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Breakeven Inflation Forecast Accuracy

I received a comment from a reader of my blog (“Lawrence”) that pointed out an article by Jonathan D. Church of the Bureau of Labor Statistics that discussed breakeven inflation implied forecast accuracy (link). The idea is that we want to compare infl…



I received a comment from a reader of my blog (“Lawrence”) that pointed out an article by Jonathan D. Church of the Bureau of Labor Statistics that discussed breakeven inflation implied forecast accuracy (link). The idea is that we want to compare inflation breakeven rates to what inflation is realised over the life of the bond (what the breakeven inflation rate is the expected value of).

I discussed this topic in greater length in Section 3.5 of my book Breakeven Inflation Analysis. The conclusion was not entirely satisfactory: we do not have enough data to do a proper historical analysis of breakeven inflation accuracy. The exception might be the United Kingdom, which started issuing inflation-linked bonds in the early 1980s. However, the bizarre structure of (old) U.K. linkers meant that it would take a lot of work to examine the returns for historical bonds. The Bank of England does publish historical real/nominal/inflation yield curves, but I would be a lot happier if I could compare “physical” bond yields to the fitted curve.

The U.S. TIPS market is shorter-lived, and for those of us using Fed data, the time series start in 2003. Other markets are not that much more helpful. Canada started issuing linkers in the early 1990s, but they were at the 30-year tenor. This means that only one bond matured (the 2021). This means that N=1 for the analysis that we want to do.

Money Market Maturities a Problem

The Church paper used Treasury data, which included a 6-month tenor. The forecast quality was bad using that data — but I would be greatly concerned about the data. The problem is straightforward: there are no money market maturity TIPS issued. The only way to get a 6-month breakeven is to look at heavily off-the-run notes/bonds.

Furthermore, any curve fitting algorithm tends to blow up at the ends of the maturity spectrum of the fitted bonds. We can hide this for conventional bonds by slamming in money market instruments to lock down the fit line at sensible levels. We cannot do this for linkers.

The key thing to keep in mind that the quoted yield (“real yield”) is a residual: it is the “difference” (approximately) of the well-defined nominal curve, and the breakeven inflation curve. Although this shocks some people, there is no firm relationship between spot inflation and short-dated nominal rates. This means that real rates can spin off to “extreme” values at the short end. So fitting a real yield curve is a garbage generation exercise.

If we fit inflation expectations, we run into the problem that we typically work with annualised inflation rates of non-seasonally adjusted headline inflation

The figure above shows the problem. Economists and financial commentators generally work with seasonally adjusted data for a reason. The above shows the annualised 3-month rate of change of headline NSA CPI (which is what TIPS are indexed to). Even during the period of inflation stability of the mid-2010, the 3-month rate of change routinely ran between negative values and 5%. The 6-month rate of change is more subdued, but if you are fitting a “6-month breakeven inflation” and the closest bond maturity is 3-months, this is what the point you are fitting looks like (assuming perfect forecasts).

We then need to be very careful about the calculation. We need to figure out the exact daily interpolated CPI series that are used in indexation calculations. The calculation uses a 3-month lag to allow for index publication delays. (This lag means that for very short breakevens, there can be a considerable amount of known information for the final fixing.)

The upshot is that unless I did the calculations myself, I would be extremely cautious about anything referring to the accuracy of money market breakeven accuracy.

What About Longer Maturities?

If we look at longer tenors, the Fed H.15 fitted curves are perfectly adequate for econometric analysis (although relative value trading probably needs granular bond level data as well). The seasonality effects are attenuated over a multi-year annualisation, and the fitted tenor is closer to more liquid bonds.

For the 5-year, the Fed H.15 data looks is as shown below.

The black line is the annualised CPI inflation over a 5-year horizon that was realised after a given calendar date; by necessity, it ends in December 2016. The red line is the 5-year breakeven inflation from the Fed H.15, which starts in 2003. If the red line on a date is below the black line, it meant that breakeven inflation rate was too low, and so TIPS outperformed conventional Treasuries.

