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By New_Deal_democrat March 5, 2016 9:35 am
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Weekly Indicators: trend changes continue with US$, steel, and rail in the spotlight edition
February 2016 reports started out mixed, with good jobs growth, a flat unemployment rate but a decrease in the underemployment rate. Wages declined. Construction spending, factory orders, and ISM services were positive, but ISM manufacturing continued slightly negative, as was the Chicago PMI. Motor vehicle sales were flat.
 

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.  The indicators will confirm a trend or indicate a switch in trend well before monthly and quarterly reports.

 

In general I go in order of long leading indicators, then short leading indicators, then coincident indicators.

 

Interest rates and credit spreads

  • 5.30% BAA corporate bonds up +.03%
  • 1.83% 10 year treasury bonds up +.12%
  • 3.47% credit spread between corporates and treasuries down -.07%
30 year conventional mortgage rate:
  • 3.73%, up +.06% w/w

With the exception of BAA corporate bonds yields, which made a new 50+ year low in January 2015, yields for corporate bonds, treasuries, and mortgages have all failed to make new lows in 3 years, thus turning yellow (caution or neutral vs. positive) as a recession indicator -- although treasuries and mortgage rates both came very close to new all-time lows in the last month, and remain low enough to be short-term positives.  Spreads remain very negative, although they, like corporate bond yields, have improved slightly in the last 45 days.

Housing

 

Mortgage applications

 

  • purchase applications down -1% w/w
  • purchase applications up +27% YoY
  • refinance applications down -7% w/w
 
Real Estate loans
  • +0.2% w/w
  • +6.5% YoY

Mortgage applications had been awful for several years, before turning up early last year in response to very low rates. They are now strongly positive.

Real estate loans have been firmly positive for two years.

 

Money supply

M1

  • -0.1% w/w
  • +0.6% m/m
  • +2.8% YoY Real M1
M2
  • +0.3% w/w 
  • +0.4% m/m 
  • +4.4% YoY Real M2

Real M1 decelerated markedly in the last month to the point where it was a very weak positive, but it did improve this week.   Real M2 has also decelerated, but is more firmly positive.

 

Trade weighted US$ 

  • Up +0.06 to 123.98 w/w, up +8.3% YoY (Broad)
  • Down -0.81 to 97.34 w/w, DOWN -0.3% YoY (major currencies)

 

The Broad measure is reported by the FRB on Mondays and so is delayed one week. Bloomberg's spot price against major currencies is accurate as of Friday.  The US$ appreciated about 20% between 12 and 18 months ago. In 2015 the broad measure continued to appreciate, but at a relatively more moderate trend, while against major currencies is has been flat since March 2016.  l consider a YoY change of 5% or higher a negative. The broad measure is still strongly negative, although it is moderating.  The big news this week is that, against major currencies, the US$ turned outright positive.

 

Commodity prices

JoC ECRI

  • Up +1.26 to 80.98 w/w 
  • Down -20.95 YoY
BBG Industrial metals ETF
  • 96.94 up +5.24 w/w (5  month high)
While oil continued to decline, commodity prices as measured by ECRI and industrial metals had generally gone sideways since November, before falling again in the first 3 weeks of January.  Even so, the YoY comparisons are "less bad." Industrial commodities turned up enough this week to be scored as neutral.

 

Employment metrics

 Initial jobless claims

  • 278,000 up +16,000 
  • 4 week average 270,250 down -1,750

 

Initial claims remain well within the range of a normal economic expansion, as does the 4 week average, although there had been some weakening in January, which has since reversed.

 

The American Staffing Association Index

 

  • Down -1 to 92 w/w
  • Down -2.42 YoY

Since last spring, the YoY comparison turned neutral and then increasingly negative, although since the beginning of the year it has become "less worse." I would need this series to be -2.15% YoY or less for me to believe it has bottomed.

 

Tax Withholding

  • $207.3 B for the month of February vs. $186.8 B one year ago, up +$20.5 B or +11.0%
  • $194.8 B for the last 20 reporting days ending Thursday vs. $193.5 B one year ago, up $1.3 B or +0.7%

February, which had looked poor, completely reversed due to a huge day on February 29.

