Home > XE Currency Blog > Weekly Indicators: watch interest rates! edition

AD

XE Currency Blog

Topics7443 Posts7488
By New_Deal_democrat May 9, 2015 10:01 am
  • XE Contributor
New_Deal_democrat's picture
New_Deal_democrat Posts: 547
Weekly Indicators: watch interest rates! edition

Monthly data for April was dominated by the jobs report, showing a return to 200k+ growth, a decline in the unemployment rate, and a slight increase in wage growth.  A big increase in construction jobs after a poor March showed that winter did indeed have an impact.  On the other hand, the manufacturing workweek and overtime both declined. The ISM services index increased.

March data included an increase in factory orders and consumer credit, and a (negative) increase in wholesale inventories, showing a mixed picture in manufacturing. The trade deficit exploded higher showing the impact of the ending of the West Coast ports strike.

In the rear view mirror, first quarter productivity declined, but unit labor costs increased.

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.

This week we had a big spike in interest rates, so let's start there:

 Interest rates and credit spreads

  • 4.82% BAA corporate bonds up +0.17%
  • 2.18% 10 year treasury bonds up +0.07%
  • 2.64% credit spread between corporates and treasuries up +0.10%

30 year conventional mortgage rate from Mortgage News Daily

  • 3.87%, up +0.03% w/w (low was 3.35% in December 2012)

Interest rates for BAA corporate bonds made a 50+ year low 12 weeks ago. This was not confirmed by AAA corporate bonds.  After a possible once-in-a-lifetime low of 1.47% in July 2012, Treasuries rose to over 3% in late 2013, then fell through 2014 and into 2015, where they had hovered at or below 2% before this week.  Spreads widened in recent months, a warning of near-term weakness, and had wobbled back and forth near the neutral 2.50% range before breaking decisively negative this week.

Mortgage rates remain just barely in the bottom half of their 12 month range, but have not made a new low in over two years. 

IMPORTANT:  I have been scoring interest rates as a positive for seemingly ages.  It will not take much more of a move for me to score them as neutral or even negative.  BAA corporate bonds intraweek came within 0.02% of a 1 year high, which was 4.91%. Over the last 5 years they have averaged about 5%.  Should they make a new 1 year high I will move them to neutral, and should they rise above 5% I will score them negative.  Treasuries, however, are still well within the lower part of their 5 year range.

Similarly, the 1 year high in mortgage rates was 4.26%. Their 5 year midpoint is about 4.2%.  If mortgage rates go above 4%, I will score them neutral, and if they move above 4.25% I will score them a negative.

Consumer spending

  • Johnson Redbook +1.5% YoY
  • Gallup daily consumer spending 14 day average at $88, down -$5 YoY

The Gallup report, which had been barely positive to outright negative since the beginning of this year, had three weeks in a row of excellent YoY comparisons, the best in 2015 to date, before turning negative this week against more challenging YoY comparisons.

In the second half of 2014, Johnson Redbook was between +3.5% to +5%.  It has fallen out of that range in 13 of the last 15 weeks.  This is the last week that the index might have been influenced by Easter distortions.

Transport
 Railroad transport from the AAR

  • -12,200 carloads down -4.8% YoY 
  • -2,500 carloads ex-coal down -2,500 YoY
  • +15,200 intermodal units up +5.7% YoY
  • +1,100 total loads up +0.2% YoY

Shipping transport

  • Harpex unchanged at 620 (4 year high)
  • Baltic Dry Index down -14 to 583

Rail traffic fell off a cliff eight weeks ago. Intermodal traffic quickly turned positive again, but domestic carloads, led by coal (for export) have remained generally negative.  After declining sharply for several months, making a 3 year low in mid-February, the BDI rebounded mildly and then has plauteaued. Meanwhile, Harpex (container shipping) has turned up sharply for the last 3 months in a row, making almost continual new 4 year highs.  In the longer term, shipping rates bottomed about 3 years ago and have been in a slow and variable uptrend since, although the Baltic index did break that to the downside in the recent skid.

Steel production from the American Iron and Steel Institute 

  • +0.3%  w/w
  • -7.0% YoY

Steel production over the last several years had generally been in a decelerating uptrend.  Since  spring 2014, it turned mixed, and then cliff-dived two months ago. This may be due to weak foreign economies and a strong dollar (and Chinese dumping). It has gotten "less worse" YoY in the last several weeks as weekly production has increased.

Commodity prices
JoC ECRI

  • Up +0.28 to 104.00 w/w
  • Down -19.64 YoY

BBG Industrial metals ETF

  • 126.57 up +7.15

Commodity prices as measured by ECRI remain close to their recent new low.  This is still probably due to international weakness, and mainly about oil.  Industrial metals generally declined in the last 3 years, then made and retested a low in the last three months, and bounced near that bottom before a smart positive move this week.

