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By New_Deal_democrat May 20, 2017 9:25 am
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Weekly Indicators: the yield curve tightens edition
April data included an increase in the index of Leading Indicators, despite the fact that both housing permits and starts declined.  Industrial production and capacity utilization both increased strongly.
 
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

  • Dow Jones corporate bond index 371.55 up +2.45 w/w (2016 high was 395.36, 2016 low was 341.41) 
  • 2.24% 10 year treasury bonds down -0.08% 
  • BofA/ML B Credit spread up +0.13% to 3.86% (recent multiyear low was 3.43%)
Yield curve, 10 year minus 2 year:
  • 0.96%, down -0.10% w/w
30 year conventional mortgage rate
  • 4.02%, down -0.15% w/w (1 year high was 4.39%)

Yields on treasuries and mortgage rates made new 12 month highs in December, but subsequently retreated, turning negative for two weeks before turning neutral again.  Corporate bonds remain neutral. Spreads remain very positive. The yield curve turned more weakly positive this week, as both the 2-5 and 5-10 year spreads are less than +0.50. The 10-30 year spread remains close to +0.70, however, which is more strongly positive.

 

Housing

 

Mortgage applications 

 

  • purchase applications down -3% w/w
  • purchase applications up +9% YoY
  • refinance applications down -6% w/w
 
Real Estate loans
  • Up +0.1% w/w
  • Up +4.9% YoY

Mortgage applications turned outright negative for three weeks before tipping back to neutral and then surprisingly positive for most weeks in the last few months, including this week. Refi applications fell back to near multi-year lows.

 

Real estate loans had been firmly positive for over 3 1/2 years, but the rate of growth (of this cumulative measure) declined sufficiently for the last two months for loans to become a neutral.

 

Money supply

M1

  • +1.3% w/w
  • -1.3% m/m
  • +4.6% YoY Real M1 
M2
  • -0.1% w/w  
  • +0.6% m/m 
  • +3.6% YoY Real M2 

Both real M1 and real M2 were positive almost all last year.  Real M2 has shown substantial deceleration beginning last August, and real M1 more recently. Both remain positives.

 

Credit conditions (from the Chicago Fed) 

 

  • Financial Conditions Index -0.84
  • Adjusted Index (removing background economic conditions) -0.47
  • Leverage subindex -0.68
In these indexes, a negative number means conditions are relatively "loose," while positive numbers means conditions are relatively "tight," although for the economy as a whole, the breakeven point has been -0.5 for the unadjusted Index. The Index Adjusted for background inflation and industrial conditions shows looseness/tightness vs. what would normally be expected for those conditions, and has led the straight Index historically.  The Chicago Fed has also flagged the Leverage subindex as a leading component.
 
All three metrics presently show looseness and so are positives for the economy.
 

Trade weighted US$

  • Up +0.47 to 124.71 w/w, up +3.9% YoY (one week ago) (Broad)
  • Down -2.08 to 97.10 w/w, up +2.0% YoY (yesterday) (major currencies)

 

The US$ appreciated about 20% between mid-2014 and mid-2015.  It went mainly sideways since then until spiking higher after the US presidential election. With a few exceptions as to major currencies, it has been generally neutral for about 4 months.

 

Commodiy prices

JoC ECRI

  • Down -0.15 to 105.05 w/w
  • Up +18.27 YoY
BBG Industrial metals ETF
  • 111.95 up +2.43 w/w, up +23.5% YoY
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals surged higher since the election, but have backed off in the last two months.

 

Stock prices S&P 500

 

  • Down -0.4% w/w to 2381.73
Stock prices are positive, having made a string of new all-time highs beginning last summer.
 

Regional Fed New Orders Indexes

(*indicates report this week)

  • *Empire State down -25.7 to -4.4
  • *Philly down -2.0 to +25.4
  • Richmond up +2 to +26
  • Kansas City down -24 to +8
  • Dallas up +2.0 to +11.5
  • Month over month rolling average: down -6 +13
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction. These continue to be very positive, although they have backed off from March's highs.

