Interest rates and credit spreads
- BAA corporate bond index 4.30% -0.05% w/w (12 mo. high 4.90%. 12 mo. low 4.15%)
- 10 year treasury bonds 2.35% -0.02% w/w
- Credit spread 1.95% down -0.03% w/w (new 10 year low)
- 0.84%, down -0.02% w/w
- 3.93%, down -0.05% w/w (1 year high was 4.39%, 1 year low 3.37%)
Yields on treasuries and mortgage rates made new 12 month highs in December and revisited that high earlier this year, but the trend for most of this year has been a decline to improving neutrals. Corporate bonds remain neutral. The yield curve remains positive also. Meanwhile, the spread between corporate bonds and treasuries hit another 10 year low, a strongly bullish short leading sign.
Housing
Mortgage applications
- purchase applications up +0.1% w/w
- purchase applications up +7% YoY
- refinance applications down -4% w/w
- Up +0.1% w/w
- Up +3.6% YoY
Purchase mortgage applications have been surprisingly positive for most weeks this year, while refi applications have remained near multi-year lows. In fact, refinancing this year has sunk so much that it is close to its lowest point since 2001!
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 few months for loans to become a neutral.
Money supply
M1
- Unchanged w/w
- -1.1% m/m
- +3.0% YoY Real M1
- +0.1% w/w
- +0.2% m/m
- +3.0% YoY Real M2
Since 2010, both real M1 and real M2 have been resolutely positive. Both have recently decelerated substantially. Real M1 is still very positive.
But the big news this week is that Real M2 declined to slightly below 3.0% (2.97%), which means it has turned from positive to neutral. In so doing, it has joined interest rates, most housing measures, the personal savings rate, and corporate profits as neutrals or negatives among this most forward-looking group.
Credit conditions (from the Chicago Fed)
- Financial Conditions Index down -0.03 to -0.89
- Adjusted Index (removing background economic conditions) down -0.03 to -0.64
- Leverage subindex down -0.04 to -0.63
Trade weighted US$
- Up +0.16 to 119.66 w/w, -1.8% YoY (one week ago) (Broad)
- Down -0.73 to 93.07 w/w, -5.1% 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 was neutral for about 5 months before turning positive this summer.
Commodity prices
JoC ECRI
- Down -0.78 to 107.87 w/w
- Up +13.64 YoY
- 131.67 up +3.32 w/w, up +32.79% YoY
Stock prices S&P 500
- Up +0.1% w/w to 2553.17 (new all time high)
Regional Fed New Orders Indexes
(*indicates report this week) (no reports this week)
- Empire State up +4.3 to +24.9
- Philly up +9.2 to +29.5
- Richmond up +3 to +20
- Kansas City down -15 to +10
- Dallas up +4.3 to +18.6
- Month over month rolling average: unchanged at +21
Employment metrics
Initial jobless claims
- 243,000 down -17,000
- 4 week average 257,500 down -10,750
- Hurricane-adjusted (one week ago) down -3,000 to 243,000
Despite the hurricane-related increase in the 5 prior weeks, 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 98 w/w
- Up +2.10 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. In the last few weeks, it has become strongly positive.
Tax Withholding
- $85.5 B for the first 8 days of October 2017 vs. $80.2 B one year ago, up +$5.3 B or +6.6%
- $184.1 B for the last 20 reporting days vs. $172.9 B one year ago, up +$11.2 B or +6,5%
After being positive through most of 2014, these decelerated and even occasionally were negative, in late 2015 through the first part of 2016. With the exception of August, 2017 has shown marked improvement.
- Up +$2.12 to $51.39 w/w, down -4.9% YoY
- Gas prices down -$0.06 to $2.50 w/w, up +$0.23 YoY
- Usage 4 week average up +1.4% YoY
The price of gas bottomed about 21 months ago at $1.69. With the exception of July, prices generally went sideways with a slight increasing trend for the last year. Usage turned negative in the first half of this year, but subsequently improved, and for most of the last two months turned positive again.
Bank lending rates
- 0.310 TED spread unchanged w/w
- 1.1240 LIBOR unchanged w/w
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 +3.2% YoY
- Goldman Sachs down -0.6% w/w, up +2.0% 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. Both were positive again this week.
Transport
Railroad transport
- Carloads up +2.0% YoY
- loads ex-coal up +4.5% YoY
- Intermodal units up +10.8% YoY
- Total loads up +6.3% YoY
Shipping transport
- Harpex up +2 to 508
- Baltic Dry Index up +113 to 1433
Rail turned negative in 2015 and fell even more sharply in spring 2016. Since summer 2016, rail improved to neutral and then generally positive since November 2016. Over the last two months, it has been more mixed. It was probably affected by the hurricanes. In any event, this week rail was uniformly positive.
Harpex recently declined to repeated multi-year lows, then came back all the way to positive, declined again, but in the last several months has come all the way back to positive again. BDI also surged back to being a positive, declined back to neutral earlier this year, but reently turned up again, and several weeks ago made a 3 year high. 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 +2.1% w/w
- Up +5.2% YoY
Steel production had generally been in a decelerating uptrend through early 2014, then gradually worsened through the end of 2015. It improved from negative to "less bad" to positive in 2016 and has generally remained positive this year, although during early summer, it alternated between positive and negative. It has been more positive in the last several months.
SUMMARY:
The big news this week was in the long leading indicators: Real M2 fell slightly below +3.0% YoY and thus is downgraded from positive to neutral. Corporate bonds, treasury yields, and mortgage rates all remain neutral, as does growth in real estate loans. The yield curve, M1 money supply, purchase mortgage applications, and the two more leading Chicago Fed Financial Conditions Indexes remain positive. Refinance mortgage applications are the sole negative.
Short leading indicators, including stock prices, industrial metals, the regional Fed new orders indexes, spreads, financial conditions, staffing, the US$, and oil and gas prices are all positive. Jobless claims also returned to positive this week as the impact of the hurricanes fades. Gas usage, has been back and forth between positive and negative recently, remained positive.
Among the coincident indicators, positives included consumer spending, steel, the TED spread, tax withholding, the Baltic Dry Index and Harpex. Rail returned to a strong positive this week. Only LIBOR remains negative.
After several months of boring sameness, the weekly indicators are beginning to show a change in trend. The short leading indicators are literally ALL positive. Coincident indicators except for LIBOR are also all positive. The present and near future economy looks stronger than at any time I can recall during this entire expansion (although job growth is decelerating and wage growth is still paltry).
But enough of the long leading indicators (including monthly and quarterly ones) have deteriorated to neutral or even negative for me to downgrade the longer term outlook to neutral. The change in real M2 may prove ephemeral, as the oil-fired surge in inflation abates, But on the other hand, even nominally, M2 has been decelerating. As usual, I will remain entirely data driven.
Have a nice weekend!