Housing

Mortgage applications from the Mortgage Bankers Association:

  • +1% w/w purchase applications
  • +12% YoY purchase applications 
  • -8% w/w refinance applications

YoY purchase applications established a "less awful" trend in the latter part of 2014.  They have turned positive for 11 of the last 12 weeks.  Despite this bounce, the longer term comparisons of refinancing applications still shows them near their bottom.

Real estate loans, from the FRB H8 report:

  • unchanged w/w
  • up +3.8% YoY

Loans turned up at the end of 2011, turned down in late 2013, but have remained positive to sharply positive since April 2014.

Money supply
M1

  • -0.2% w/w
  • -0.4% m/m
  • +6.9% YoY Real M1

M2

  • -0.2% w/w
  • +0.2% m/m
  • +5.7% YoY Real M2

Between actual deflation and possibly a mild European flight to safety, real YoY money supply is firmly positive.  At the time of the last flight to safety (from Europe) in January 2012, YoY Real M1 made a high of about 20%, and YoY Real M2 made a high of about 10.5%.  Growth in both then decelerated.  Real M2 made a new 2 year low at the beginning of 2014.  Both Real M1 and Real M2 improved substantially since.

Employment metrics
 Initial jobless claims

  • 265,000 up +3,000 
  • 4 week average 279,500 down -4,250 (15 year low)

Initial claims remain well within the range of a normal economic expansion, as does the 4 week average.  This is particularly interesting since the 10 Oil patch states have seen higher jobless claims in the last few months, but they have been overmatched by lower claims elsewhere.

The American Staffing Association Index 

  • Up +1 to 98
  • Up +2.22% YoY.

The YoY comparison had generally been positive to strongly positive since last spring.  One month ago, the YoY comparisons, while still positive, declined significantly, although in the last two week we got a decent rebound.

Tax Withholding

  • $51.4 B for the first 5 days of May vs. $48.9 B one year ago, up +$2.5 B or +5.1%
  • $166.4 B for the last 20 reporting days ending Thursday vs. $158.0 B one year ago, up +$8.4 B or +5.3%

Beginning with the last half of 2014, virtually all readings have been positive.

Oil prices and usage

  • Oil up +$0.21 to $59.47 w/w
  • Gas up +$.09 to $2.66 w/w
  • Usage 4 week average up +3.9% YoY

The price of gas bottomed 12 weeks ago. Oil briefly made a new low four weeks ago, but has also risen to 2015 highs since.  The 2010-2013 Oil choke collar has been broken.  The interesting issue now is when and at what price we get the seasonal peak, even though gas prices have only risen about $0.64 off their January bottom.  If they follow past seasonal patterns, their summer peak will be roughly $1 above their winter low.

Bank lending rates

  • 0.266 TED spread down -0.008. w/w
  • 0.1803 LIBOR down -0.007 w/w 

LIBOR has risen sharply from its post-recession low set in one year ago, and the TED spread has been in an uptrend since the last the middle of 2014, rising off its November 2013 low.  LIBOR also was in an uptrend but over the last 6 weeks seems to have plateaued.  Both have recently made significant new highs.

SUMMARY:

Among long leading indicators, the big spike in interest rates moved them much closer to neutral from positive.  Money supply and real estate loans were positive.  Purchase mortgage applications were positive for the seventh straight week, while refinancing, despite a small boomlet, in the longer term is negative and still very close to its multi-year bottom. 

The short leading indicators were mixed.  The big story is spreads.  An upward spike in interest rates with widening spreads is a classic short leading indicator for recession, and this week, that's what we got.  While oil and gas prices have risen, both remain positives, as is gas usage.  Initial jobless claims were very positive, and temporary staffing improved.  Industrial metals turned slightly positive.

All but two of the coincident indicators were negative.  The positives were tax withholding and  container shipping.  Steel production was again "less awful," and rail was again mixed, dragged down by the strong dollar killing coal exports. The Baltic Dry Index remained slightly negative, as did the TED spread and LIBOR.  Johnson Redbook consumer spending rebounded a little more from its least positive week in a year, while disappointingly Gallup turned negative again against more challenging comparisons with last May.

In the last several months the theme has been  poor coincident indicators with generally positive long and short leading indicators, reflecting a shallow industrial recession due to the strong dollar and oil patch weakness, but a resilient domestic, consumer economy.  The big addition this week was the move in interest rates.  Should interest rates spike much more, they will begin to drag down housing again, and that will leave money supply as the only positive long leading indicator, as corporate profits have already turned down.

Have a nice weekend!

Paste link in email or IM