The chart above shows the gap (on a monthly frequency basis). Please note that I made no attempt to take into account the publication lag. We can divide the experience into a few “eras.”
  • Until mid-2004, the breakeven inflation rate was way too low. In the early years of the TIPS market (as well as the Canadian linker market), breakeven inflation rates were stupidly low. Basically, whenever portfolio managers looked at those breakevens in later years, they winced. (One of my few early institutional research pieces that caught attention was one noting the mispricing.)
  • For the mid-2000s and mis-2010s, the breakeven was “slightly” too high. This could either be chalked up to an inflation risk premium, or the market was surprised by inflation being persistently below where the Fed wanted it (which was a consensus view).
  • The breakevens were fairly horrible around the Financial Crisis. Going into the crisis, there was an oil price spike that had a large effect on headline inflation. Once the crisis hit, breakevens were well below any reasonable estimate of future inflation. The reason is straightforward: being long breakevens was a consensus balance sheet intensive trade, and those longs were mercilessly liquidated when financing dried up. For anyone with liquidity, it was easy to find bargains elsewhere, and so there was no move to “bail out” the trapped longs.
  • At the end of the forecast horizon, 5-year forecasts were blindsided by the pandemic inflation surge.

What Can We Say?

I would argue that there are only a couple of conclusions we can draw from this data set — and frankly, both are obvious.

  1. The breakeven inflation is driven by market participants, and at best, they are forecasters, not clairvoyants. They were unable to forecast the oil price spike in 2008, nor the pandemic inflation. Unless one fell for the “wisdom of crowds” nonsense, that is hardly a surprise. The real question is whether breakevens are better than other forecasts.

  2. Market conditions can “blow up” the breakevens versus forecasts. One could be an academic and drone on about risk premia, but we should not forget that even the Treasury market can be affected by financing concerns. The question that matters is how much this shows up in “normal” times?

The other concern is the lack of data. We do not have enough independent data points to get too fancy. The principle is very simple: an “unexpected” inflation spike in 2021 will blow up 5-year forecasts in 2020, 2019, …, 2016. No matter how many trading days are in those years, the realised inflation we are comparing to are being blown up by the same “event.” Although I have seen academic econometricians come up with theories that suggest that they can work around this problem, there is no information free lunch. You really need a lot of non-overlapping data intervals to have any confidence. The problem that you then run into is that structural changes will probably hit the market before you get through a couple of those intervals.

In summary, any analysis of this sort needs to be taken with a large heaping pile of salt. You need to look at plots of time series, and then line up behaviour with what you know about market history.

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(c) Brian Romanchuk 2022

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5 Top Consumer Stocks To Watch Right Now

Are these consumer stocks a buy amid the earnings season?
The post 5 Top Consumer Stocks To Watch Right Now appeared first on Stock Market News, Quotes,…



5 Trending Consumer Stocks To Watch In The Stock Market Now         

As we tread through the earnings season, consumer stocks could be worth watching in the stock market this week. This would be the case since a number of big consumer names such as Costco (NASDAQ: COST) and Macy’s (NYSE: M) will be posting their financials for the quarter. As such, investors will be keeping an eye on these reports for clues on the strength of consumer spending amid this period of high inflation.

However, despite the soaring prices across the economy, it seems that consumers are surprisingly showing resilience. According to the Commerce Department, retail sales in April outpaced inflation for a fourth straight month. This could suggest that consumers as a whole were not only sustaining their spending, but spending more even after adjusting for inflation. Ultimately, it could be a reassuring sign that consumers are still supporting the economy and helping to diminish the narrative of an incoming recession. With that being said, here are five consumer stocks to check out in the stock market today.

Consumer Stocks To Buy [Or Sell] Right Now


retail stocks (JWN stock)

Starting off our list of consumer stocks today is Nordstrom. For the most part, it is a fashion retailer of full-line luxury apparel, footwear, accessories, and cosmetics among others. The company operates through multiple retail channels, boutiques, and online as well. As it stands, Nordstrom operates around 100 stores in 32 states in the U.S. and three Canadian provinces.

