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By New_Deal_democrat August 16, 2014 8:31 am
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Weekly Indicators: flight to safety edition

July monthly data included positive industrial production, capacity utilization, and Empire State Manufacturing. Producer prices increased slightly. Retail sales were flat.  University of Michigan sentiment as to present conditions improved, but expectations declined.  In fact, for the last 4 years the trend for consumer sentiment has been improving present conditions, but a slightly negative trend as to expectations.  This is a similar pattern to that which occurred in 2003-04. It suggests consumers have some money to spend, but don't trust the economy.

 

The high frequency weekly indicators provide an up-to-this-week snapshot of the economy.  The indicators will confirm a trend or indicate a switch in trend well before monthly reports, and are a way to mark one's opinions to market on a regular basis.

 

Let's start this week with treasuries and money supply, both of which showed signs of an international flight to safety:

 

Interest rates and credit spreads

  • 4.73% BAA corporate bonds up +0.01%
  • 2.47% 10 year treasury bonds down -0.06%
  • 2.26% credit spread between corporates and treasuries up +0.07%

Interest rates for corporate bonds made a low of 4.46% in November 2012. Treasuries fell to a possible once-in-a-lifetime low of 1.47% in July 2012, but rose over 1.6% above that mark in late 2013.  This year interest rates have declined since January, and ended this week under 2.4%!  Spreads have widened since their expansion lows of a few months ago.

 

Money supply

M1 

  • +0.7% w/w
  • +1.7% m/m
  • +10.2% YoY Real M1

 M2 

  • -0.3% w/w
  • +0.7% m/m
  • +4.5% YoY Real M2

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 this year.  Both Real M1 and Real M2 improved substantially since. and Real M1 is showing signs of the flight to safety once again.

 

Employment metrics

 Initial jobless claims

  • 311,000 up +22,000
  • 4 week average 295,750 up +2,250

The increase this week was from long term lows. These have been in the normal range for an economic expansion for 4+ months.

 

The American Staffing Association Index was unchanged at 99.  It is up +3.89%YoY.

 

This Index made an all-time high for this week. The YoY comparison has been positive to strongly positive since early spring.

 

Tax Withholding

  • $79.6 B for the first 10 days of August vs. $75.6 B one year ago, up +$4.9 B or +5.3%.
  • $144.4 B for the last 20 days ending Thursday vs. $139.5 B for 20 days ending Thursday 1 year ago, up +$4.9 B or +3.5%.

 

After July's tax withholding turned negative, it was beginning to be a significant ground for concern.  The last two weeks have seen a return to a regular positive number.

 

Oil prices and usage

  • Oil down -0.30 to $97.35 w/w
  • Gas down -$.01 at $3.51 w/w
  • Usage 4 week average YoY -1.3%

 

 

The price of gas has declined significantly in the last month.  It is below its prices of 1, 2, and 3 years ago.  The Oil choke collar has disengaged.

 

Consumer spending

Gallup's 14 day average of consumer spending averaged between $80 and $100 for most of 2013, with frequent YoY comparisons over $20, and few less than +$10.  In 2013 the YoY range for the ICSC declined to between +1.5% and +3.0%, while Johnson Redbook YoY was between from +2% to a high over +4%.  Gallup has now been weakly positive or negative YoY for about 3 months, and had its worst YoY comparison this week.  Last year at this time "back to school" spending peaked; this year there has been no positive bump at all.

 

Steel production from the American Iron and Steel Institute 

  • -0.3% w/w
  • +2.0% YoY

Steel production over the last several years has generally been in a decelerating uptrend.  After a strongly positive move late in 2013, YoY comparisons turned negative again from January through early May, but have turned positive since then.

 

Transport

 Railroad transport from the AAR

  • +13,000 carloads up +4.5% YoY
  • +16,000 carloads ex-coal up +9.3% YoY
  • + 8,300 intermodal units +3.2% YoY
  • +21,300 total loads +3.9% YoY

Shipping transport

Rail traffic has been strong since early spring, but less so again this week. The BDI declined substantially since the end of last year, but this week tied a 4 month high. Harpex tends to correlate with intermodal traffic, and has been more positive, but generally flat for the last few months.  In the longer term, shipping rates bottomed about 2 years ago and have been in a slow and variable uptrend since.

 

Housing metrics

Mortgage applications from the Mortgage Bankers Association:

  • w/w purchase applications down -1%
  • YoY purchase applications down -10%
  • w/w refinance applications down -4%

Both refinance applications and purchase applications have flattened out near their recent post-recession lows. This week we had the "least worst" reading in YoY financing in months.  Recently applications appear to have been particularly sensitive to small changes in interest rates.

 

Housing prices

  • YoY this week +9.0% (75th percentile up +5.4% YoY)

Housing prices bottomed in November 2011 on Housing Tracker, and YoY comparisons rose to just shy of +12% in late 2013.  The comparison has fallen below +10% since early June.  High end housing prices, which were a harbinger of the top of the housing bubble a decade ago, and were as high as ~+8% YoY earlier this year, suggest a turn is again near.  The sharp YoY increase in prices in 2013 and early 2014 may have actually been a negative. 

 

Real estate loans, from the FRB H8 report:

  • -0.4% w/w
  • +2.2% YoY
  • +5.2% from their bottom

Loans turned up at the end of 2011, but with higher interest rates, the comparisons rolled over and had been negative since April 2013.  They turned positive YoY in March 2014, and have remained positive to sharply positive since.

 

Bank lending rates

LIBOR has risen slightly from its post-recession low set in May. The TED spread has been trending slightly upward since November of last year, although it is still lower on a YoY basis. 

 

JoC ECRI Commodity prices

  • Down -0.90 to 129.35 w/w
  • +3.49 YoY 
Strong commodity price gains come in a strong economy. With international political and economic worries, commodities weakened.
 

Summary:  The significant moves this week were dominated by the "flight to safety" in treasuries, money supply, and a correlative weakening in commodities.

 

All of the long leading indicators,  excepting mortgage applications and corporate bonds, were positive, including money supply, bank lending rates, real estate loans, and treasury bonds. Treasury bonds hit a 12 month low by Friday.  Even mortgage applications were "less worse." Corporates rose slightly.

 

The short leading indicators were mixed but with a positive bias.  The 4 week average for Initial jobless claim rose but are still very low. Credit spreads widened on the flight to safety, but still remain near their post-recession low. Temporary jobs made another seasonal all-time high.  Commodities turned negative, partly on geopolitical and international economic concerns. The Oil choke collar has seasonally disengaged. Housing prices still appear to be at or near an interim peak, and the YoY  comparisons are fading slowly.

 

The coincident indicators were also mixed.  Two measures of consumer spending was positive, but Gallup has turned negative again.  I am wondering if Gallup is explained by our old friend, the polar vortex, which has caused a relatively cool summer in the midwest and northeast.  No need for seasonal shopping there! On the other hand, it also suggests "back to school" shopping may be a bust this year.  Steel production was positive, as was rail traffic although less so than recently. Shipping has stabilized or increased. Tax withholding was decent.

 

The hugely positive rebound of the second quarter has moderated.  Housing leads, and housing faded in the last 12 months. Still, growth for the rest of 2014, and early 2015, looks intact. Watch to see if this significant move lower in treasury yields persists.

 

Have a nice weekend!

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