Interest rates and credit spreads
- BAA corporate bond index 4.17% down -0.08% w/w (new 12 month low) (multiyear low 4.15%)
- 10 year treasury bonds 2.35% down -0.03% w/w
- Credit spread 1.82% down -0.05% w/w
- 0.51%, down -0.04% w/w (expansion low)
- 3.96%, down -0.01% w/w (1 year high was 4.39%, 1 year low 3.84%)
Corporate bonds, having made a new 12 month low, are a weak positive. Should they fall below 4.15%, which was the low for this entire expansion, that will be a major positive. Mortgage rates, which have also declined recently, also remain neutral. IMPORTANTLY, AAA rated corporate bonds have not confirmed this move, and are still neutral.
Yields on treasuries and mortgage rates made new 12 month highs last December and revisited that high earlier this year, but the trend for most of this year has been neutral. The yield curve is at its most narrow for this expansion, but remains positive in the longer term context -- although more weakly so. The spread between corporate bonds and treasuries remains near its recent 10 year low.
Housing
Mortgage applications
- purchase applications down -1% w/w
- purchase applications up +10% YoY
- refinance applications down -3% w/w
- Unchanged w/w
- Up +3.9% YoY
Purchase mortgage applications remained positive this week, while refi applications remain near 15 year lows. The growth rate of real estate loans, which returned to being positive last week, declined back to a neutral.
Money supply
M1
- +0.5% w/w
- +2.1% m/m
- +7.4% YoY Real M1
- +0.3% w/w
- +0.5% m/m
- +2.5% YoY Real M2 (2.499%)
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, on the other hand, declined back ever so slightly into negative territory this week (under 2.5%), and the longer term deceleration of growth remains intact.
Credit conditions (from the Chicago Fed)
- Financial Conditions Index up +0.01 to -0.91
- Adjusted Index (removing background economic conditions) down -0.01 to -0.72
- Leverage subindex down -0.02 at -0.63
Trade weighted US$
- Up +1.10 to 120.34 w/w, -5.2% YoY (one week ago) (Broad)
- Up +0.05 to 93.95 w/w, -8.6% 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 +0.72 to 107.13 w/w
- Up +3.87 YoY
- 129.54 up +5.47 w/w, up +13.31% YoY
Stock prices S&P 500
- Up +0.5% w/w to 2675.81 (new record high)
Regional Fed New Orders Indexes
(*indicates report this week)
- *Empire State down -1.2 to +19.5
- Philly up +1.8 to +21.4
- Richmond up +18 to +35
- Kansas City down -5 to +22
- Dallas down -4.8 to +20.0
- Month over month rolling average: unchanged at +24
Employment metrics
Initial jobless claims
- 225,000 down -11,000
- 4 week average 234,750 down -6,750
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
- Up +4 to 100 w/w
- Up +0.83 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
- $98.8 B for the first 10 days of December 2017 vs. $92.2 B one year ago, up +$6.6 B or +7.2%
- $186.8 B for the last 20 reporting days vs. $171.3 B one year ago, up +$15.5 B or +9.0%
With the exception of the month of August and late November, this has been positive for almost all of 2017.
- Oil up +$0.02 to $57.35 w/w, up +12.7% YoY
- Gas prices down -$0.01 to $2.49 w/w, up +$0.25 YoY
- Usage 4 week average up +1.6% 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 for most of the last several months turned positive again.
Bank lending rates
- 0.320 TED spread up +0.040 w/w
- 1.49 LIBOR up +0.058 w/w
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 +3.2% w/w, up +3.1% 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 +3.4% YoY
- loads ex-coal up +4.1% YoY
- Intermodal units up +4.6% YoY
- Total loads up +4.0% YoY
Shipping transport
- Harpex unchanged at 477
- Baltic Dry Index up +60 to 1730 (new three year high)
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 few weeks 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
- Down -2.8% w/w
- Up +4.0% 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 had been more positive in the last several months, but this week the YoY change has declined enough to warrant a neutral rating.
SUMMARY:
In the long leading indicators. the yield curve remains a weak positive, as do corporate bonds, M1 money supply, purchase mortgage applications, and the two more leading Chicago Fed Financial Conditions Indexes. Treasury yields, mortgage rates, and growth in real estate loans remain neutral Refinance mortgage applications were joined again this week by Real M2 as the only negatives. Importantly, higher rated AAA corporate bonds have not confirmed the positive move by BAA bonds.
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. Oil prices have turned neutral for the last three weeks, as has the ECRI commodity index.
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, with only relatively strong oil prices juxtaposed with relatively weak commodity prices (perhaps due to weakness in China?) as flies in the ointment. It seems we will find out in the next 12 to 24 months if an inverted yield curve in China means the same thing it has meant in the US.
The longer term forecast is undergoing relatively rapid changes. The yield curve is a weakening positive, and M2 has turned negative. On the other hand, lower grade (and only lower grade) corporate bonds have turned weakly positive. For now that is enough for me to maintain a weak positive forecast. As is so often, much will turn on housing, and we will get all of those important reports this coming week.
Have a nice weekend!
