Weekly Indicators: Short Leading Indicators Surge Further, But One More Long Leading Indicator Close To Neutral

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by: Hale Stewart

by New Deal democrat

University of Michigan sentiment for February declined slightly on the back of a significant decline as to expectations for the future. January existing home sales increased to a near 10 year high. New home sales also increased, but remained significantly below their post recession high from half a year ago.

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 365.92 up +3.01 w/w (2016 high was 395.36, 2016 low was 341.41)
  • 2.33% 10 year treasury bonds down -0.18%
  • BofA/ML B Credit spread down -.06% to 3.70%

Yield curve, 10 year minus 2 year:

  • 1.20%, down -.04% w/w

30 year conventional mortgage rate

  • 4.12%, down -.06% w/w

Yields on treasuries and mortgage rates made new 12 month highs in December, but both have retreated since then. Both were neutral this week. Corporate bonds also remain neutral. The yield curve and spreads are very positive.

Housing

Mortgage applications

  • purchase applications -3% w/w
  • purchase applications +10% YoY
  • refinance applications -1% w/w

Real Estate loans

  • Up +0.1% w/w
  • Up +5.5% YoY

Mortgage applications turned outright negative for three weeks before tipping back to neutral for three weeks, and this week score as positive. Refi applications, however, are 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) has declined sufficiently for the last several weeks for loans to become a neutral.

Money supply

M1

  • +0.9% w/w
  • -1.5% m/m
  • +5.1% YoY Real M1

M2

  • Unchanged w/w
  • +0.2% m/m
  • +3.8% YoY Real M2

Both real M1 and real M2 were firmly positive almost all last year, although generally less so in the last several months, with real M2 showing substantial deceleration. I will change M2 to a neutral if either the YoY measure decelerates below +3.0%, or if on a quarter over quarter basis it improves by +0.6% or less. This week it is up +0.7% q/q.

Trade weighted US$

  • Up +0.03 to 126.05 w/w, up +2.1% YoY (one week ago) (Broad)
  • Up +0.20 to 101.09 w/w, up +3.0% 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. It has been generally neutral for about 3 months.

Commodity prices

JoC ECRI

  • Down -2.22 to 106.64 w/w
  • Up +33.77 YoY

BBG Industrial metals ETF

  • 117.51 down -0.52 w/w, up +28.1% YoY

Commodity prices bottomed near the end of 2015. After briefly turning negative, metals surged higher since the election.

Stock prices S&P 500

  • Up +0.7% w/w to 2367.34

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 +10.4 to +13.5
  • Philly up +12 to +38
  • Richmond up +4 to +15
  • *Kansas City up +6 to +26
  • Dallas up +8.4 to +15.7
  • Month over month rolling average: up +2 to +22 (2+ year high)

The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction. These are screaming positive.

Employment metrics

Initial jobless claims

  • 244,000 up +5,000
  • 4 week average 241,000 up +2,000

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 94 w/w
  • Up +3.74 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 now been positive for the last two months.

Tax Withholding

  • $167.8 B for the first 16 days of February vs. $165.9 B one year ago, up +$1.9 B or +1.1%
  • $201.8 B for the last 20 reporting days ending Thursday vs. $189.4 B one year ago, up +$12.4 B or +6.5%

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. February started out poor, but returned to positive territory this week.

Oil prices and usage

  • Oil up +$0.66 to $54.02 w/w, up +$10.76 YoY
  • Gas prices down -$.01 to $2.30 w/w, up +$0.57 YoY
  • Usage 4 week average down -5.2% YoY

The price of gas bottomed one year ago at $1.69. Prices have gone sideways since late last summer, and moved higher in the last month, making them, and oil prices, neutrals. 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're not there yet.

Bank lending rates

Both TED and LIBOR rose 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. While the TED spread turned positive for five weeks recently, this week both were again negatives.

Consumer spending

Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat in 2016. This week Redbook was positive. Gallup showed weaker holiday spending in December vs. one year ago, then rebounded sharply for two weeks before turning negative for two weeks, but then for three weeks has absolutely screamed higher, and remained very positive this week.

Transport

Railroad transport

  • Carloads up +7.6% YoY
  • loads ex-coal up +2.6% YoY
  • Intermodal units up +6.0% YoY
  • Total loads up +6.8% YoY

Shipping transport

Rail turned negative in 2015. It improved for a couple of months at the beginning of 2016 before falling sharply during the spring. Since last June, rail was neutral, and has been positive for most weeks beginning in November.

Harpex recently declined to repeated multi-year lows. BDI recently turned very positive before declining over a month ago, but improved from negative to neutral this week. 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 +1.6% w/w
  • Up +3.3% 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 one week ago has remained positive since.

SUMMARY:

The interest rate components of the long leading indicators have improved enough to be neutral. The yield curve and money supply remain positive, although real money supply has decelerated significantly, and real M2 is close to turning neutral. Purchase mortgage applications improved to positive, but refinance mortgage applications remain quite negative. Growth in real estate loans has decelerated enough to turn neutral.

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

The coincident indicators are now predominately positive as well. Rail, steel, consumer spending, and tax withholding are all positive. The BDI improved enough to score neutral this week. Harpex shipping, the TED spread and LIBOR remain negative.

If anything, the economy over the next 6 to 8 months looks to be even stronger than before. The 12 month + forecast is neutral with a few negative elements. Purchase mortgage applications, money supply and the yield curve are the remaining positives. But real M2 is very close to turning from positive to neutral for the first time in years.

New Deal democrat, XE.com

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