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By New_Deal_democrat July 2, 2016 9:10 am
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Weekly Indicators: changes afoot edition

Monthly June data started out with a very solid ISM manufacturing report, but weak motor vehicle sales.

My usual note: I look at the high frequency weekly indicators because while they can be very noisy, they provide a good Now-cast of the economy, and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available.  They are also an excellent way to "mark your beliefs to market."

 

In general I go in order of long leading indicators, then short leading indicators, then coincident indicators.

 

Interest rates and credit spreads

  • 4.40% BAA corporate bonds down -.15% (down -1.09% since Jan 1)
  • 1.50% 10 year treasury bonds down -.19%
  • 2.90% credit spread between corporates and treasuries up +.04%
Yield curve, 10 year minus 2 year:
  • 0.86%, down -.06% w/w
30 year conventional mortgage rate:
  • 3.40%, down -.09% w/w (new 1 year low)

Despite coming very close on Friday, with the exception of BAA corporate bonds yields, which made a new 50+ year low in January 2015, yields for corporate bonds, treasuries, and mortgages have all failed to make new lows in 3 years, thus turning yellow (caution or neutral vs. positive) as a recession indicator -- although treasuries and mortgage rates both came very close to new all-time lows in February and again this past week, and remain low enough to be short-term positives.  Spreads have improved enough this year to go from negative to neutral. Yields have tightened enough to go from strongly positive to normally positive.

 

Housing

 

Mortgage applications

 

  • purchase applications down -3% w/w
  • purchase applications up +13% YoY
  • refinance applications down -2% w/w
 
Real Estate loans
  • Up +0.4 w/w
  • +6.9% YoY 

Mortgage applications had been awful for several years, before turning up early last year in response to very low rates. Purchase applications are very positive near 5 year highs, while refinancing has been moving more sideways with a slight positive trend in the last few months.

Real estate loans have been firmly positive for nearly 3 years.

 

Money supply

M1

  • +0.6% w/w 
  • -0.2% m/m 
  • +6.9% YoY Real M1
M2
  • +0.1% w/w  
  • +0.5% m/m 
  • +5.9% YoY Real M2

Real M1 decelerated markedly in January to the point where it was a very weak positive, and has fluctuated since then.   Real M2 also decelerated, but has been more firmly positive.  Both have been very positive for the last two months.

 

Trade weighted US$

  • Down -.25 to 120.89 w/w, up +5.5% YoY (one week ago) (Broad)
  • Down -0.36 to 94.21 w/w, down -2.0% YoY (yesterday) (major currencies)

 

The US$ appreciated about 20% from July 2014 through spring 2015, and has gone more or less sideways with a slight positive trend since then.  l consider a YoY change of 5% or higher a negative. Against major currencies, the US$ returned to being positive. The broad measure has returned to being negative for 7 of the last 8 weeks.

 

Commodity prices

JoC ECRI

  • Up +0.91 to 92.85 w/w
  • Down -7.33 YoY
BBG Industrial metals ETF
  • 99.82 up +5.11 w/w 
Commodity prices as measured by industrial metals appear to have bottomed in November. ECRI and oil subsequently turned up as well. Both are at 6 month highs and have come back well over 50% from their most negative readings last autumn. This is enough to turn them all the way back to positive.

 

Stock prices S&P 500

 

  • Up +3.2% w/w 
  • Down -1.4% from high over 1 year ago 
Stock prices made new 6 month lows in February, but also made a number of 6 month highs since April. For forecasting purposes, I am scoring this as a neutral.
 

Regional Fed New Orders Indexes

(*indicates report this week)

  • Empire State up +16.4 to +10.9
  • Philly down -1 to -2.9
  • *Richmond down -14 to -14
  • *Kansas City up +7 to +4
  • Dallas down -20.9 to -14.9
  • Month over month rolling average: -2 to -4
I inaugurated coverage of these indexes as an experiment to see if they helped forecast the ISM new orders index, which is an excellent short leading indicator for sales and industrial production roughly by 6 months.   In May there was a serious divergence between the two. In the regional indexes, the positive bounce in March and April has been taken back, but the average is less negative than in the previous year.  This week's regional reports were poor.

 

Employment metrics

 Initial jobless claims

  • 268,000 up +9,000
  • 4 week average 266,750 down -250

 

Initial claims remain well within the range of a normal economic expansion, as does the 4 week average. After weakening in January, they have since recovered.

 

The American Staffing Association Index

 

  • Unchanged at 94 w/w
  • Up +0.38 YoY

This index turned negative in May 2015, getting as bad as -4.30% late last autumn.  Since the beginning of the year it has been progressively "less bad" and for 3 of the last 4 weeks ago has turned positive.