Yesterday, the company reported its financials for the first quarter of 2022. Starting with revenue, Nordstrom pulled in net sales worth $3.47 million for the quarter. This marks an increase of 18.7% from the same quarter last year. Its Nordstrom banner saw net sales rise by 23.5% year-over-year, exceeding pre-pandemic levels. Next to that, its Nordstrom Rack banner saw a 10.3% increase in net sales from last year. Besides, net earnings were $20 million, with earnings per share of $0.13 for the quarter. Considering Nordstrom’s solid quarter, should you invest in JWN stock?

[Read More] Best Stocks To Invest In Right Now? 5 Value Stocks To Watch This Week

The Wendy’s Company

best consumer stocks (WEN stock)

Next up, we have The Wendy’s Company. For the most part, it is the holding company for the major fast-food chain, Wendy’s. Being one of the world’s largest hamburger fast-food chains, the company boasts over 6,500 restaurants in the U.S. and 29 other countries. The chain is known for its square hamburgers, sea salt fries, and the Frosty, a form of soft-serve ice cream mixed with starches. WEN stock is rising by over 8% on today’s opening bell.

According to an SEC filing, Wendy’s largest shareholder, Trian Partners, is looking into making a potential deal with the company. Trian said that it is considering a deal to “enhance shareholder value.” Also, the firm adds that this could lead to an acquisition or business combination. In response, Wendy’s stated that it is constantly reviewing strategic priorities and opportunities. It added that the company’s board will carefully review any proposal from Trian. Given this piece of news, will you be watching WEN stock?

[Read More] 4 Semiconductor Stocks To Watch In The Stock Market Today

Foot Locker

FL stock

Another stock investors could be watching is the shoes and apparel company, Foot Locker. In brief, the company uses its omnichannel capabilities to bridge the digital world and physical stores. As such, it provides buy online and pickup-in-store services, order-in-store, as well as the growing trend of e-commerce. Some of its most notable brands include Eastbay, Footaction, Foot Locker, Champs Sports, and Sidestep. Last week, the company reported its results for the first quarter of the year.

For starters, total sales came in at $2.175 billion, a slight uptick compared to sales of $2.153 billion in the year prior. Next to that, Foot Locker reported a net income of $133 million. Accordingly, adjusted earnings per share came in at $1.60, beating Wall Street’s expectations of $1.54. CEO Richard Johnson added, “Our progress in broadening and enriching our assortment continues to meet our customers’ demand for choice. These efforts helped drive our strong results in the first quarter, which will allow us to more fully participate in the robust growth of our category going forward.”  As such, is FL stock one to add to your watchlist? 

Tyson Foods 

TSN stock

Tyson Foods is a company that built its name on providing families with wholesome and great-tasting protein products. Its segments include Beef, Pork, Chicken, and Prepared Foods. With some of the fastest-growing portfolio of protein-centric brands, it should not be surprising that TSN stock often comes to mind when investors are looking for the best consumer stocks to buy. 

Earlier this month, Tyson Foods provided its fiscal second-quarter financial update. The company’s total sales for the quarter were $13.1 billion, representing an increase of 15.9% compared to the prior year’s quarter. Meanwhile, its GAAP earnings per share climbed to $2.28, up 75% year-over-year. According to Tyson, these financial figures are a reflection of the increasing consumer demand for its brands and products. To top it off, the company was also able to reduce its total debt by approximately $1 billion. Thus, does TSN stock have a spot on your watchlist?

[Read More] Stock Market Today: Dow Jones, S&P 500 Rise, Wendy’s Stock Gains On Potential Deal


food delivery stocks (DASH Stock)

DoorDash is a consumer company that operates an online food ordering and delivery platform. In fact, it is one of the largest delivery companies in the U.S. and enjoys a huge market share. The company connects hundreds of thousands of merchants to over 25 million consumers in the U.S., Canada, Australia, and Japan through its local logistics platform. Accordingly, its platform allows local businesses to thrive in today’s “convenience economy,” as the company puts it.