 

Employment metrics

 Initial jobless claims

  • 232,000 down -4,000
  • 4 week average 240.750 down -2750

 

Initial claims remain well within the range of a normal economic expansion, as does the 4 week average.

 

The American Staffing Association Index

 

  • Down -1 to 94 w/w
  • Up +0.65 YoY

This index turned negative in May 2015, getting as bad as -4.30% late that year. In 2016 it became progressively "less bad," turning generally neutral since last May, and has been positive since the beginning of this year. For the second week in a row, this week it was sufficiently flat YoY to score neutral.

 

Tax Withholding

  • $131.8 B for the first 14 days of May 2017 vs. $127.4 B one year ago, up +$4.4 B or +3.5%
  • $179.2 B for the last 20 reporting days vs. $171.7 B one year ago, up +$7.5 B or +4.7%

Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, and occasionally even negative, in last 2015 through the first part of 2016.  The last few months have with brief exceptions showed a marked improvement.

 

Oil prices and usage

  • Oil un +$2.69  $50.53 w/w,  down -$2.79 YoY
  • Gas prices unchanged at $2.37 w/w, up +$0.13 YoY
  • Usage 4 week average down -2.6% YoY 

 

The price of gas bottomed over one year ago at $1.69.  Prices went sideways since late last summer, then briefly moved higher making them neutrals, before easing in the last few weeks.  Usage  faltered and has now turned negative for several months. Historically, it has taken at least a 40% increase YoY for gas to turn into a headwind.  We got close a month ago, but the YoY change in gas prices is back well below 20% now.

 

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 has turned very positive for the last several months. Meanwhile LIBOR has turned more and more negative.  I am at a loss as to why the two lending measures have diverged so sharply.

 

Consumer spending

  • Johnson Redbook up +2.4% YoY
  • Goldman Sachs/Retail Economist down -0.7 w/w, up +0.7% YoY (one week ago)
  • Gallup daily consumer spending 14 day average $104, up +$15 YoY

 

Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat in 2016.  This week both Goldman and Redbook were again positive, although Goldman very weakly so. Meanwhile for nearly four months Gallup has absolutely screamed higher, and remained very positive this week.

 

Transport

Railroad transport

  • Carloads up +7.0% YoY
  • loads ex-coal up +4.2% YoY
  • Intermodal units up +4.4% YoY
  • Total loads up +5.7% YoY

Shipping transport

Rail turned negative in 2015 and fell even more sharply in spring 2016. Since last June, rail improved to neutral, and then positive almost all weeks since the beginning of November. It was very positive again this week.

Harpex recently declined to repeated multi-year lows, but in the last three months came back all the way to positive. It is now higher than during 4 of the last 5 years. BDI has now also surged back to being a positive.  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 -0.5% w/w
  • Down -0.2% 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. It improved from negative to "less bad" to positive in 2016 and except for several recent weeks remained positive since. In the last few weeks it has been neutral or negative.

 
 

SUMMARY: 

 

We went from 3 or 4 outright negatives this week, as mortgage refinancing, gas usage, and LIBOR were joined by steel. Neutrals, chiefly among long leading indicators, remain at 5.  Everything else was positive, although I have downgraded the yield curve to a weak positive. 

 

Among long leading indicators, Treasuries, corporate bonds, mortgage rates, and growth in real estate loans remain neutral. The yield curve is positive but weakly so. Money supply remains positive.  Purchase mortgages also are very positive, while  refinance mortgage applications remained negative. The two more leading Chicago Fed Financial Conditions Indexes are both positive.

 

Short leading indicators, including stock prices, jobless claims, industrial commodities, the regional Fed new orders indexes, spreads, Financial conditions, and oil and gas prices are all positive.   The US$ and staffing are neutral. Gas usage remains negative.

 

The coincident indicators are generally positive, including consumer spending, rail, the TED spread, tax withholding,  and both measures of shipping. Steel turned negative this week, joining LIBOR. 

 

The nowcast for the economy remains positive The longer term forecast remains neutral to positive, shading a little closer to neutral based on the tightening yield curve, less robust growth in real money supply, and the last several months' decline in housing permits.

 

Have a nice weekend!

 

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