Interest rates and credit spreads
- BAA corporate bond index 4.26% -0.11% w/w (12 mo. high/low 4.90% vs. 4.23%)
- 10 year treasury bonds 2.37% -0.05% w/w
- Credit spread 1.89% down -0.06% w/w
- 0.76%, down -0.07% w/w
- 3.97%, down -0.09% w/w (1 year high was 4.39%, 1 year low 3.37%)
I am changing the rating for corporate bonds this week to a mild positive from neutral, because they are close to their 12 month low. Should they fall below 4.15%, which was the low for this entire expansion, that will be a major positive. Mortgage rates also fell enough to score neutral this week.
Yields on treasuries and mortgage rates made new 12 month highs in December and revisited that high earlier this year, but the trend for most of this year has been a decline to improving neutrals. The yield curve remains positive. The spread between corporate bonds and treasuries is just off its10 year low.
Housing
Mortgage applications
- purchase applications down -1% w/w
- purchase applications up +10% YoY
- refinance applications down -5% w/w
- Up +0.1% w/w
- Up +4.0% YoY
Purchase mortgage applications have been surprisingly positive for most weeks this year, while refi applications have remained near 15 year lows.
Real estate loans had been firmly positive for over 3 1/2 years, but the rate of growth (of this cumulative measure) declined sufficiently for the last few months for loans to become a neutral.
Money supply
M1
- +0.9% w/w
- +1.8% m/m
- +6.6% YoY Real M1
- Unchanged w/w
- +0.3% m/m
- +2.8% YoY Real M2
Since 2010, both real M1 and real M2 were resolutely positive. Both have recently decelerated substantially. Real M1 is still very positive. Real M2, however, has declined to a neutral for the last month.
Credit conditions (from the Chicago Fed)
- Financial Conditions Index unchanged at -0.91
- Adjusted Index (removing background economic conditions) down -0.01 to -0.70
- Leverage subindex down -0.02 to -0.70
Trade weighted US$
- Up +1.13 to 121.51 w/w, -1.7% YoY (one week ago) (Broad)
- Up +0.09 to 94.93 w/w, -2.0% YoY (yesterday) (major currencies)
The US$ appreciated about 20% between mid-2014 and mid-2015. It went mainly sideways since then until spiking higher after the US presidential election. With a few exceptions as to major currencies, it was neutral for about 5 months before turning positive this summer.
Commodity prices
JoC ECRI
- Down -0.57 to 107.50 w/w
- Up +15.02 YoY
- 133.69 up +2.53 w/w, up +28.24% YoY
Stock prices S&P 500
- Up +0.2% w/w to 2587.94 (new all time high intraweek)
Regional Fed New Orders Indexes
(*indicates report this week) (no reports this week)
- Empire State down -6.9 to +18.0
- Philly down -9.9 to +19.6
- Richmond down -3 to +17
- Kansas City up +17 to +27
- Dallas up +4.3 to +18.6
- Month over month rolling average: up +3 to +20
Employment metrics
Initial jobless claims
- 229,000 down -4,000
- 4 week average 232,500 down -7,000
The 4 week average fell to its lowest reading since 1973 this week. Initial claims remain well within the range of a normal economic expansion.
The American Staffing Association Index
- Up 1 to 100 w/w
- Up +1.53 YoY
This index was generally neutral from May 2016 until the end of the year, and has been positive with a few exceptions since the beginning of this year.
Tax Withholding
- $195.2 B for the month of October 2017 vs. $182.8 B one year ago, up +$12.4 B or +6.8%
- $177.3 B for the last 20 reporting days vs. $167.5 B one year ago, up +$9.8 B or +5.9%
After being positive through most of 2014, these decelerated and even occasionally were negative, in late 2015 through the first part of 2016. With the exception of August, 2017 has shown marked improvement.
- Up +$1.51 to $55.70 w/w, up +12.5% YoY
- Gas prices up +$0.01 to $2.48 w/w, up +$0.19 YoY
- Usage 4 week average up +2.8% YoY
The price of gas bottomed about 21 months ago at $1.69. With the exception of July, prices generally went sideways with a slight increasing trend for the last year. Usage turned negative in the first half of this year, but subsequently improved, and for most of the last two months turned positive again.
Bank lending rates
- 0.250 TED spread down -0.050 w/w
- 1.1240 LIBOR unchanged w/w
Both TED and LIBOR rose since the beginning of last year to the point where both were usually negatives, although there were some wild fluctuations. Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions. The TED spread has turned very positive for the last several months. Meanwhile LIBOR has generally turned more and more negative.
Consumer spending
- Johnson Redbook up +3.6% YoY
- Goldman Sachs down -1.1% w/w, up +1.3% YoY
Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat in 2016, and more markedly so in the last several months. Both were positive again this week.
Transport
Railroad transport
- Carloads down -3.2% YoY
- loads ex-coal up +0.2% YoY
- Intermodal units up +3.7% YoY
- Total loads up +0.2% YoY
Shipping transport
- Harpex down -20 to 474
- Baltic Dry Index down -97 to 1496
Rail turned negative in 2015 and fell even more sharply in spring 2016. Since summer 2016, rail improved to neutral and then generally positive since November 2016. Over the last several months, it has been more mixed.
Harpex recently declined to repeated multi-year lows, then came back all the way to positive, declined again, but in the last several months has come all the way back to positive again. BDI also surged back to being a positive, declined back to neutral earlier this year, but recently turned up again, and this week made another 3 year high. 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 +0.5% w/w
- Up +5.1% YoY
Steel production had generally been in a decelerating uptrend through early 2014, then gradually worsened through the end of 2015. It improved from negative to "less bad" to positive in 2016 and has generally remained positive this year, although during early summer, it alternated between positive and negative. It has been more positive in the last several months.
SUMMARY:
Corporate bonds are now positive, although not strongly so. A breakout to a new expansion low in bonds would be a very big positive. Meanwhile treasury yields, real M2, mortgage rates, and growth in real estate loans remain neutral. The yield curve, M1 money supply, purchase mortgage applications, and the two more leading Chicago Fed Financial Conditions Indexes remain positive. Refinance mortgage applications remain negative.
All of the short leading indicators, including stock prices, industrial metals, the regional Fed new orders indexes, spreads, financial conditions, staffing, the US$, initial jobless claims, oil and gas prices and usage, remain positive. That both the stock market and initial claims made new highs and lows this week, respectively, is extremely positive.
Among the coincident indicators, positives included consumer spending, steel, the TED spread, tax withholding, the Baltic Dry Index and Harpex. Only LIBOR remains negative. Rail was mixed this week.
If anything, the near term forecast for the economy is even stronger than it has been in the last few months, and the coincident nowcast is also quite positive.
The action is among the long leading indicators. There has been generally gradual deterioration this year, but now we see corporate bonds yields breaking out positively from the others. My 12 month plus forecast remains neutral for now.
Have a nice weekend!
