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By New_Deal_democrat October 14, 2017 9:26 am
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Weekly Indicators: Real M2 and long term outlook both downgraded to neutral edition
September data included a big jump in retail sales and inflation, both probably powered by the impact of the hurricanes. All of the measures contained in the JOLTS report declined.Sentiment as measured by the University of Michigan soared, with sentiment as to current conditions at a new record for the Millennium.
 
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 4.30% -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)
Yield curve, 10 year minus 2 year:
  • 0.84%, down -0.02% w/w
30 year conventional mortgage rate
  • 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
 
Real Estate loans
  • 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
M2
  • +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
The Chicago Fed updated and changed the Adjusted Index several weeks ago, so that its break-even point appears to be -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 +0.16 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
BBG Industrial metals ETF 
  • 131.67 up +3.32 w/w, up +32.79% YoY
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the election.  ECRI briefly turned down enough to be downgraded to neutral, but both are again positive -- industrial metals rip-roaringly so.

 

Stock prices S&P 500

 

  • Up +0.1% w/w to 2553.17  (new all time high)
Stock prices are positive, having made a string of new all-time highs beginning over one year ago.
 

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
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction. These have turned more positive in the last two months.

 

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.

 

Oil prices and usage

  • 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

 

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

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!

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