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By New_Deal_democrat March 31, 2018 9:52 am
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Weekly Indicators: flatter yield curve balance lower long rates edition

February data included a decline in consumer confidence from both sources, and a decline in the Chicago PMI, which was nevertheless still positive. Nominal personal income and spending increased, but in real terms income was flat. House prices continued to increase strongly YoY.

 
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 4.63% down -.04% w/w (1 yr range: 4.15 - 4.90)
  • 10 year treasury bonds 2.74% down -08% w/w  (2.05 - 2.93) 
  • Credit spread 1.89% up +.04% w/w (1.56 - 2.30)
Yield curve, 10 year minus 2 year:
  • 0.47%, down -0.09% w/w (.47 - 1.30) (new expansion low)
30 year conventional mortgage rate
  • 4.51%, down -0.03% w/w (3.84 -  4.58) 

BAA Corporate bonds fell back below 4.65%, and so are weakly positive again.  Mortgage rates and treasury bonds are still both negatives. The trend for these for most of 2017 was neutral. The yield curve remains positive if more weakly so, and the spread between corporate bonds and treasuries also remains positive.

 

Housing

 

Mortgage applications  

  • Purchase apps up +3% w/w
  • Purchase apps up +8% YoY
  • Refi up +7% w/w
 
Real Estate loans
  • Up +0.3% w/w 
  • Up +4.4% YoY  ( 3.3 - 6.5) (re-benchmarked, adding roughly +0.5% to prior comparisons)

Refi has been dead for some time. Purchase applications were strong almost all last year, but began to falter in late December, turning neutral and briefly even negative. They were less than +3% YoY for two weeks, and thus neutral, before rebounding to positive for the last three weeks.

 

With the re-benchmarking of the last year, the growth rate of real estate loans changes from neutral to positive. [insert expletives here]

 

Money supply

M1

  • -1.1% w/w 
  • +1.7% m/m 
  • +3.7% YoY Real M1 (3.7 - 6.9) (2 year low)
M2
  • -0.1% w/w  
  • +0.5% m/m 
  • +1.4% YoY Real M2 (1.4 - 4.1)(new 7 year low) 

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

 

After improving for two weeks, real M1 declined again. Should real M1 YoY growth fall below 3.5% and turn negative on a 6 month basis, I will downgrade it to neutral.

 

Credit conditions (from the Chicago Fed) 

 

  • Financial Conditions Index up +0.01 -0.75
  • Adjusted Index (removing background economic conditions) up +0.06 to -0.5
  • Leverage subindex down -0.01 to -0.54
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 -0.65 to 117.92 w/w -4.9% YoY (last week) (broad) (116.74 -128.62) 
  • Down -0.53 to 90.01 w/w, -10.% 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 -0.96 to 109.34 w/w
  • Up +2.04 YoY 
BBG Industrial metals ETF 
  • 129.38 up +0.83 w/w, up +10.10% YoY (108.00 - 140.86)
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 recently made a new high.

 

Stock prices S&P 500

 

  • Up +2.0% w/w to 2640.87
Despite coming close in recent selloffs, 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 +3.3 to +16.8
  • Philly up +11.2 to +35.7
  • *Richmond down -10 to +17
  • Kansas City down -17 to -1
  • *Dallas down -17 to +8.3
  • Month over month rolling average: down -5 to +16
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction, and remains positive. The steep declines in three of the five surveys this month argue that manufacturing, while positive has slowed down.

 

Employment metrics

 Initial jobless claims

  • 215,000 down -14,000 (new 45 year low)
  • 4 week average 224,500 down -500 

Initial claims made another 40+ year low this week and so are very positive. The YoY% change in these metrics had been decelerating but is now back on its multi-year pace. 

 

The American Staffing Association Index

  • Unchanged at 94 w/w
  • Up +1.3% 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 at the beginning of this year, but has returned to a positive.

 

Tax Withholding 

  • $194.8 B for the last 20 reporting days vs. $190.0 B one year ago, up +$4.8 B or +2.5%
  • 20 day rolling average adjusted for tax cut [+$4 B]: up +$8.8 B or +4.6%

With the exception of the month of August and late November, this was positive for almost all of 2017. Except for this week, it has generally been negative since the effects of the recent tax cuts started in February.

 

I am discontinuing the intramonth metric for the remainder of this year, since the kludge to guesstimate the impact of the recent tax cuts makes it too noisy to be of real use.  Based on Treasury Dept. estimates, this is roughly $4 Billion over a 20 day period, so I am using that for a temporary adjustment this year, during which we have to take this measure with a big grain of salt.

 

Oil prices and usage 

  • Oil down -$1.04 to $64.91 w/w,  up +28.4% YoY 
  • Gas prices up +$0.05 to $2.65 w/w, up $0.33 YoY 
  • Usage 4 week average up +0.5% YoY 

 The price of gas bottomed over 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. Should the YoY% change in price exceed 40%, that has typically meant roughly a 1% decrease in the YoY growth rate of GDP.

 

 Bank lending rates

  • 0.642 TED spread up +0.039 w/w (new 18 month high)
  • 1.880 LIBOR up +0.018 w/w 

 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. In the past few weeks the TED spread returned to being a negative.

 

Consumer spending

  • Johnson Redbook up +3.6 YoY
  • Goldman Sachs Retail Economist +4.3% w/w, +3.6% YoY

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

 

Transport

Railroad transport

  • Carloads up +2.5% YoY
  • Intermodal units up +0.3% YoY
  • Total loads up +1.4% YoY

Shipping transport

Rail was generally positive since November 2016 and remained so during all of 2017 with the exception of a period during autumn when it was mixed. This year in January and February, carloads were usually negative, while intermodal (mainly imports) were positive. This has now resolved to 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, although it has since declined again.  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 

  • Down -1.3% w/w
  • Up +5.1% 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. It turned negative in January and early February, but has been positive since then.

 
 

SUMMARY: 

 

Among the long leading indicators, corporate bond yields have returned to a weak positive. The yield curve remains positive if more weakly so, as are purchase mortgage applications, Real M1, and the more leading Chicago Fed Financial Conditions Indexes, With their re-benchmarking, real estate loans have also returned to being positive. 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, staffing, and gas prices and usage all remain positive. Oil prices and the ECRI commodity index are neutral.

 

Among the coincident indicators, positives included consumer spending, Harpex, rail and steel.  Adjusted tax withholding also turned positive this week, but I am giving this measure very little weight. LIBOR and the TED spread remained negative, and the Baltic Dry Index has declined enough to turn neutral.

 

The short term forecast remains very positive. The nowcast is also positive, despite weakening in several components. 

 

The long term forecast also remains weakly positive, as declining long rates are balanced by a flatter yield curve.

 

Have a nice weekend!

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