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By New_Deal_democrat July 11, 2015 10:26 am
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Weekly Indicators: commodity decline in the spotlight edition

Monthly data for June was sparse, consisting of an increased positive ISM services report.  Monthly data for May included an inventory to sales ratio flat at an elevated rate, and the JOLTS report, showing a slight increase in job openings, and slight decreases in hires and quits.  While openings have been soaring, hires and quits have been basically flat since last September.

 

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.  The indicators will confirm a trend or indicate a switch in trend well before monthly and quarterly reports.

 

In general I am going in order of long leading indicators, then short leading indicators, then coincident indicators.  But since the big news this week was in commodities, so let's start there:

 

Commodity prices

JoC ECRI

  • Down -3.22 to 96.97 w/w (new low)
  • Down -24.66 YoY
BBG Industrial metals ETF
  • 108.81 down -3.46 w/w  (made a new 5 year low on Thursday)
Commodity prices as measured by ECRI made a new low.  Industrial metals generally declined in the last 3 years, and during this week made another multi-year low.  In the 20th century, commodity prices mainly told us about US manufacturing.  Now I think they are mainly telling us about Chinese manufacturing. If so, the Chinese economy may be even weaker than the relatively weak +6% YoY growth in the official reports.  If anything, this is a positive for US consumers, who are the bulk of the US economy.

 

 Interest rates and credit spreads

  • 5.09% BAA corporate bonds down -0.17%
  • 2.22% 10 year treasury bonds down -0.21%
  • 2.87% credit spread between corporates and treasuries up +0.04%
30 year conventional mortgage rate:
  • 4.08%, down -0.05% w/w (low was 3.35% in December 2012; 52 week high was 4.26%)

 

Interest rates for BAA corporate bonds made a 50+ year low in January. This was not confirmed by AAA corporate bonds.  After a possible once-in-a-lifetime low of 1.47% in July 2012, Treasuries rose to over 3% in late 2013, then fell through 2014 and into 2015, where they had hovered at or below 2% before yields broke out to the upside.  Spreads widened in recent months, and recently broke decisively negative.

Mortgage rates have risen to close to the top of their 12 month range, and have not made a new low in 2 1/2 years. 

Housing

 

Mortgage applications

  • +7% w/w Purchase applications
  • +32 YoY Purchase applications
  • +3% w/w Refinance applications
Real Estate loans from the FRB's H8 report:
  • +.2% w/w
  • +4.1 YoY

Mortgage applications had been awful for several years, before turning up early this year in response to very low rates.  With rates rising again, there has been some rush to lock in rates for purchase mortgages, fearing even higher rates soon, while refinancing has declined to a trickle. 

Real estate loans have been firmly positive for close to two years.

 

Money supply

M1

  • +0.6% w/w
  • +2.0% m/m
  • +7.7% YoY Real M1
M2
  • +0.2% w/w
  • +0.5% m/m
  • +5.8% YoY Real M2

Real YoY money supply remains firmly positive.  At the time of the last flight to safety (from Europe) in January 2012, YoY Real M1 made a high of about 20%, and YoY Real M2 made a high of about 10.5%.  Growth in both then decelerated.  Real M2 made a new 2 year low at the beginning of 2014.  Both Real M1 and Real M2 improved substantially since.

 

Trade weighted US$:

  • Up +0.49 to 115.91

 

The US$ appreciated about 20% against the Euro in particular late last year.  While it has retreated a little, it remains near the top of that range.

 

Employment metrics

 Initial jobless claims

  • 297,000 up +16,000 
  • 4 week average 279,500 up +4,500

Initial claims remain well within the range of a normal economic expansion, as does the 4 week average.

 

The American Staffing Association Index 

 

  • Unchanged at 96.
  • Down -2.59 YoY

The YoY comparison had generally been positive to strongly positive since last spring. In the last two months have turned neutral and then increasingly negative.

