Is the LEI Index Calling a Recession?

  • Investors are getting better yields again this morning in light trading given that much of Asia is closed this week for Lunar New Year celebrations. As earnings season rolls on here a modest risk-on tone continues and that’s weighing a bit on Treasury prices as well. The 10yr currently yields 3.54% which is nice move from the 3.32% low from last Thursday. Meanwhile, the 2yr yields 4.22% compared to a low last week of 4.03%.


  • With the Fed having gone into radio silence until next week’s FOMC meeting, investors will have to be content with a light menu of economic releases. The Leading Index for December will be released later this morning and is expected to print a -0.7 vs. -1.0 the prior month. The index has had a pretty good track record of calling recessions when it goes negative on a YoY basis (see graph below), so watch for that print at 10am ET.


  • Another economic release that will get some attention will be Thursday’s first look at fourth quarter GDP. Expectations are for 2.7% annualized growth after the third quarter’s 3.2%. The Atlanta Fed’s GDPNow is calling for a better quarter at 3.5%.


  • The other big release will be Friday’s personal income and spending numbers including the PCE inflation series. Expectations on inflation are for continued improvement with the overall unchanged for the month of December which will drop the YoY to 5.0% from 5.5%. The core PCE is expected to increase 0.3% vs. 0.2% in November with the YoY decreasing to 4.4% from 4.7%.


  • Some of the bigger monthly gains in this inflation series from last year are behind us for awhile so the improvement in YoY prints will be tougher to come by for the next several months, which will give the Fed some ammunition in defending their higher-for-longer refrain.


  • While it looks like the Fed will throttle rate hikes down to the 25bps pace for the next couple meetings, the question will be is it two or three (or more) of these 25bps moves? That answer won’t come next week but some additional insight into the Fed’s terminal rate will probably be learned at the post-meeting press conference.  There’s still a big disagreement between the Fed’s rate outlook and the market so expect Powell to address that at the press conference. To date, these jawboning sessions haven’t swayed the market, and some Fed officials have recently begun to recognize the improvement in inflation and wages. We think Powell may mention that improvement too but still stick to a fairly hawkish ”a lot more work to do” refrain that we’ve heard from him repeatedly in recent months.

LEI Index and Recessions



Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 4.99 4.70 4.65 4.65 4.82 5.28
0.50 4.98 4.67 4.59 4.54 4.68 5.17
1.00 4.97 4.64 4.56 4.49 4.59 5.04
2.00 4.63 4.50 4.42 4.47 NA
3.00 4.37 4.41 NA
4.00 4.36 NA
5.00 4.33 NA
10.00 NA

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Published: 01/23/23 Author: Thomas R. Fitzgerald