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By New_Deal_democrat February 10, 2018 9:54 am
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Weekly Indicators: forecast positive despite stock market gyrations edition
There was no January data this week. Wholesale inventories rose in December, but sales rose even more, driving the inventory to sales ratio down, also a positive. The JOLTS report for December was also 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 4.48% up +.14% w/w (1 yr range: 4.15 - 4.90)
  • 10 year treasury bonds 2.86% up +.02% w/w  (2.05 - 2.86) (new 4 year high)
  • Credit spread 1.62% up +.12% w/w (1.56 - 2.30)
Yield curve, 10 year minus 2 year:
  • 0.78%, up +0.20% w/w (.50 - 1.30) 
30 year conventional mortgage rate
  • 4.50%, up +0.05% w/w (3.84 -  4.50) (new 4 year high)

BAA Corporate bonds, having recently tied their expansion low, are now a positive, but only weakly so because AAA bonds did not confirm this low.  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 unchanged w/w
  • Purchase apps up +8% YoY
  • Refi up +1% w/w
 
Real Estate loans
  • Down -0.1% w/w 
  • Up +3.8% YoY  ( 3.3 - 6.5)

Purchase applications were strong almost all last year. Refi has been dead. In December, purchase applications turned neutral and then negative. In January they returned to positivity.

 

The growth rate of real estate loans remains neutral.

 

Money supply

M1

  • -0.9% w/w 
  • +2.4% m/m 
  • +5.0% YoY Real M1 (4.6 - 6.9)
M2
  • Unchanged w/w  
  • +0.1  m/m 
  • +2.1% YoY Real M2 (2.1 - 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 down -0.1 -0.88
  • Adjusted Index (removing background economic conditions) up +.01 to 0.69
  • Leverage subindex up +.01 to -0.57
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$

  • Up +0.43 to 115.85 w/w -7.4% YoY (last week) (broad) (116.74 -128.62) 
  • Up +1.14 to 90.35 w/w, -10.29% 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 -2.78 to 112.08 w/w
  • Up +2.78 YoY 
BBG Industrial metals ETF 
  • 132.11 down -5.62 w/w, up +14.41% YoY (108.00 - 138.81)
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the 2016 presidential election.  ECRI has recently decelerated enough to become neutral.  Industrial metals remain a  positive.

 

Stock prices S&P 500

 

  • Down -5.2% w/w to 2619.55
Despite the 10% correction in the last week, stock prices have not made 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) (no reports this week)

  • Empire State down -7.1 to +11.9
  • Philly down -18.1 to +10.1
  • Richmond unchanged at +16
  • Kansas City up +7 to +14
  • *Dallas down -4.6 to +25.5
  • Month over month rolling average: down -1 to +15
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

  • 221,000 down -9,000
  • 4 week average 234,500 down -10,000 (new 40 year low)

 Initial claims remain well within the range of a normal economic expansion. The YoY% change in these metrics has been decelerating but is still a positive as well. 

 

The American Staffing Association Index

 

  • Up +3 to 92 w/w
  • Unchanged YoY

This index was generally neutral from May through December 2016, and then positive with a few exceptions all during 2017. This number -- calculated by the ASA as a 4 week average -- was  negative for over a month. The actual weekly number is 94, which is +1 compared to last year's number.

 

Tax Withholding

  • $62.8 B for the first 8 days of February 2018 vs. $68.5 B one year ago, down -5.7$ B or -8.3%
  • $201.5 B for the last 20 reporting days vs. $197.8 B one year ago, up +$3.7 B or +1.9%

With the exception of the month of August and late November, this was positive for almost all of 2017. The last 8 days are not enough for me to change this assessment.

 

Oil prices and usage 

  • Oil down -$6.01 to $59.05 w/w,  up +11.4% YoY
  • Gas prices up +0.03 to $2.64 w/w, up $0.34 YoY 
  • Usage 4 week average up +6.5 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 +3.0% YoY
  • Goldman Sachs Retail Economist -1.9% w/w, +2.7% 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 -1.4% YoY
  • Intermodal units up +6.3% YoY
  • Total loads up +2.5% YoY

Shipping transport

Rail has 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, and at the beginning of this year, when it was negative for a few weeks. It was positive last week, but mixed again this week.

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 +1.6% w/w
  • Down -0.2% 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 has turned negative for the last 6 week, except for last week.

 
 

SUMMARY: 

 

Among the long leading indicators, spreads are very positive, joined by some corporate bonds, real M1, purchase mortgage applications, and the more leading Chicago Fed Financial Conditions Indexes. 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, and gas prices and usage all remain positive. Oil prices, the ECRI commodity index, and staffing are neutral. Despite their big decline Friday, stocks remain a positive unless or until they make a three month low.

 

Among the coincident indicators, positives included consumer spending, tax withholding, the TED spread, the Baltic Dry Index and Harpex. LIBOR remains negative.  Rail and steel, which have been mixed or negative recently, rebounded to positive last week, but returned to mixed/negative this week.

 

It is important this week to emphasize that I use this information for forecast the economy, not the stock market.  Stocks were melting up at a 48% annual rate since the beginning of September, so even the 10% correction this week, they did not make a 3 month low! Thus they remain a positive in this forecast. Aside from several long leading indicators, the only other weak spots were steel and rail carloads.

 

The nowcast is weakly positive until steel and rail resolve. The short term forecast remains very positive, despite the stock market. The long term forecast remains weakly positive. The biggest potential negative here is if increased interest rates translate into weaker housing in the next few months.

 

Have a nice weekend!

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