Weekly Indicators: The Wobbles Turn More Neutral Edition

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By New Deal democrat

September data included an increase in the index of Leading Indicators, driven in part by an increase in housing permits. Existing home sales also increased. In contrast, housing starts declined sharply. Industrial production rose slightly, while capacity utilization fell. Consumer inflation rose a little more than it has recently.

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

  • 4.36% BAA corporate bonds unchanged
  • 1.76% 10-year treasury bonds down -.03%
  • 2.60% credit spread between corporates and treasuries up +.03%

Yield curve, 10 year minus 2 year:

  • 0.95%, up +.03% w/w

30-year conventional mortgage rate

  • 3.54%, down -.02% w/w

Yields on corporate bonds and treasuries made new lows after the Brexit vote, strongly suggesting that the expansion will continue through mid-2017. On the other hand, mortgages have failed to make a new low for over 3 years, thus turning yellow (caution or neutral vs. positive) as a recession indicator. Yields are also still positive, but spreads are neutral.

Housing

Mortgage applications

  • purchase applications up +3% w/w
  • purchase applications up +13% YoY
  • refinance applications down -1% w/w

Real Estate loans

  • Up +0.4% w/w
  • Up +7.9% YoY

Mortgage applications turned up early in 2015 in response to very low rates. They briefly spiked in response to low rates following the Brexit vote. Purchase applications improved enough in the last four weeks to be positive again.

BUT, mortgage applications have not made a new high since the beginning of June, and if the present trend continues, may go YoY negative in the next month. If so, they will flip to becoming an important negative.

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

Money supply

M1

  • -0.2% w/w
  • +2.1% m/m
  • +10.2% YoY Real M1

M2

  • +0.3% w/w
  • +0.5% m/m
  • +6.5% YoY Real M2

Both real M1 and real M2 have been firmly positive for the last 8 months.

Trade weighted US$

  • Up +0.52 to 123.16 w/w, up +4.2% YoY (one week ago) (Broad)
  • Up +0.52 to 98.66 w/w, up +2.4% YoY (yesterday) (major currencies)

The US$ appreciated about 20% between mid-2014 and mid-2015. It has gone mainly sideways since then, and for the last 7 months has generally been neutral or positive. Both have been neutral for the last 3 weeks.

Commodiy prices

JoC ECRI

  • Down -0.14 to 94.76 w/w
  • Up +9.71 YoY

BBG Industrial metals ETF

  • 97.00 down -1.90 w/w, down -0.7% YoY

Commodity prices as measured by industrial metals bottomed last November. ECRI subsequently turned up as well, enough so that both turned positive. In the last month, however, metals have been negative for all but one week.

Stock prices S&P 500

  • Up +0.4% w/w

Stock prices became a positive having made new all-time highs in summer.

Regional Fed New Orders Indexes

(*indicates report this week)

  • *Empire State up +1.9 to -5.6
  • *Philly up +14.9 to +16.3
  • Richmond up +13 to -7
  • Kansas City up +19 to +12
  • Dallas down -8.2 to -2.9
  • Month over month rolling average: up +3 to +2

In March and April, the turning up of these indexes forecast the positive readings in the ISM. Then in May and June there was a serious divergence between the two, but in July the regional indexes became on balance positive, again forecasting the positive ISM. In August there was a serious downdraft which again forecast the poor ISM. September turned better, accurately forecasting a positive ISM manufacturing reading. October is beginning positively.

Employment metrics

Initial jobless claims

  • 260,000 up +14,000
  • 4 week average 251,750 up +2,500

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

The American Staffing Association Index

  • Up +1 to 97 w/w
  • Down -1.64 YoY

This index turned negative in May 2015, getting as bad as -4.30% late last autumn. Since the beginning of the year it became progressively "less bad" and for the last few months has been so close to positive YoY as to be a neutral, as it was again this week, after two weeks of being negative.

Tax Withholding

  • $124.4 B for the first 13 days of October vs. $115.7 B one year ago, up +$8.7 B or +7.5%
  • $171.1 B for the last 20 reporting days ending Thursday vs. $162.5 B one year ago, up +$8.6 B or +5.3%

Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, and occasionally even negative, since August 2015. With one brief exception, the last few months have shown a marked improvement.

Oil prices and usage

  • Oil up +$0.68 to $51.00 w/w
  • Gas prices down -$.01 to $2.26 w/w
  • Usage 4-week average up +1.7% YoY

The price of gas bottomed last winter at $1.69. Usage has been almost uniformly positive. Gas prices are off their summer seasonal high, but have gone sideways for the last two months, and both gas and oil are now only about -1% below their readings 12 months ago. This is enough to move them from positive to neutral. In short, oil is no longer a tailwind for the economy.

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. Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions. Both recently reached that level.

Consumer spending

Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat since the beginning of last November. Redbook has recently turned very weak. Goldman and Gallup have both been generally more positive, but Gallup turned negative 2 weeks, then unchanged last week, before turning positive again this week.

Transport

Railroad transport

  • Carloads down -6.1% YoY
  • loads ex-coal down -4.6% YoY
  • Intermodal units down -2.2% YoY
  • Total loads down -4.2% YoY

Shipping transport

Rail traffic turned negative and then progressively worse in pulses throughout 2015. Rail loads became "less worse" in January and showed continued improvement until going over the proverbial cliff all spring (typically down -10% or more) in spring. It trended incrementally less awful since June, and has scored neutral 5 times in the last 9 weeks, including this week.

Harpex has recently resumed its decline again to repeated multi-year lows. BDI has backed off its recent 12-month highs, turning back from positive to neutral. 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

  • Up +0.3% w/w
  • Down -2.4% 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. This year it started out as "less worse" and turned positive a few months ago, but recently turned negative again.

SUMMARY:

The story of long leading indicators remains the same as recently. Interest rates for corporate bonds, treasuries, the yield curve, real money supply, real estate loans, mortgage rates, and mortgage applications remain positive for now. A significant negative, however, is that mortgage rates have not made new lows for over 3 years.

Short leading indicators are mixed, but with only one negative. Stock prices, jobless claims, gas usage and one reading of industrial commodities remain positive. Oil and gas prices, however, have now both turned neutral from being positive for over 2 years. Both readings of the US$ are now neutral. Industrial metals have turned negative for the last two weeks. The volatile regional Fed average, however, has now turned positive.

The coincident indicators remain mixed. Rail flipped back to neutral again this week, as did temp staffing. Consumer spending is weakly positive. The BDI turned neutral, while steel, the Harpex shipping index and bank rates remain negative. Tax withholding is positive.

The recent wobbling in the shorter term measures continues, with many turning neutral this week (from both directions) with only a few outright negatives.

I have a longer term concern about the energy tailwind ending, and potentially turning back into a headwind. I wrote last week that a great deal depends on whether the recent lows in interest rates translate into an increase in the new housing market. Permits and starts sharply diverged this past week, so no help at all. In the coming week we will get new home sales, and Q3 GDP, where I will pay particular attention to proprietors' income and real residential investment.

New Deal Democrat, XE.com