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By New_Deal_democrat December 23, 2017 10:05 am
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Weekly Indicators: spreads fall to 10 year low edition

November housing data was all strongly positive, including permits, starts, and new and existing home sales. Partly as a result of that, the Index of Leading Indicators increased. Personal income and spending were up, but at the expense of a decline in the savings rate.  Durable goods rose overall, but core goods fell slightly. Sentiment as measured by the University of Michigan, particularly as measured by the forward-looking expectations component, 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 4.27% up +0.10% w/w (multiyear low 4.15% tied intraweek)
  • 10 year treasury bonds 2.49% up +0.14% w/w 
  • Credit spread 1.78% down -0.04% w/w (new 10 year low)
Yield curve, 10 year minus 2 year:
  • 0.62%, up +0.11% w/w (expansion low)
30 year conventional mortgage rate
  • 4.10%, up +0.14% w/w (1 year high was 4.39%, 1 year low 3.84%)

BAA Corporate bonds, having tied their expansion low, are now a positive, but only weakly so because AAA bonds did not confirm this low. Mortgage rates, however, rose and are back to a weak negative.

 

Yields on treasuries and mortgage rates made new 12 month highs one year ago and revisited that high early this year, but the trend for most of this year has been neutral. The yield curve widened somewhat this week, and remains weakly positive in the longer term context. Finally, the spread between corporate bonds and treasuries made a new 10 year low and so is strongly positive.

 

Housing

 

Mortgage applications 

 

  • purchase applications down -6% w/w 
  • purchase applications up +1% YoY
  • refinance applications down -3% w/w
 
Real Estate loans
  • Down -0.1% w/w 
  • Up +3.8% YoY

Purchase mortgage applications turned neutral this week, but this is probably an artifact of seasonal volatility. Refi applications  remain near 15 year lows.  The growth rate of real estate loans remains neutral.

 

Money supply

M1

  • +0.2% w/w 
  • +2.0% m/m 
  • +7.4% YoY Real M1
M2
  • +0.4% w/w  
  • +0.5%  m/m 
  • +2.9% YoY Real M2 

Since 2010, both real M1 and real M2 were resolutely positive.  Both recently decelerated substantially.  Real M1, however, is still very positive, and jumped even more positively this week. 

 

Real M2 bounced back from negative to neutral this week. Its longer term deceleration in growth remains intact.

 

Credit conditions (from the Chicago Fed) 

 

  • Financial Conditions Index unchanged at -0.91
  • Adjusted Index (removing background economic conditions) unchanged -0.72
  • Leverage subindex up +0.01 at -0.62
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$

  • Down -0.12 to 122.22 w/w -6.1% YoY (last week) (broad)
  • Down -0.64 to 93.31 w/w, -8.3% 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 positive since this summer.

 

Commodity prices

JoC ECRI

  • Up +0.95 to 108.80 w/w
  • Up +5.90 YoY 
BBG Industrial metals ETF 
  • 134.77 up +5.23 w/w, up +22.61% YoY
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the election.  ECRI has recently decelerated enough to become neutral.  Industrial metals remain a  positive, although less so than earlier this year.

 

Stock prices S&P 500

 

  • Up +0.3% w/w to 2683.34 (new record high intraweek)
Stock prices are positive, having made a string of new all-time highs beginning in summer 2016.
 

Regional Fed New Orders Indexes

(*indicates report this week)

  • Empire State down -1.2 to +19.5
  • *Philly up +8.4 to +29.8
  • Richmond up +18 to +35
  • *Kansas City down -15 to +7
  • Dallas down -4.8 to +20.0
  • Month over month rolling average: down -2 to +22
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction, and remains very positive.

 

Employment metrics

 Initial jobless claims

  • 245,000 up +20,000
  • 4 week average 236,000 up +1,250

 

Initial claims remain well within the range of a normal economic expansion, and further, their YoY change shows no sign of substantial deceleration yet.

 

The American Staffing Association Index

 

  • Unchanged at 100 w/w
  • Up +0.43 YoY

This index was generally neutral from May 2016 until the end of last year, and has been positive with a few exceptions all this year. This number is subject to wide seasonal swings from Thanksgiving through New Year's Day.

 

Tax Withholding

  • $166.6 B for the first 15 days of December 2017 vs. $153.4 B one year ago, up +$13.2 B or +8.6%
  • $203.5 B for the last 20 reporting days vs. $189.1 B one year ago, up +$14.4 B or +7.6%

With the exception of the month of August and late November, this has been positive for almost all of 2017.

 

Oil prices and usage 

  • Oil up +$1.00 to $58.35 w/w,  up +12.2% YoY
  • Gas prices down -$0.04 to $2.45 w/w, up +$0.19 YoY
  • Usage 4 week average up +0.4% YoY

 

The price of gas bottomed nearly 2 years 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 in the last several months has been 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 turned very positive for several months, but has given that back in the last month. Meanwhile LIBOR has generally turned more and more negative.

 

Consumer spending

  • Johnson Redbook up +3.3% YoY
  • Goldman Sachs up +2.8% w/w, up +2.8% 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 +4.1% YoY
  • loads ex-coal up +5.7% YoY
  • Intermodal units up +7.6% YoY
  • Total loads up +5.9% 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 several months, it has been more mixed, although in the last month it has turned stronger.

Harpex declined earlier this year to repeated multi-year lows, then came back all the way to positive, declined again, and then came all the way back to positive again. BDI also surged back to being a positive, declined back to neutral earlier this year, but turned up again in the last few months and is now at 3 year highs. 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
  • Up +5.7% 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: 

 

Once again the "action" has been in the long leading indicators, as spreads turned very positive, joined by some corporate bonds, while mortgage rates almost turned back to negative. purchase mortgage applications fell to neutral, and M2 improved from negative to neutral. M1 money supply, and the two more leading Chicago Fed Financial Conditions Indexes. Treasury yields and growth in real estate loans remain neutral, and refinance mortgage applications remain negative.

 

All but two of the short leading indicators, including stock prices, industrial metals, the regional Fed new orders indexes, spreads, financial conditions, staffing, the US$, initial jobless claims,and gas prices and usage, remain positive. In the past month, oil prices and the ECRI commodity index have turned neutral, the latter almost turning negative.

 

Among the coincident indicators, positives included consumer spending, tax withholding, rail, steel, the TED spread, the Baltic Dry Index and Harpex. Only LIBOR remains negative.

 

The nowcast and the near term forecast remain very positive, although the weakness in commodity prices is a significant concern for the global economy.

 

The longer term forecast is in what passes for turmoil. The very positive monthly indicators in housing this past week, along with the improvements in spreads and lower rated corporate bonds, implies a strengthening positive forecast -- for now.

 

Have a nice weekend!

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