 

Tax Withholding

  • $62.6 B for the month 7 days of July vs. $60.5 B one year ago, up +$2.1 B or +3.5%
  • $164.5 B for the last 20 reporting days ending Thursday vs. $159.4 B one year ago, up +$5.1 B or +3.2%

 

Beginning with the last half of 2014, virtually all readings have been positive.

 

Oil prices and usage

  • Oil down -$2.87 to $52.65 w/w
  • Gas down -$.01 to  $2.79 w/w 
  • Usage 4 week average up +5.3% YoY 9524 v. 9044

The price of gas and oil bottomed at the end of January.  The 2010-2013 Oil choke collar has been broken.  Gas prices rose $0.80 since then, before backing off in the last three weeks.  If they follow past seasonal patterns, their summer peak will be roughly $1 above their winter low, but it appears increasingly likely that we have already seen the peak.

 

Bank lending rates

LIBOR rose sharply from its post-recession low set in one year ago, and the TED spread was also in an uptrend since the last the middle of 2014, rising off its November 2013 low.  In the last few weeks, however, both have plateaued.

 

Consumer spending

Both the Goldman Sachs and Johnson Redbook Indexes weakened after last Christmas, and weakened further YoY in May, before their relatively good readings this week.  With the exception of 3 weeks in April, the Gallup report has been negative since the beginning of this year.  It had two positive weeks, then turned negative last week, and this week it was very negative.

 

Transport

Railroad transport

  • Carloads down -7.1% YoY
  • cars ex-coal down -1.5%YoY
  • Intermodal units up +12.3% YoY
  • Total loads up +1.7% YoY

Shipping transport

Rail traffic fell off a cliff in mid-February. Intermodal traffic quickly turned positive again, but domestic carloads, led by coal (for export) have remained negative. After declining sharply for several months, making a 3-year low in mid-February, the BDI surged higher. Meanwhile, Harpex (container shipping) turned up sharply for 3 months, making almost continual new 4-year highs, peaking at 646 three weeks ago. In the longer term, shipping rates bottomed about 3 years ago and have been in a slow and variable uptrend since, although the Baltic index did break that to the downside in the recent skid.

Steel production

 

  • Down -2.8% w/w
  • Down -11.4% YoY

Over the last several years steel production had generally been in a decelerating uptrend.  Since  spring 2014, it turned mixed, and then cliff-dived five months ago.

 
 

SUMMARY:

    

Among long leading indicators, interest rates for corporate bonds, treasuries and mortgages are all neutral.  Purchase mortgages soared, probably as buyers anticipate higher rates ahead. Refinancing, while improved this week, is bouncing along its multi-year bottom.  Money supply and real estate loans remain positive. 

 

The short leading indicators remain extremely mixed.  The interest rate spread between corporates and treasuries widened further.  Temporary staffing was negative for the eighth week in a row, and is in a real downtrend.  On the other hand, jobless claims remain quite positive. Oil and gas prices may have reached their seasonal high for the year.  Both remain positives, as is gas usage.  Industrial metal prices intra-week, made another new multi-year low..

 

The coincident indicators were mixed, with the important note that none of the negative trends have worsened recently.  The uptrend in the TED spread and LIBOR appears to have reached a plateau.  Steel production and rail carloads (led by coal and industrial metals) are still negative.  The positive side included tax withholding, shipping, and intermodal rail traffic. Gallup spending turned very negative, while Johnson Redbook and Goldman Sachs consumer spending had better YoY comparisons.

 

I suspect that the renewed collapse in commodities is telling us more about China than the US, and that may also be the case for transport of coal and industrial metals. I further suspect that the "shallow industrial recession" of the first half of this year is bottoming. The long leading indicators keep me positive for the next 12 months, while the change in interest rates from positive to neutral, as well as the continuing elevation of spreads, TED and LIBOR warrant caution further out.

 

Have a nice weekend!

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