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By New_Deal_democrat April 26, 2017 9:17 am
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Money and financial long leading indicators update

The basic financial indicators of money, credit, and interest rates tend to be the longest leading indicators, as they set the basic backdrop for business and consumer borrowing in order to spend.

Think of money supply as the production of money, interest rates as its price, and credit conditions as its throttle.  Most crucially it affects mortgage and business lending, so it has its biggest effect several years later.

We've had something of a whipsaw here. Almost a year ago, we had record low treasury rates and close to new lows in mortgage rates (thank you, Brexit!).  Then we had a 1%+ surge almost immediately after the election of Trump to the Presidency. In the past month, with the apparent inability of Trump and the GOP to actually enact their agenda (for now, anyway) and a little soft data, interest rates declined again:

When we plot the YoY change in interest rates against the YoY change in building permits, we can see the increase post-Brexit that is probably at or near its peak now.

I expect the YoY comparisons to decline for awhile now, as the surge in interest rates after November becomes more felt. And yes, after that if the recent decline in interest rates last, there should be a relative pick-up in housing again.

Turning next to the yield curve, while it has been a reliable indicator for recessions and expansions since the 1950s, in the 1930s and 1940s there was never an inversion - even before the 1938, 1945, 1948, and 1950 recessions:

Since I am concerned that the yield curve may not invert in deflationary times, I've posted a willingness to discount a normally shaped curve if it is tight enough -- with less than a 0.5% spread between the 2 year and 5 year, 5 year and 10 year, and 10 year and 30 year treasuries.  At the moment, only the 5 to 10 year spread is less than 0.5%:

Turning to money supply, both real M1 and M2 have been decelerating of late:

But neither are at the point where they have in the past suggested that a recession may be in the offing soon.

Finally, I have discovered that the weekly Chicago Fed's Financial Conditions Index (blue) is a good and more timely proxy for the Senior Loan Officer's Survey (quarterly, red). The weekly Adjusted Financial Conditions Index (green), while more volatile, tends to lead that:

The most recent Senior Loan Officers Survey, from Q4 2016, was basically neutral. The NFCI and ANFCI have improved since then, suggested a slight loosening in credit provision.

I see signs of deceleration in all of these metrics, and I think that deceleration is real, as in, we are on the way to the signs turning negative at some point in the not-to-distant future.  But we're not there yet.

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