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By New_Deal_democrat January 27, 2018 10:37 am
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Weekly Indicators: what's going on with rail and steel? edition
The most noted data this week was that in the rear view mirror, Q4 GDP continued to increase at a rate approaching 3% annualized in the initial estimate. Capex and residential investment increased nicely, while inventories slackened.
 
December data included a strong increase in the Index of Leading Indicators, and positive durable goods orders. On the other hand, both new and existing home sales fell.
 
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.
 
NOTE that I include 12 month highs and lows in the data in parentheses to the right.

 

Interest rates and credit spreads

  • BAA corporate bond index 4.24% down -.02% w/w (1 yr range: 4.15 - 4.90)
  • 10 year treasury bonds 2.65% down -.01% w/w  (2.05 - 2.67) (new 3 year high intraweek)
  • Credit spread 1.59% down -.01% w/w (1.68 - 2.30) (new 10 year low)
Yield curve, 10 year minus 2 year:
  • 0.56%, down -0.03% w/w (.50 - 1.30) 
30 year conventional mortgage rate
  • 4.25%, up +0.02% w/w (3.84 -  4.39)

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

 

Yields on treasuries and mortgage rates made new 12 month highs one year ago. The trend for most of 2017 was neutral. Treasuries just made a new high, but mortgage rates are still below theirs. The yield curve remains weakly positive, while the spread between corporate bonds and treasuries is strongly positive.

 

Housing

 

Mortgage applications 

 

  • Purchase apps up 63% w/w
  • Purchase apps up +7% YoY
  • Refi up +1% w/w
 
Real Estate loans
  • Up +0.2% w/w 
  • Up +3.7% YoY  ( 3.5 - 6.5) (new 1 year low) 

Purchase applications were strong almost all last year. Refi has been dead.  Last month, purchase applications turned neutral and then negative. This month they returned to positivity.

 

The growth rate of real estate loans remains neutral.

 

Money supply

M1

  • Up +1.6 w/w 
  • -1.6% m/m
  • +6.4% YoY Real M1 (4.6 - 6.9)
M2
  • Up +0.2 w/w  
  • -0.1%  m/m 
  • +2.2% YoY Real M2 (2.2 - 4.1)

Since 2010, both real M1 and real M2 were resolutely positive.  Both decelerated substantially in 2017.  Real M1 is still quite positive, however, while real M2 growth has fallen below 2.5% and is thus a negative.

 

Credit conditions (from the Chicago Fed) 

 

  • Financial Conditions Index down -.01 to -0.94 (new 1 year low)
  • Adjusted Index (removing background economic conditions) up +.02 to 0.76
  • Leverage subindex up +.01 to -0.60
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 -1.03 to 116.76 w/w -7.7% YoY (last week) (broad) (116.74 -128.62) 
  • Down -1.59 to 89.06 w/w, -11.43% 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 a positive since last summer.

 

Commodity prices

JoC ECRI 

  • Up +1.64 to 115.82 w/w
  • Up +6.84 YoY 
BBG Industrial metals ETF 
  • 138.94 up +2.79 w/w, up +22.29% YoY (108.00 - 138.81)
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the 2016 presidential election.  ECRI has recently decelerated enough to become neutral.  Industrial metals remain a  positive.

 

Stock prices S&P 500

 

  • Up +2.2% w/w to 2872.87 (new all time high)
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 -7.1 to +11.9
  • Philly down -18.1 to +10.1
  • *Richmond unchanged at +16
  • *Kansas City up +7 to +14
  • Dallas up +10.1 to +30.1
  • Month over month rolling average: up +1 to +16
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction, and remains positive, but less so than the last few months.

 

Employment metrics

 Initial jobless claims

  • 233,000 up +13,000
  • 4 week average 240,000 down -5,500

 Initial claims remain well within the range of a normal economic expansion. They turned negative YoY, probably due to seasonal distortions, for two weeks before falling sharply this week. The less volatile 4 week average is right in line with its 2017 average.

