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By New_Deal_democrat July 8, 2017 10:17 am
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Weekly Indicators: interest rates turn negative edition
June data started out with poor motor vehicle sales, but an excellent headline jobs report. Wage growth shows no sign whatsoever of acceleration.  Both ISM manufacturing and services reports were more positive.
 
May data included declining factory orders, and flat construction, but the more leading residential construction declined.
 
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

  • BAA corporate bond index 4.44% +0.08% w/w (12 mo. high 4.90%. 12 mo. low 4.15%)
  • 10 year treasury bonds 2.39% +0.09% w/w 
  • Credit spread 2.05% -0.01% w/w 
Yield curve, 10 year minus 2 year:
  • 0.92%, up +0.03% w/w
30 year conventional mortgage rate
  • 4.13%, up +0.06% w/w (1 year high was 4.39%)

Yields on treasuries and mortgage rates made new 12 month highs in December, but subsequently retreated, turning neutral for several months -- until this week, when they rose enough again to score negative.  Corporate bonds remain neutral. Spreads remain very positive. The yield curve became more positive, primarily due to increasing longer term bond rates.

 

Housing

 

Mortgage applications 

 

  • purchase applications up +3% w/w
  • purchase applications up +6% YoY
  • refinance applications down -0.4% w/w
 
Real Estate loans
  • Up +0.1% w/w 
  • Up +4.6% YoY 

Mortgage applications turned outright negative for three weeks before tipping back to neutral and then surprisingly positive for most weeks in the last few months, including this week. Refi applications remain near multi-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 three months for loans to become a neutral.

 

Money supply

M1

  • +1.4% w/w 
  • -0.5% m/m
  • +6.5% YoY Real M1 
M2
  • +0.3% w/w 
  • +0.1% m/m 
  • +3.6% YoY Real M2 

Both real M1 and real M2 were positive almost all last year.  Both have recently shown substantial deceleration, but both remain positives.

 

Credit conditions (from the Chicago Fed) 

 

  • Financial Conditions Index unchanged at -0.87
  • Adjusted Index (removing background economic conditions) up +0.15 to-0.21
  • Leverage subindex unchanged at -0.64
In the adjusted and leverage indexes, which are more leading, 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, although the adjusted index was substantially weaker this week.
 

Trade weighted US$

  • Down -0.26 to 122.23 w/w, up +0.6% YoY (one week ago) (Broad)
  • Up +0.36 to 95.99 w/w, -0.4% 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 has been generally neutral for about 5 months, and has turned into a positive as to major currencies as of this week.

 

Commodiy prices

JoC ECRI

  • Down -0.37 to 103.01 w/w
  • Up +11.10 YoY
BBG Industrial metals ETF 
  • 112.98 down -1.53 w/w, up +15.6% YoY
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the election.  They have cooled off this year, but not quite yet enough to be downgraded to neutral.

 

Stock prices S&P 500

 

  • Up +0.1% w/w to 2425.18 
Stock prices are positive, having made a string of new all-time highs beginning last summer, including several weeks ago.
 

Regional Fed New Orders Indexes

(*indicates report this week) (no reports this week)

  • Empire State up +22.5 to +18.1
  • Philly up +0.5 to +25.9
  • Richmond up +6 to +6
  • Kansas City down -4 to +5
  • Dallas down -9.5 to +9.6
  • Month over month rolling average: down -1 to +12
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction. These continue to be positive, although they have backed well off from March's highs.

 

Employment metrics

 Initial jobless claims

  • 248,000 up +4,000
  • 4 week average 243,000 up +750

 

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

 

The American Staffing Association Index

 

  • Unchanged at 96 w/w
  • Up +2.02 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 

  • $195.6 for the month of June 2017 vs. $180.6 B one year ago, up +$15.0 B or +8.3%
  • $184.2 B for the last 20 reporting days vs. $173.8 B one year ago, up +$10.4 B or +6.0%

Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, and occasionally even negative, in last 2015 through the first part of 2016.  The last few months have with brief exceptions shown marked improvement.

 

Oil prices and usage

  • Oil down -$1.95 to $44.38 w/w,  down -15.9% YoY 
  • Gas prices down -$0.03 to $2.26 w/w, down -$0.03 YoY
  • Usage 4 week average down -1.8% YoY 

 

The price of gas bottomed about 18 months ago at $1.69.  Until the last month, prices generally went sideways with a slight increasing trend for the last year. In the last month, they turned negative YoY (which is a positive for the economy).  Usage faltered and has now turned negative for several months.

 

Bank lending rates 

 

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 +2.7% YoY
  • Retail Economist/Goldman Sachs +0.1% w/w, up +1.9% YoY (one week ago)
  • Gallup daily consumer spending 14 day average $109, up +$22 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.  Redbook was positive again this week. Meanwhile with the exception of one week, for over four months Gallup has been very positive.

 

Transport

Railroad transport

  • Carloads up +2.3% YoY
  • loads ex-coal down -1.1% YoY
  • Intermodal units up +4.0% YoY
  • Total loads up +3.2% YoY

Shipping transport

Rail turned negative in 2015 and fell even more sharply in spring 2016. Since last June, rail improved to neutral, and then positive almost all weeks since the beginning of November. For the second week in a row, however, it was mixed this week.

Harpex recently declined to repeated multi-year lows, but in the last three months came back all the way to positive, to the point where higher than during 4 of the last 5 years.  In the last few weeks it has declined substantially. BDI also surged back to being a positive before declining back to neutral 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 -0.7% w/w
  • Down -1.5% 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. It improved from negative to "less bad" to positive in 2016 and until recently remained positive since. In the last several months, it has alternated between positive and negative.

 
 

SUMMARY: 

 

The big news this week is among long leading indicators. While corporate bonds and growth in real estate loans remain neutral, Treasury yields and mortgage rates have increased sufficiently to score negative again. There are also longer term reasons for this call upon which I will elaborate in the coming week.  With increasing longer yields, the yield curve did become more positive this week. Money supply remains positive, although more weakly so.  Purchase mortgages also are very positive, while  refinance mortgage applications remain negative. The two more leading Chicago Fed Financial Conditions Indexes are both positive, although one decelerated substantially.

 

Short leading indicators, including stock prices, jobless claims, industrial commodities, the regional Fed new orders indexes, spreads, financial conditions, staffing, and oil and gas prices are all positive. The US$ is positive against major currencies, but still neutral broadly. Gas usage remains negative.

 

Among the coincident indicators, which were again mixed this week, positives included most measures of rail, consumer spending, and the TED spread. The Baltic Dry Index, Harpex, and are neutral. LIBOR and steel remain negative, joined by railcars ex-coal this week.

 

The present remains positive, if not so strongly as recently. The near term forecast also remains very positive. 

 

For the first time in years, however, I am changing the longer term forecast to neutral, as corporate profits, housing, and interest rates are all now neutral or negative, with money supply and the yield curve remaining positive.

 

Have a nice weekend!

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