MMRI represents a subset of the Economic Trend & Momentum indices, a pair benchmarks that track the economy’s broad trend for signs of major turning points in the business cycle via a diversified set of indicators. Analyzing the market-price components separately offers a real-time approximation of macro conditions, according to the “wisdom of the crowd.” By contrast, conventional economic reports are published with a time lag. MMRI is intended for use as a supplement for developing perspective on the current month’s economic profile until a complete data set is published.
MMRI measures the daily median change of four indicators based on the following calculations:
• US stocks (S&P 500), 250-trading day % change, plotted daily
• Credit spread (BofA ML US High Yield Master II Option-Adjusted Spread), inverted 250-trading day % change, plotted daily
• Treasury yield curve (10-yr Treasury yield less 3-month T-bill yield), no transformation, plotted daily
• Oil prices (iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)), inverted 250-trading day % change, plotted daily
Here’s how MMRI compares on a daily basis since August 2007:

Here’s a closer review of how MMRI stacks up so far this year: