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By New_Deal_democrat February 24, 2018 9:31 am
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Weekly Indicators: coincident rough patch continues edition
January data this week was sparse: existing home sales were negative, but the Index of Leading Indicators was strongly positive.
 
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.
 
NOTE that I include 12 month highs and lows in the data in parentheses to the right.

 

Interest rates and credit spreads

  • BAA corporate bond index 4.60% up +.07% w/w (1 yr range: 4.15 - 4.90)
  • 10 year treasury bonds 2.87% unchanged w/w  (2.05 - 2.93) (new 4 year high intraweek)
  • Credit spread 1.73% up +.07% w/w (1.56 - 2.30)
Yield curve, 10 year minus 2 year:
  • 0.63%, down -0.05% w/w (.50 - 1.30) 
30 year conventional mortgage rate
  • 4.57%, up +0.04% w/w (3.84 -  4.58) (new 4 year high intraweek)

BAA Corporate bonds, having recently tied their expansion low, are now a positive, but very weakly so. If they move above 4.65%, I will downgrade them to neutral.  Mortgage rates and treasury bonds are now both negatives. The trend for these for most of 2017 was neutral. The yield curve is positive, while the spread between corporate bonds and treasuries is strongly positive.

 

Housing

 

Mortgage applications  

  • Purchase apps down -6% w/w
  • Purchase apps up +3% YoY
  • Refi down -7% w/w
 
Real Estate loans
  • Unchanged w/w 
  • Up +3.7% YoY  ( 3.3 - 6.5) 

Refi has been dead for some time. Purchase applications were strong almost all last year, but began to falter In December, turning neutral and then negative before turning positive again in January. They are just barely a positive this week. If they drop below +3% YoY, I will change the rating to neutral.

 

The growth rate of real estate loans remains neutral.

 

Money supply

M1

  • -0.6% w/w 
  • -0.7% m/m 
  • +5.1% YoY Real M1 (4.6 - 6.9)
M2
  • -0.1% w/w  
  • +0.2  m/m 
  • +2.0% YoY Real M2 (2.0 - 4.1)

Since 2010, both real M1 and real M2 were resolutely positive.  Both decelerated substantially in 2017.  Real M1 is still quite positive. Real M2 growth has fallen below 2.5% and is thus a negative.

 

Credit conditions (from the Chicago Fed) 

 

  • Financial Conditions Index up +0.02 to -0.80
  • Adjusted Index (removing background economic conditions) up +0.04 to  -0.57
  • Leverage subindex up +0.04 to -0.50
The Chicago Fed's Adjusted Index's real break-even point is roughly -0.25.  In the leverage index, a negative number is good, a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. All three metrics presently show looseness and so are positives for the economy.
 

Trade weighted US$

  • Down -1.22 to 117.14 w/w -6.9% YoY (last week) (broad) (116.74 -128.62) 
  • Up +0.78 to 89.89 w/w, -11.11% YoY (yesterday) (major currencies) 

 The US$ appreciated about 20% between mid-2014 and mid-2015.  It went mainly sideways afterward until briefly spiking higher after the US presidential election. It has been a positive since last summer.

 

Commodity prices

JoC ECRI 

  • Down -0.06 to 112.20 w/w
  • Up +5.21 YoY 
BBG Industrial metals ETF 
  • 137.67 down -2.43 w/w, up +18.86% YoY (108.00 - 140.10)
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the 2016 presidential election.  ECRI has decelerated enough to become neutral.  On the other hand, industrial metals have been strongly positive and made a new high one week ago.

 

Stock prices S&P 500

 

  • Up +0.6% w/w to 2747.30 
Despite the recent 10% correction, stock prices did not make a new 3 month low and so remain positive, They made a string of new all-time highs beginning in summer 2016.
 

Regional Fed New Orders Indexes

(*indicates report this week)

  • Empire State up +1.6 to +13.5
  • Philly up +14.4 to +24.5
  • Richmond unchanged at +16
  • *Kansas City up +2 to +16
  • Dallas down -4.6 to +25.5
  • Month over month rolling average: unchanged at +18
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction, and remains positive, but less so than the last few months.

 

Employment metrics

 Initial jobless claims

  • 222,000 down -8,000
  • 4 week average 226,000 down -2,500

Initial claims are at 40 year lows and so are very positive. The YoY% change in these metrics has been decelerating but is still a positive as well. 

 

The American Staffing Association Index

  • Unchanged at 94 w/w
  • Up +0.5% YoY

This index was generally neutral from May through December 2016, and then positive with a few exceptions all during 2017. It was negative for over a month, but returned to being weakly positive one week ago.

 

Tax Withholding 

  • $156.7 B for the first 15 days of February 2018 vs. $157.9 B one year ago, down -$1.2 B or --0.8%
  • $199.5 B for the last 20 reporting days vs. $201.8 B one year ago, down -$2.2 B or -1.1%
  • 20 day rolling average adjusted for tax cut [+$4 B]: up +$1.8 B or +0.8%

With the exception of the month of August and late November, this was positive for almost all of 2017. 

 

This month withholding has declined substantially.  Special thanks to Matt Trivisonno of the Daily Jobs Update (http://www.dailyjobsupdate.com), who tracks this closely, who has told me that while SS and Medicare withholding should not be affected by the recent tax cut, income tax withholding would be.  His best preliminary estimate is  $50 Billion per year, which rounds to roughly $4 Billion over a 20 day period.

 

I will make use of this adjustment for the remainder of this year, during which we have to take this measure with a big grain of salt.

 

Oil prices and usage 

  • Oil up +$1.93 to $63.57 w/w,  up +17.7% YoY 
  • Gas prices down -0.05 to $2.56 w/w, up $0.26 YoY 
  • Usage 4 week average up +5.4 YoY

 The price of gas bottomed 2 years ago at $1.69.  With the exception of July, prices generally went sideways with a slight increasing trend in 2017.  Usage turned negative in the first half of 2017, but has almost always been positive since then.

 

 Bank lending rates

 Both TED and LIBOR rose in 2016 to the point where both were usually negatives, with lots of fluctuation.  Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions.  The TED spread was generally increasingly positive in 2017, while LIBOR was increasingly negative.

 

Consumer spending

  • Johnson Redbook up +3.7 YoY
  • Goldman Sachs Retail Economist -0.6% w/w, +2.1% YoY

 Both the Goldman Sachs and Johnson Redbook Indexes generally improved from weak to moderate or strong positives during 2017.

 

Transport

Railroad transport

  • Carloads down -0.6% YoY
  • Intermodal units up +6.8% YoY
  • Total loads up +3.1% YoY

Shipping transport

Rail had been generally positive since November 2016 and remained so during all of 2017 with the exception of a period during autumn when it was mixed. Since the beginning of this year, turned negative for a few weeks, then positive for one weeks, but mixed again since then, with carloads negative and intermodal (mainly imports) positive.

Harpex made multi-year lows in early 2017, then improved, declined again, and then improved  yet again to recent highs. BDI traced a similar trajectory, and made 3 year highs near the end of 2017. 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 +0.8% w/w
  • Down -1.1% YoY

Steel production improved from negative to "less bad" to positive in 2016 and with the exception of early summer, remained generally positive in 2017. Except for one week, it has been negative since the beginning of this year.

 
 

SUMMARY: 

 

First of all, once again thanks to Matt Trivisonno of http://www.dailyjobsupdate.com for giving me an estimate of the effect of the tax cut on income tax withholding.

 

Among the long leading indicators, spreads are positive, as are real M1, and the more leading Chicago Fed Financial Conditions Indexes. Purchase mortgage applications and corporate bonds are very weakly positive. Growth in real estate loans is neutral. Treasuries, mortgage rates, refinance applications, and real M2 are all negative.

 

Among the short leading indicators, industrial metals, the regional Fed new orders indexes, spreads, financial leverage, the US$, jobless claims, stocks, and gas prices and usage all remain positive. Staffing is weakly positive. Oil prices and the ECRI commodity index are neutral.

 

Among the coincident indicators, positives included consumer spending, the TED spread, the Baltic Dry Index and Harpex. LIBOR remains negative.  Rail and steel have been mixed or negative since the beginning of the year with the exception of one week. Even with a preliminary adjustment for the recent tax cut, tax withholding is no better than neutral. 

 

The weekly numbers are telling us that February is a coincident rough patch for the economy. But because the coincident tail does not wag the leading dog, I still expect this to resolve higher in the next few months, as the short leading indicators remain very positive.

 

For now, the long term forecast remains weakly positive. But if there is any further deterioration in purchase mortgage applications and corporate bonds, I will downgrade this to neutral.

 

Have a nice weekend!

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