 

Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, while still positive, since August. Two weeks ago I said I would need this series on the 20 day basis to decline to less than +2% YoY for me to think it has reached a turning point, and it has now done so for 3 weeks in a row, thus becoming a major red flag. I should note that Lee Adler of the Wall Street Examiner ( http://wallstreetexaminer.com ), who frequently reports on this metric, has attributed the poor February YoY readings to differences in the schedules of bonus payments last year vs. this year. I have no idea if he is right or not, but it is worth passing on.  If so, however, this should correct itself over the next few weeks.

 

Oil prices and usage

  • Oil up $3.49 to  $36.33 w/w
  • Gas prices up +$.05  to $1.78 w/w 
  • Usage 4 week average up +6.9% YoY 

 

The price of gas and oil bottomed at the end of January 2015 at $2.02, and appears to have bottomed for this winter three weeks ago at $1.69.  Usage turned negative for five weeks, but has returned to positive in the last 3 weeks.

 

Bank lending rates

 

Both TED and LIBOR were already rising since the beginning of last year to the point where both have usually been negatives, although there were some wild fluctuations.  Both TED and LIBOR were at or near 5 year highs in the past several months, but TED has improved in the last month or so.

 

Consumer spending

 

Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat since the beginning of November.  Gallup turned  positive and has remained so for 9 of the last 11 weeks. Because Gallup includes gas purchases, the fact that it turned positive strongly suggests that consumers have started to spend some of their gas savings on other things.

 

Transport

Railroad transport

  • Carloads down -7.1% YoY
  • loads ex-coal up +0.7% YoY
  • Intermodal units up +13.0% YoY
  • Total loads up +2.5% YoY

Shipping transport

Rail traffic turned negative and then progressively worse in pulses throughout 2015. While intermodal traffic quickly turned positive, domestic carloads, led by coal (for export) continued to deteriorate.  Rail loads became "less worse" in January, and this week for the second straight week carloads were less than -10% YoY (and positive ex-coal), which suggests that rail has bottomed.

After rising briskly last spring, both the BDI and Harpex declined again to new multi-year lows, although both may have bottomed. 

Steel production

 

  • Down  -0.4% w/w
  • Down -0.8% 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. In the last two months these too have gotten "less worse." Three weeks ago I wrote that if steel production turned less than -4% off YoY for several weeks, that would suggest it has bottomed - and it has done exactly that.

 
 

SUMMARY: 

 

The recent reversals in trends continued this week. For the first time, the US$ was down YoY against major currencies, a positive (although the broad measure remains quite negative).  Rail, steel, and industrial commodities have improved enough to be scored as neutral. The recent slight decline in corporate bond yields and spreads is also slightly encouraging. Gallup daily spending has become a real positive. On the other hand, tax withholding has stalled (although there may be a non-economic explanation). Real M1, which had been a concern, improved somewhat this week.

 

Among long leading indicators, interest rates for corporate bonds are neutral, while treasuries, real estate loans, mortgage applications, Real M2, and mortgage rates are positive.  In fact, mortgage rates and applications are now strongly positive. Real M1, which had decelerated to the point of being only slightly positive, improved somewhat this week.

 

Among short leading indicators, the interest rate spread between corporates and treasuries remains very negative, although it has improved in recent weeks.  Jobless claims remain positive. Oil and gas prices, and usage, remain very positive. Commodities have been "less worse" on a YoY basis recently, and industrial commodities have improved enough to be scored as neutral. The US$ as against major currencies has turned outright positive while on a broad basis it remains quite negative.

 

Among coincident indicators, bank rates, staffing and shipping remain negative,  Consumer spending was positive.  Withholding taxes which have deteriorated badly enough to be negative (accurately forecasting the decline in wages and hours worked in the February job report), may be explained by difference in bonus payments this year vs. last year.  On the other hand, over the last month, steel production has almost turned positive and rail transport actually positive on a YoY basis, suggesting these have bottomed. I have therefore changed to scoring them as neutral.

 

This week is confirmation that the bifurcation of decent consumer economy, poor industrial economy (at least that portion tied to commodity extraction and exports) that began one year ago, is apparently changing -- and generally for the better, as commodity production and transportation look like they have turned positive. At the same time, Real M1 and tax withholding continue to bear close watching.

 

Have a nice weekend!

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