 

The American Staffing Association Index

 

  • Down -1 to 90 w/w
  • Down -0.6 YoY

This index was generally neutral from May through December 2016, and then positive with a few exceptions all during 2017. This number -- calculated by the ASA as a 4 week average -- has now been negative for a month, but is still in the throes of volatile seasonality for several more weeks. The actual weekly number is 94, which is 1 above last year's number of 93.

 

Tax Withholding

  • $197.1 B for the first 17 days of January 2018 vs. $187.0 B one year ago, up +$10.1 B or +5.4%
  • $230.3 B for the last 20 reporting days vs. $190.3 B one year ago, up +$40.0 B or +21.0%

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

 

Oil prices and usage 

  • Oil down -$2.69 to $66.26 w/w,  up +20.6% YoY (2.5 year high) 
  • Gas prices up +0.01 to $2.57 w/w, up +$0.24 YoY 
  • Usage 4 week average up +5.4 YoY 

 The price of gas bottomed 2 years ago at $1.69.  With the exception of July, prices generally went sideways with a slight increasing trend in 2017.  Usage turned negative in the first half of 2017, but has almost always been positive since then.

 

 Bank lending rates

 Both TED and LIBOR rose in 2016 to the point where both were usually negatives, with lots of fluctuation.  Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions.  The TED spread was generally increasingly positive in 2017, while LIBOR was increasingly negative.

 

Consumer spending

  • Johnson Redbook up +3.8% YoY
  • Goldman Sachs Retail Economist +0.1% w/w, +3.4% YoY

 Both the Goldman Sachs and Johnson Redbook Indexes generally improved from weak to moderate or strong positives during 2017.

 

Transport

Railroad transport

  • Carloads down -7.6% YoY
  • Intermodal units up +1.8% YoY
  • Total loads down -2.9% YoY

Shipping transport

Rail has been generally positive since November 2016 and remained so during all of 2017 with the exception of a period during autumn when it was mixed. Seasonal distortion should be over, so the big negative carloads number is a concern.

Harpex made multi-year lows in early 2017, then improved, declined again, and then improved  yet again to recent highs. BDI traced a similar trajectory, and made 3 year highs near the end of 2017. 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 

  • Down -0.8% w/w
  • Down -2.5% YoY

Steel production improved from negative to "less bad" to positive in 2016 and with the exception of early summer, remained generally positive in 2017. It has turned negative for the last month. Since seasonality should no longer be influencing this number, it, like rail carloads, is a concern.

 
 

SUMMARY: 

 

Among the long leading indicators, spreads are very positive, joined by some corporate bonds, real M1, purchase mortgage applications, and the more leading Chicago Fed Financial Conditions Indexes. Growth in real estate loans is neutral. Treasuries, mortgage rates (slightly), refinance applications, and real M2 all remain negatives.

 

Among the short leading indicators, stock prices, industrial metals, the regional Fed new orders indexes, spreads, financial conditions, the US$, jobless claims, and gas prices and usage all remain positive. Oil prices and the ECRI commodity index are neutral. Staffing was negative. but the actual number for this past week was positive, so I am discounting that.

 

Among the coincident indicators, positives included consumer spending, tax withholding, the TED spread, the Baltic Dry Index and Harpex. LIBOR remains negative.  That rail has been mixed and steel has been negative for a month, even though seasonality should have disappeared, is a concern.

 

The near term forecast remains extremely positive, so the downturn in rail and steel is a real puzzle.  Sine the coincident tail does not wag the short leading dog, I am still positive on the outlook, but will watch rail and steel to see if the negativity spreads.

 

The recent increase in interest rates turning some long leading indicators negative, and the negative real M2, are causes for longer term concern. But with this week's numbers, housing remains a weak positive, as are corporate bonds. Corporate profits also remain positive. Thus the long term forecast on balance remains weakly positive.

 

Have a nice weekend!

 

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