(Reuters) - U.S. economic data remains strong but a range of financial indicators point to a sharp slowdown over the next year that would dampen oil consumption and lead to lower prices.. .The apparent contradiction between the real economy and financial markets has puzzled some commentators but is normal around a peak in the business cycle.. .Economic data reflect current conditions while financial prices reflect how traders expect the economy to evolve in future.. .By definition, every downturn starts from a peak in the business cycle when activity is strong. The rapid shift from strong and rising economic activity into a contraction is what makes turning points hard to predict.
U.S. equity indices have already slumped as investors anticipate a downturn hitting demand and discount future earnings more heavily.. .After adjusting for inflation, the broad U.S. S&P 500 equity index is down by around 13-14% compared with the same period last year.. .Individual equities closely linked with the cycle, including Caterpillar, the heavy equipment maker, and 3M Corporation, the diversified manufacturer, have fallen sharply, consistent with a significant economic slowdown.
But a broad range of financial indicators from fixed income, equity and commodity markets, as well as individual share prices for bellwether companies, all point to a significant slowdown in the cycle in the next six months. EXPECTED SLOWDOWN. .Futures prices imply the U.S. central bank is expected to raise interest rates over the next six months to 4.25-4.50% before April 2023 from 2.25-2.50% at present, shocking borrowers and the economy.. .The U.S. Treasury yield curve between securities maturing in two and ten years’ time is more inverted than at any time since August 2000 when the dotcom bubble was starting to burst.. .Financial conditions are tightening at some of the fastest rates for more than a decade, based on the Chicago Fed’s Financial Conditions Index, which is based on measures of risk, credit and leverage.
PEAKING ACTIVITY?. .Global trade volumes and industrial output remained at or very close to record levels in June, according to the Netherlands Bureau for Economic Policy Analysis (“World trade monitor”, CPB, Aug. 25).. .U.S. freight volumes were at record levels in June and manufacturing output was close to its highest levels since before the financial crisis, based on data from the U.S. Bureau of Transportation Statistics and the Federal Reserve.. .Manufacturing activity continued to increase through August, albeit more slowly than before, according to surveys conducted by the Institute for Supply Management.. .The ISM composite purchasing managers’ index remained at 52.8 in July and August, slightly above the 50-point threshold that divides expanding activity from a contraction, and in the 50th percentile for all months since 1980.