 

Tax Withholding

  • $180.6 B for the month of June vs. $180.0 B one year ago, up +$0.6 B or +0.3%
  • $152.2 B for the last 20 reporting days ending Thursday vs. $166.4 B one year ago, down -$14.3 B or -8.5% 

Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, while still positive, since August 2015. In February I said I would need this series on the 20 day basis to decline to less than +2% YoY for me to think it has reached a turning point, and it did so for 3 weeks in a row, briefly becoming a major red flag.  April collections ran positive, and May strongly so. June, however, was poor.

 

Oil prices and usage

  • Oil up +$1.70 to  $49.24 w/w
  • Gas prices down -$.02  to $2.33 w/w 
  • Usage 4 week average up +1.8% YoY

 

The price of gas bottomed this winter at $1.69.  Usage turned briefly negative at the beginning of the year, but has been positive ever since.  Gas prices may have made their summer high two weeks ago.

 

Bank lending rates

 

Both TED and LIBOR were already rising since the beginning of last year to the point where both have usually been negatives, although there were some wild fluctuations.  Both TED and LIBOR were at or near 5 year highs in the past several months, but both have improved in the last several months, although in the last 5 weeks the TED spread rose back close to that high. Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions, so although it is a negative, it is not a strong one.

 

Consumer spending

 

Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat since the beginning of last November.  Both Goldman Sachs and JR were positive this week, one strongly, one very weakly.  Gallup has been positive almost every week so far this year, and strongly so for 2 weeks before turning negative for the last two weeks.  As a result I am scoring consumer spending as mixed.

 

Transport

Railroad transport 

  • Carloads down -5.2% YoY
  • loads ex-coal down -1.3% YoY
  • Intermodal units down -2.7% YoY
  • Total loads down -3.9% YoY

Shipping transport

Rail traffic turned negative and then progressively worse in pulses throughout 2015. Rail loads became "less worse" in January and showed continued improvement until going over the proverbial cliff in March. They have been trending incrementally less awful for the last month, and this week improved enough to score a neutral - but I suspect this is due to the change of week for the July 4 holiday, so it may not last.

After rising briskly last spring, both the BDI and Harpex recently declined again to new multi-year lows. BDI has improved enough since then to score a neutral, while Harpex has recently resumed a slight decline. I am wary of reading too much into price indexes like this, since they are heavily influenced by supply (as in, a huge overbuilding of ships in the last decade) as well as demand.

Steel production 

 

  • Up +0.4% w/w
  • Down -0.2% YoY

 

Until spring 2014, steel production had generally been in a decelerating uptrend.  It then gradually rolled over and got progressively worse in pulses through the end of 2015. This year it started out as "less worse" and turned positive several months ago, but for the last two weeks has turned negative again.

 
 

SUMMARY: 

This week saw some significant changes in the pattern.

 

Among long leading indicators, interest rates for corporate bonds, treasuries, the yield curve, real money supply, real estate loans, purchase mortgage applications, and mortgage rates are positive. Refinance applications are neutral.  Since - despite the Brexit-related declines - neither corporate nor treasury interest rates have made new lows in at least a year, and mortgage rates have not made new lows for over 3 years, while the "now-cast" is positive, this remains a big negative in the longer term forecast.

 

There has been a significant change among short leading indicators.  For the first time in almost two years, commodities across the board have improved so much that I am now scoring them a positive.  The spread between corporates and treasuries, and stock prices, remain neutral.  The US$ against major currencies changed from neutral to positive, but against all currencies remains negative. Jobless claims, oil and gas prices, and usage, all remain very positive.

 

There have also been significant changes among coincident indicators.  On the positive side,  rail transport improved significantly enough to score as neutral, although this may be an artifact of the July 4 holiday week being different.  Temp staffing was positive again for the 3rd of the last 4 weeks.  But consumer spending was sharply mixed for the 2nd week in a row.  Steel was negative again for the second week in a row.  Most surprisingly, tax withholding also sharply negative for June. Shipping and bank rates remain negative.

 

There has developed a sharp bifurcation in the indicators.  The long and short leading indicators remain positive or are turning positive, with the exception of the broad US$, stock prices, (which remain a neutral (because they keep failing to make a new high), spreads, and the regional Fed indexes (which are contraindicated by the national ISM).  Meanwhile the coincident indicators, with the possible exception of rail, and Goldman Sachs consumer spending, are negative and/or deteriorating.

 

Since my approach is that "this time it isn't different," I continue to believe that the coincident tail is not going to wag the leading dog.  This week we will find out where employment stands in that bifurcation.

 

Have a nice weekend!

 
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