US economic output in January posted a modestly stronger trend vs. the previous month, according to this morning’s update of the Chicago Fed National Activity Index. This macro benchmark’s three-month average (CFNAI-MA3) rose to -0.15 last month, matching The Capital Spectator’s projection that was posted on Friday.
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Stock markets around the world bounced last week, based on a set of proxy ETFs representing the major asset classes. Breaking with the recent bias for selling risk, global equities (along with REITs and US high-yield bonds) posted solid gains for the shortened four-day trading week in the US through Feb. 19.
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● Core US Consumer Prices Rise by Most in Over 4 Years | Bloomberg
● PMI: Eurozone Feb growth lowest in over a year | Markit
● PMI: Slowdown in German mfg contrasts with solid services growth in Feb | Markit
● PMI: Slow but stable mfg conditions in Japan in Feb | Markit
● Eurozone consumer confidence falls sharply in Feb | EC
● We Can’t Get the Recovery We Threw Away in 2009 | Brad DeLong

● Adaptive Asset Allocation:
Dynamic Global Portfolios to Profit in Good Times–and Bad
By Adam Butler, et al.
Summary via publisher (Wiley)
Adaptive Asset Allocation is a no-nonsense how-to guide for dynamic portfolio management. Written by the team behind Gestaltu.com, this book walks you through a uniquely objective and unbiased investment philosophy and provides clear guidelines for execution. From foundational concepts and timing to forecasting and portfolio optimization, this book shares insightful perspective on portfolio adaptation that can improve any investment strategy. Accessible explanations of both classical and contemporary research support the methodologies presented, bolstered by the authors’ own capstone case study showing the direct impact of this approach on the individual investor.
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The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to reflect a modest increase in the January update that’s scheduled for Monday (Feb. 22), based on The Capital Spectator’s average point forecast for several econometric estimates. The projection for -0.15 reflects a slight improvement over the previous month, which indicates US economic activity running moderately below the historical trend rate of growth. Only values below -0.70 signal an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Using today’s average estimate for January as a guide, CFNAI’s three-month average is expected to reflect an expansion that’s moderately below the historical trend but well above the tipping point that marks the start of a new US recession.
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Analyzing history as a guide to the future is riddled with caveats, but if you’re mindful of the limitations there’s a mother lode of perspective waiting to be mined in the cause of modeling relationships in macro and markets. One of the more useful techniques in this corner: impulse-response (IR) simulations by way of vector autoregression (VAR) modeling. As econometric applications go, this is a powerful tool for developing perspective on a recurring question in all things economic and financial: What could happen to y if x changes by z percent?
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● US jobless claims fall to lowest level since Nov | Bloomberg
● Philly Fed index: mfg in Feb contracts for 6th straight month | MarketWatch
● Conference Board’s US Leading Economic Index Dips in Jan | RTT
● Americans’ Expectations for Economy Decline to 3-Month Low | Bloomberg
● Oregon Lawmakers Approve Landmark Minimum Wage Increase | AP
● The bull market in voodoo economic projections | Krugman/NY Times

Today’s upbeat numbers on jobless claims raise fresh doubts about the implied warnings of a US recession via a markets-based view of the macro trend. New filings for unemployment benefits fell more than expected last week, dropping to 262,000—close to the multi-decade low of 255,000 that was reached last July. There’s still plenty of wobbly numbers around to keep everyone guessing. But until further notice, jobless claims no longer deserve a spot on the short list of key indicators worry about.
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US macro risk has eased in recent days, thanks to a mix of upbeat economic reports and a rebound in financial markets. The potential for trouble is still elevated relative to the outlook during last year’s fourth quarter. But for the moment, the numbers generally look a bit less threatening compared with the steady drumbeat of warnings in previous weeks.
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● Strong US industrial output in Jan bolsters growth picture | Reuters
● US Housing Starts Unexpectedly Tumble 3.8% In January | RTT
● Atlanta Fed’s US Q1 GDP estimate ticks lower to +2.6% | Atlanta Fed
● Atlanta Fed’s Bus. Inflation Expectations in Feb unchanged at +1.8% | Atlanta Fed
● OECD Cuts Global Growth Forecast, Warns of Growing Risks | Bloomberg
● Japan exports fall most since 2009 as global slowdown bites | Reuters
● China Jan inflation data shows deflationary pressure persists | Reuters