By New Deal Democrat
May data underwhelmed this week. Producer prices were unchanged while consumer prices declined. That was the best news. But industrial production was flat while capacity utilization declined. Retail sales declined, including in real terms. Consumer sentiment as measured by the University of Michigan declined. Housing starts and permits both declined significantly.
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
- BAA corporate bond index 4.34% -0.08% w/w (12 mo. high 4.90%. 12 mo. low 4.15%)
- 10-year Treasury bonds 2.15% -0.03% w/w
- Credit spread 2.19% -0.05% w/w
Yield curve, 10-year minus 2-year:
- 0.80%, down -0.06% w/w
30-year conventional mortgage rate:
- 4.00%, down -0.01% 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 became even more weakly positive, as both the 2-5 and 5-10 year spreads (but not the 10-30 year spread) are less than +0.50.
- Purchase applications down -3% w/w
- Purchase applications up +8% YoY
- Refinance applications up +9% w/w (six-month high)
Real estate loans:
- Unchanged w/w
- Up +4.8% 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 (although they showed a pulse this week) remain 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 three months for loans to become a neutral.
- -1.0% w/w
- +1.8% m/m
- +6.2% YoY Real M1
- -0.1% w/w
- +0.3% m/m
- +3.9% 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, but both remain positives.
Credit conditions (from the Chicago Fed)
- Financial Conditions Index -0.86
- Adjusted Index (removing background economic conditions) -0.42
- Leverage Subindex -0.64
In the adjusted and leverage indexes, which are more leading, a negative number is good, and a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. All three metrics presently show looseness and so are positives for the economy.
Trade weighted US$:
- Down -0.50 to 122.47 w/w, up +1.4% YoY (one week ago) (broad)
- Up +0.51 to 96.16 w/w, up +2.7% YoY (yesterday) (major currencies)
The US$ 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 four months.
- Down -0.88 to 101.40 w/w
- Up +12.65 YoY
BBG Industrial metals ETF
- 109.01 down -2.30 w/w, up +17.4% YoY
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the election. They have cooled off this year, but not quite yet enough to be downgraded to neutral.
Stock prices S&P 500
- Up +0.1% w/w to 2433.15
Stock prices are positive, having made a string of new all-time highs beginning last summer, including several weeks ago.
Regional Fed New Orders Indexes
(*indicates report this week)
- *Empire State up +22.5 to +18.1
- *Philly up +0.5 to +25.9
- Richmond down -26 to 0
- Kansas City up +1 to +9
- Dallas up +6.6 to +18.1
- Month-over-month rolling average: up +5 to +14
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 positive, although they have backed well off from March's highs.
Initial jobless claims:
- 237,000 down -8,000
- Four-week average 243,000 up +1,000
Initial claims remain well within the range of a normal economic expansion, as does the four-week average.
The American Staffing Association Index:
- Unchanged at 95 w/w
- Up +2.11 YoY
This index was generally neutral from May 2016 until the end of the year, and has been positive with a few exceptions since the beginning of this year.
- $102.9 B for the first 11 days of June 2017 vs. $97.6 B one year ago, up +$5.3 B or +5.4%
- $171.7 B for the last 20 reporting days vs. $169.5 B one year ago, up +$2.2 B or +1.3%
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 shown marked improvement.
- Oil down -$1.22 $44.68 w/w, down -9.19% YoY
- Gas prices unchanged at $2.37 w/w, down -$0.03 YoY
- Usage four-week average down -1.2% YoY
The price of gas bottomed about 18 months ago at $1.69. Except for early this spring, prices have generally gone sideways with a slight increasing trend for the last year. Usage faltered and has now turned negative for several months.
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.
- Johnson Redbook up +2.1% YoY
- Goldman Sachs/Retail Economist up +1.1% w/w, up +0.5% YoY
- Gallup daily consumer spending 14 day average $104, up +$6 YoY
Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat in 2016. Both were positive this week. Meanwhile with the exception of one week, for over four months, Gallup has been very positive.
- Carloads up +7.1% YoY
- Loads ex-coal up +3.1% YoY
- Intermodal units up +5.3% YoY
- Total loads up +6.2% YoY
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 to the point where higher than during four of the last five years. In the last few weeks, it has declined substantially. BDI also surged back to being a positive before declining back to neutral in the last month. 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.
- Down -1.8% w/w
- Down -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. It improved from negative to "less bad" to positive in 2016 and until recently remained positive since. In the last six weeks, it has alternated between positive and negative.
Among long leading indicators, Treasuries, corporate bonds, mortgage rates, and growth in real estate loans remain neutral. The yield curve remains positive but even more weakly so. Money supply remains positive. Purchase mortgages also are very positive while refinance mortgage applications remain 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, staffing, and oil and gas prices are all positive. The US$ is neutral. Gas usage remains negative.
After being positive last week, the coincident indicators turned more mixed this week. Positives included rail, consumer spending, and the TED spread. The Baltic Dry Index and Harpex are neutral, and LIBOR remains negative, joined by steel this week.
While the present remains positive, as does the near-term forecast, there were two significant negative events for the longer-term forecast this week. The first was the Fed raising rates, which caused the yield curve to flatten some more. It is just barely positive now (as opposed to neutral). The second was the poor housing starts and permits report, which was just bad enough to turn housing, on net, negative. As a result, the longer-term forecast is now just slightly above neutral.