On May 5, the company reported its first-quarter financials for 2022. Diving in, it posted a revenue of $1.5 billion, growing by 35% year-over-year. This was driven by total orders that grew by 23% year-over-year to $404 million. Along with that, it reported a GAAP gross profit of $662 million, an increase of 34% year-over-year. The company said that it added more consumers than any quarter since Q1 2021, due in part to the growth of its DashPass members. The growth in Monthly Active Users and average order frequency has helped it gain share in the U.S. Food Delivery category this quarter as well. Given DoorDash’s performance for the quarter, should you watch DASH stock?

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The post 5 Top Consumer Stocks To Watch Right Now appeared first on Stock Market News, Quotes, Charts and Financial Information |

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Philly Fed: State Coincident Indexes Increased in 50 States in April

From the Philly Fed: The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2022. Over the past three months, the indexes increased in all 50 states, for a three-month diffusion index of 100. Additiona…



From the Philly Fed:
The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2022. Over the past three months, the indexes increased in all 50 states, for a three-month diffusion index of 100. Additionally, in the past month, the indexes increased in all 50 states, for a one-month diffusion index of 100. For comparison purposes, the Philadelphia Fed has also developed a similar coincident index for the entire United States. The Philadelphia Fed’s U.S. index increased 1.1 percent over the past three months and 0.3 percent in April.
emphasis added
Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed:
The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.
Click on map for larger image.

Here is a map of the three-month change in the Philly Fed state coincident indicators. This map was all red during the worst of the Pandemic and also at the worst of the Great Recession.

The map is all positive on a three-month basis.

Source: Philly Fed.

Philly Fed Number of States with Increasing ActivityAnd here is a graph is of the number of states with one month increasing activity according to the Philly Fed. 

This graph includes states with minor increases (the Philly Fed lists as unchanged).

In April all 50 states had increasing activity including minor increases.

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Finding Shelter in an Inverse ETF

As the old saying goes, “What goes up must come down.” Indeed, up until the recent selling wave caused by Russia’s war against Ukraine and the continued…



As the old saying goes, “What goes up must come down.”

Indeed, up until the recent selling wave caused by Russia’s war against Ukraine and the continued effects of supply chain disruptions amid the COVID-19 pandemic, tech stocks, including semiconductors, were the darlings of the investment world. That is, it seemed as if the sky-high valuations of some tech stocks were sustainable in an atmosphere of seemingly perpetual growth.

That, of course, was not the case, and the too-good-to-be-true valuations were quickly brought down to earth by the forces of inflation and tight monetary policy. As a result, the tech-heavy Nasdaq entered a free-fall that has not yet found a bottom.

At the same time, that does not mean that we should abandon the sector as a lost cause. One such way to play the sector during its downhill slide is the exchange-traded fund (ETF) Direxion Daily Semiconductor Bear 3X Shares (NYSEARCA: SOXS).

As its title suggests, this is an inverse ETF, meaning that it is built to go up in value when its parent index goes down. Specifically, SOXS provides three times leveraged inverse exposure to a modified market-cap-weighted index of semiconductor companies that trade in American markets by using swap agreements, futures contracts and short positions.

While the index’s holdings are weighted by market capitalization, the fund’s managers cap the weights of the top five securities in the portfolio at 8% each. The weight of the remaining securities is capped at 4% each.

As of May 24, SOXS has been up 0.37% over the past month and up 24.73% for the past three months. It is currently up 60.47% year to date.

Chart courtesy of

The fund has amassed $258.15 million in assets under management and has an expense ratio of 1.01%.

In short, while SOXS does provide an investor with a way to invest in an inverse ETF, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors always should conduct their due diligence and decide whether the fund is suitable for their investing goals.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

The post Finding Shelter in an Inverse ETF appeared first on Stock Investor.

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