Philly ADS Business Conditions Index explains some of the big bond move

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The Philadelphia Fed produces a real time business condition forecast, called the ADS index. The index provides good quick insights on the US economy and it matches well with the behavior of the bond yields. It can explain some of the bond reversal in September, but is showing a current mixed signal.

The Aruoba-Diebold-Scotti (ADS) business conditions index is designed to track real business conditions at high frequency. Its underlying (seasonally adjusted) economic indicators (weekly initial jobless claims; monthly payroll employment, industrial production, personal income less transfer payments, manufacturing and trade sales; and quarterly real GDP) blend high- and low-frequency information and stock and flow data. As an index measure, it blends macro data into a single business conditions indicator.

By itself, the ADS index is somewhat noisy, but the combination of a negative declining value suggests that bond yields are headed lower. Business conditions were much worse in 2015 relative to 2019, but the combination of a weak business conditions and the Fed lowering rates was a perfect bond buying opportunity earlier this year. While conditions are not currently positive, the improvement since spring suggest yields may in the near-term remain stable.