Summary: US leading index increases for second consecutive month; increase less than expected; economic outlook still weak; in recession in “near term.”
The Conference Board Leading Economic Index (LEI) is a composite index composed of ten sub-indices which are thought to be sensitive to changes in the US economy. The Conference Board describes it as an index which attempts to signal growth peaks and troughs; turning points in the index have historically occurred prior to changes in aggregate economic activity. Readings from March and April signalled “a deep US recession” but more recent figures indicate the worst has probably passed.
The latest reading of the LEI indicates it rose by 2.0% in June. The result was less than the 2.4% increase which had been generally expected and less than May’s figure of 3.2% after it was revised up from 2.8%. On an annual basis, the LEI growth rate increased from May’s revised figure of -10.7% to -8.9%.
“The June increase in the LEI reflects improvements brought about by the incremental reopening of the economy, with labour market conditions and stock prices in particular contributing positively,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board.
Changes over time can be large but once they are standardised, a clearer relationship with GDP emerges. The latest reading implies a year-on-year growth rate of around -1.5% in the December quarter.
US Treasury bond yields at the long end finished lower, especially at the ultra-long end. By the end of the day, 2-year and 10-year bond yields had each shed 2bps to 0.14% and 0.58% respectively while the 30-year yield finished 7bps lower at 1.23%.
In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months retained a slight easing bias. OIS contracts for July implied an effective federal funds rate of 0.082%, about 1bp below the current spot rate.