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By New_Deal_democrat December 31, 2016 10:28 am
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Weekly Indicators: interest rates turn more neutral edition
Monthly data for November included an increase in consumer confidence, an increase in house prices, and an increase in business inventories.
 

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.

 

Interest rates and credit spreads

  • Dow Jones corporate bond index 358.63 up +2.72 w/w (2016 high is 395.36, 2016 low is 341.41) 
  • 2.47% 10 year treasury bonds down -.07%
  • BofA/ML B Credit spread up +.02% to 4.07% (near 24 month low)
Yield curve, 10 year minus 2 year:
  • 1.25%, down -.09% w/w
30 year conventional mortgage rate
  • 4.21%, down -.12% w/w

Yields on treasuries and mortgage rates made new 12 month highs two weeks ago, but retreated enough to score neutral this week. Corporate bonds are still neutral. Because rates made new lows after the Brexit vote in June, that nevertheless strongly suggests that the expansion will continue through mid-2017.  The yield curve and spreads are very positive.

 

Housing

 

Mortgage applications - No Report this Week

 

  • purchase applications w/w
  • purchase applications YoY
  • refinance applications w/w
 
Real Estate loans
  • Up +0.1% w/w
  • Up +6.2% YoY

Mortgage applications briefly  spiked in response to low rates following the Brexit vote.  Purchase applications last made a new high at the beginning of June.  They wobbled between being positive and neutral and have remained just barely above turning negative for a month.  As usual, the MBA did not report this week, but will resume next week.  Refinance applications have turned south in a big way in the last month and are near multiyear lows.

 

Real estate loans have been firmly positive for over 3 years.

 

Money supply

M1

  • -1.4% w/w
  • -2.2% m/m 
  • +5.0% YoY Real M1 
M2
  • Unchanged w/w  
  • Unchanged m/m
  • +5.5% YoY Real M2 

Both real M1 and real M2 have been firmly positive almost all year, although less so in the last month. 

 

Trade weighted US$

  • Down -1.48 to 126.77 w/w, up +3.8% YoY (one week ago) (Broad)
  • Down -0.66 to 102.35 w/w, up +3.7% 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. It has been generally neutral for about 2 months.

 

Commodiy prices

JoC ECRI

  • Up +.09  to 102.83 w/w
  • Up +27.33 YoY
BBG Industrial metals ETF
  • 108.10 down -0.52 w/w, up +19.5% YoY
Commodity prices bottomed about one year ago. After briefly turning negative, metals have now surged higher since the election.

 

Stock prices S&P 500

 

  • Up +0.3% w/w 
Stock prices became a positive having made new all-time highs in summer, and more new highs since..
 

Regional Fed New Orders Indexes

(*indicates report this week)

  • Empire State up +8.3 to +11.4
  • Philly down -4.7 to +13.9
  • *Richmond up +5 to +12
  • Kansas City up +1 to +7
  • *Dallas up +8.7 to +7.3
  • Month over month rolling average: up +3 to +11 (18 month high)
The regional average has generally been lower than the ISM manufacturing index, but has accurately forecast its month over month direction. The average Fed readings made yet another 12 month high this week,

 

Employment metrics

 Initial jobless claims

  • 265,000 down -10,000
  • 4 week average 263,000 down -500

 

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

 

The American Staffing Association Index

 

  • Down -1 to 99 w/w
  • Down -1.27 YoY

This index turned negative in May 2015, getting as bad as -4.30% late last year.  Since the beginning of the year it became progressively "less bad" and for since May has been so close to positive YoY as to be a neutral most weeks, as it was again this week.

 

Tax Withholding

  • $200.6 B for the first 20 days of December vs. $192.4 B one year ago, up +$8.2 B or +4.3%
  • $200.6 B for the last 20 reporting days ending Thursday vs. $190.4 B one year ago, up +$9.6 B or +5.0%

Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, and occasionally even negative, since August 2015.  The last few months have with brief exceptions shown a marked improvement.

 

Oil prices and usage

  • Oil up +$0.58 to  $53.83 w/w,  up +$11.93 YoY 
  • Gas prices up +.05 to $2.31 w/w, up +$0.28 YoY 
  • Usage 4 week average down -2.8% YoY

 

The price of gas bottomed last winter at $1.69.  Usage had been almost uniformly positive until one month ago, when it turned negative.  Gas prices have gone sideways for the last four months, and are now higher YoY, making them a neutral, as were oil prices this week. In general oil is no longer a tailwind for the economy, but it hasn't quite turned into a headwind yet -- although it is getting closer.

 

Bank lending rates

 

Both TED and LIBOR rose since the beginning of last year to the point where both have usually been negatives, although there were some wild fluctuations.  Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions.  While the TED spread turned positive for  five weeks recently, this week both were again negatives.

 

Consumer spending

 

Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat over the last 12 months.  Redbook recently turned very weak.  Goldman and Gallup have both been generally more positive, although Gallup was wobbly for a month before turning positive again. Gallup is showing weaker holiday spending this year than last year, an important negative if it persists.

 

Transport

Railroad transport

  • Carloads up +17.8% YoY
  • loads ex-coal up +16.8% YoY
  • Intermodal units up +37.2% YoY
  • Total loads up +27.0% YoY

Shipping transport

After turning negative throughout 2015, rail loads became "less worse" in January and showed continued improvement until going over the proverbial cliff all spring (typically down -10% or more). Since June, generally rail was neutral. For five of the last seven weeks it has been positive.

Harpex has recently resumed its decline again to repeated multi-year lows. BDI recently turned very positive before declining again in the last month.  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 -3.4% w/w
  • Up +10.2% YoY

Until spring 2014, steel production had generally been in a decelerating uptrend.  It then gradually rolled over and got progressively worse in pulses through the end of 2015. This year it started out as "less worse" and has been neutral to positive for the last few few months.

 
 

SUMMARY: 

 

The interest rate components of the long leading indicators declined enough to all score neutral. The yield curve and money supply as well as real estate loans remain positive. Mortgage information will resume next week.

 

Short leading indicators, including stock prices, jobless claims, industrial commodities, the regional Fed new orders indexes, and spreads, are all positive.  Temp staffing, oil and gas prices, and the US$ are neutral.  Gas usage remained negative.

 

The coincident indicators are mixed. Rail, steel, consumer spending, and tax withholding are positive. The BDI is neutral. The Harpex shipping index, the TED spread and LIBOR remain negative.

 

Seasonality continues to be a huge factor in the volatility of the data at this time of year.  Thus I am discounting, e.g., rail. The shorter term 6 month forecast remains positive (barring a trade war).  The 12+ forecast is bolstered by housing's continued strength, but the post-election increase in interest rates in particular are likely to put an end to that.  I remain wary of a negative trifecta of increased interest rates, gas prices, and the US$, but it has not fully emerged.

 

Happy New Year,

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