Weekly Indicators: Is An Inventory Liquidation Underway Edition

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Includes: BNO, GSC, ITB, IYT, OIL, SLX, USO, XHB
by: Hale Stewart

By New Deal Democrat

The biggest news of the week was the slightly positive first-quarter GDP. First-quarter employment costs also increased.

Monthly data for April started out with a barely positive Chicago PMI, and decreases in two measures of consumer sentiment. March data included positive personal income, but flat personal spending in real terms. Durable goods orders increased. New home sales declined, but prices continued to increase at a decelerating pace.

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, and then coincident indicators.

Interest rates and credit spreads

  • 4.73% BAA corporate bonds down -.06% (down over -.60% since Jan. 1)
  • 1.87% 10-year treasury bonds down -.01%
  • 2.86% credit spread between corporates and treasuries down -.07%

Yield curve, 10-year minus 2-year:

  • 1.01%, unchanged w/w

30-year conventional mortgage rate:

  • 3.67%, down -0.08% 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 in February, and remain low enough to be short-term positives. Spreads have improved enough in the last two months to go from strongly to normally positive.

Housing

Mortgage applications

  • Purchase applications down -2% w/w
  • Purchase applications up +14% YoY
  • Refinance applications down -5% w/w

Real Estate loans

  • +0.4% w/w
  • +6.7% YoY

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

Real estate loans have been firmly positive for nearly 3 years.

Money supply

M1

  • -1.0% w/w
  • +0.2% m/m
  • +4.5% YoY Real M1

M2

  • +0.1% w/w
  • +0.5% m/m
  • +5.3% YoY Real M2

Real M1 decelerated markedly in January to the point where it was a very weak positive, and has fluctuated since then. Real M2 also decelerated, but has been more firmly positive. Both were very positive this week.

Trade weighted US dollar

  • Up +0.12 to 119.79 w/w, up +4.5% YoY (Broad)
  • Down -3.06 to 93.06 w/w, Down -2.4% 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% from July 2014 through March 2015. Afterward, the broad measure continued to appreciate, but at a relatively more moderate trend, while against major currencies the US dollar has been flat. l consider a YoY change of 5% or higher a negative. The broad measure has now fallen below that mark, and against major currencies, the US dollar turned outright positive.

Commodity prices

JoC ECRI

  • Down -0.17 to 89.62 w/w
  • Down -13.59 YoY

BBG Industrial metals ETF

  • 99.06 up +1.45 w/w

Commodity prices as measured by industrial metals appear to have bottomed in November. ECRI and oil have also now turned up. This is enough to move commodities from negative to neutral.

Stock prices S&P 500

  • Down -1.3% w/w
  • Down -3.1% from 1-year high 11 months ago

Stock prices made new 6-month lows in February, but also made an intraday 6-month high one week ago as well. For forecasting purposes, I am scoring this as a neutral.

Regional Fed New Orders Indexes

(*indicates report this week)

  • Empire State up +1 to +11
  • Philly down -16 to 0
  • *Richmond down -6 to +18
  • *Kansas City unchanged at -2
  • *Dallas up +11 to +6
  • Month-over-month rolling average: unchanged at +6

Since the ISM new orders index is an excellent short leading indicator for sales and industrial production (roughly by 6 months), I believe a rolling average of these regional indexes may reasonably forecast the direction and intensity of moves in that monthly index. April reports were mixed, but the rolling average remains positive.

Employment metrics

Initial jobless claims

  • 257,000 down +10,000
  • 4-week average 256,000 down -4,500 (new 40-year low)

Initial claims remain well within the range of a normal economic expansion, as does the 4-week average. After weakening in January, they have since recovered, and this week made a new low.

The American Staffing Association Index

  • Up +1 to 95 w/w
  • Down -2.71 YoY

Since last spring, the YoY comparison turned neutral and then increasingly negative, although since the beginning of the year it has generally been "less worse." I would need this series to be -2.15% YoY or less for me to believe it has bottomed.

Tax Withholding

  • $173.9 B for the first 20 days of April vs. $166.4 B one year ago, up +$7.5 B or +4.5%
  • $173.9 B for the last 20 reporting days ending Thursday vs. $150.3 B one year ago, up +$23.6 B or +15.7%

Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, while still positive, since August. In February, 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 it did so for 3 weeks in a row, briefly becoming a major red flag. April collections, however, ran quite positive.

Oil prices and usage

  • Oil up +$5.65 to $46.01 w/w
  • Gas prices up +$.02 to $2.16 w/w
  • Usage 4-week average up +5.6% YoY

The price of gas bottomed this winter at $1.69. Usage turned briefly negative at the beginning of the year, but is now positive again.

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 both have improved in the last several months, although recently the TED spread rose back close to that high.

Consumer spending

Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat since the beginning of November. They were very weakly positive this week. Gallup has been positive almost every week so far this year which, because it includes gas purchases, strongly suggests that consumers have started to spend some of their gas savings on other things. That is contrary to the poor monthly retail sales or personal spending reports.

Transport

Railroad transport

  • Carloads down -17.1% YoY
  • Loads ex-coal down -8.4% YoY
  • Intermodal units down -6.3% YoY
  • Total loads down -11.7% 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. Rail loads became "less worse" in January and showed continued improvement until going over the proverbial cliff 7 weeks ago. This ts a big negative, but it may suggest aggressive inventory liquidation is underway.

After rising briskly last spring, both the BDI and Harpex recently declined again to new multi-year lows. In the last few weeks, the BDI has rebounded enough for it to be scored a neutral.

Steel production

  • Down -0.5% w/w
  • Up +2.1% 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. In the last three months, these became "less worse" and now positive.

SUMMARY:

There was little change this week.

Among long leading indicators, interest rates for corporate bonds, treasuries, the yield curve, real money supply, real estate loans, mortgage applications, and mortgage rates are positive. At the same time, no interest rates have made new lows in at least a year, and mortgage rates have not made new lows for over 3 years, so while the "now-cast" is positive, this is a big negative in the longer term forecast.

There are no more negatives among short leading indicators. The spread between corporates and treasuries has gone from negative to neutral. Commodities across the board have improved enough to be scored as neutral, as have stocks. The broad US dollar is also neutral, while against major currencies it is positive. Jobless claims, oil and gas prices, and usage, all remain very positive.

Among coincident indicators, rail transport had an absolutely awful week for the 7th week in a row. Bank rates and staffing also remain negative. Shipping is mixed, with Harpex negative and the Baltic Index improved enough to be scored a neutral. Steel is positive as are withholding taxes.

There has been a broad improvement to neutral or outright positive among a number of a variety of indicators, including corporate yields, stock prices, commodities, the US dollar, new orders, spreads, commodities, and the Baltic Index. The negatives are reduced to rail, Harpex, and bank lending rates, with even staffing turning less negative.

My sense is that manufacturing new orders will be positive again when reported by the ISM this week. Meanwhile, rail and the Chicago PMI appear to support intense inventory liquidation. This is the bottoming process of a manufacturing downturn. I am increasingly concerned, however, by relatively poor consumer spending. Motor vehicle sales, which have been flagging so far this year, will also be a particularly important report to watch this week.

Have a nice weekend!

New Deal Democrat, XE.com