Weekly Indicators: Real M1 Decelerates Sharply Edition

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Includes: DIA, QQQ, SPY
by: Hale Stewart

By New Deal Democrat

January 2016 reports included a decline in housing permits and starts, but an increase in industrial production. In part due to housing, the Index of Leading Indicators declined. The Empire State and Philly manufacturing indexes were negative, but "less bad." Producer prices rose, but consumer prices were unchanged.

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

  • 5.37% BAA corporate bonds up +,11%
  • 1.75% 10-year treasury bonds up +.12%
  • 3.62% credit spread between corporates and treasuries down -.01%

30-year conventional mortgage rate:

  • 3.64%, down -.02% 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 one week ago, and remain low enough to be short-term positives. Spreads remain very negative.

Housing

Mortgage applications

  • Purchase applications down -4% w/w
  • Purchase applications up +30% YoY
  • Refinance applications up +16% w/w

Real Estate loans

  • +0.1% w/w
  • +7.0% YoY

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

Real estate loans have been firmly positive for two years.

Money supply

M1

  • -0.1% w/w
  • -2.4% m/m
  • +1.1% YoY Real M1

M2

  • -0.6% w/w
  • +0.8% m/m
  • +4.4% YoY Real M2

Real M1 decelerated markedly in the last few weeks to the point where it is a very weak positive. Real M2 has also decelerated, but is more firmly positive.

Trade weighted US Dollar

  • Down -0.14 to 123.97 w/w, up +8.5% YoY (Broad)
  • Up +0.62 to 96.60 w/w, up +2.3% 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 Dollar 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 it 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 this week it fell further below 10%. Against major currencies it is approaching parity, so has become a neutral.

Commodity prices

JoC ECRI

  • Up +0.41 to 79.47 w/w
  • Down -21.04 YoY

BBG Industrial metals ETF

  • 90.72 unchanged w/w

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," especially for industrial commodities.

Employment metrics

Initial jobless claims

  • 262,000 down -7,000
  • 4-week average 273,250 down -8,000

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 93 w/w
  • Down -2.97 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

  • $140.2 B for the first 13 days of February vs. $138.7 B one year ago, up +$1.5 B or +1.1%
  • $196.6 B for the last 20 reporting days ending Thursday vs. $193.1 B one year ago, up $3.5 B or +1.8%

Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy in August and September. In general, they have remained positive, but a little more weakly so, in the last five months. Last week 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 this week it has done so., so I will watch it carefully for the next several weeks.

Oil prices and usage

  • Oil unchanged at $29.72 w/w
  • Gas prices down -$.04 to $1.72 w/w
  • Usage 4-week average up +3.0% YoY

The price of gas and oil bottomed at the end of January 2015 at $2.02. It broke through that bottom 4 weeks ago. Usage turned negative for five weeks, but has returned to positive.

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 considerably in the last month.

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 8 of the last 9 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 -15.4% YoY
  • Loads ex-coal down -10.9% YoY
  • Intermodal units up +10.4% YoY
  • Total loads down -3.8% 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. These remain recessionary readings. Rail loads have become much "less worse," but I need carloads to be less than -10% off YoY for me to believe rail has bottomed.

After rising briskly last spring, both the BDI and Harpex declined again to new multi-year lows. Harpex has bottomed. BDI is still sliding.

Steel production

  • Up +1.1% w/w
  • Down -0.1% YoY

Until spring 2014, steel production had generally been in a decelerating uptrend. It then gradually rolled over and has gotten progressively worse in pulses since. In the last month, these too have gotten "less worse." If steel production remains less than -4% off YoY for another week or two, that will cause me to think it has made a bottom.

SUMMARY:

There were a number of changes this week. Most importantly, Real M1 has decelerated to the point where it is barely positive. Withheld taxes also decelerated to less than +2% YoY. On the other hand, rail carloads have continued to be "less bad," and steel production has almost turned positive.

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 has decelerated to the point of being only slightly positive.

Among short leading indicators, the interest rate spread between corporates and treasuries remains very negative. Jobless claims remain positive. Oil and gas prices remain very positive, while usage, which was negative for 5 weeks, has turned positive. Commodities remain a big global negative, although they appear "less worse" on a YoY basis. The US Dollar as against major currencies has turned from negative to neutral. The broad US Dollar remains quite negative, but is also becoming "less worse."

Among coincident indicators, shipping, staffing, and rail transport all remain negative, but all of these except for shipping have turned much "less bad. " Steel production has almost turned positive, but growth in withholding taxes paid has decelerated markedly. Consumer spending remains positive.

The bifurcation of decent consumer economy, poor industrial economy (at least that portion tied to commodity extraction and exports) remains. There is no sign that the negatives are spreading for now. Should real money supply actually turn negative, however, that would not bode well for next year.

New Deal Democrat, XE.com