Weekly Indicators: Interest Rates Improve, While Rail Carloads And Vehicle Sales Disappoint Edition

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by: Hale Stewart

By New Deal Democrat

August data started out with positive ISM manufacturing and Chicago PMI, positive consumer confidence, but only a weakly positive employment report. Motor vehicle sales were a significant negative.

July data included positive personal income and spending, but a decline in the savings rate. Construction spending declined and wholesale inventories increased.

In the rear view mirror, Q2 GDP was revised higher, but corporate profits declined slightly.

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

  • BAA corporate bond index 4.26% -0.05% w/w (12 mo. high 4.90%. 12 mo. low 4.15%)

  • 10-year treasury bonds 2.12% -0.05% w/w

  • Credit spread 2.14% unchanged w/w

Yield curve, 10 year minus 2 year:

  • 0.79%, down -0.06% w/w

30-year conventional mortgage rate

  • 3.90%, up -0.05% w/w (1-year high was 4.39%, 1-year low 3.37%)

Yields on treasuries and mortgage rates made new 12-month highs in December, but subsequently retreated, turning neutral for several months, rose enough again to score negative for two weeks, but have turned neutral again. Corporate bonds remain neutral. Spreads remain very positive. The yield curve remains positive also.

Housing

Mortgage applications

  • Purchase applications down -3% w/w

  • Purchase applications up +4% YoY

  • Refinance applications down -2% w/w

Real Estate loans

  • Up +0.3% w/w

  • Up +4.2% 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 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.

Money supply

M1

  • +1.6% w/w

  • +2.1% m/m

  • +6.2% YoY Real M1

M2

  • +0.3% w/w

  • +0.3% m/m

  • +3.6% YoY Real M2

Both real M1 and real M2 were positive almost all last year. Both recently decelerated substantially, but have improved in the last few weeks and remain positives.

Credit conditions (from the Chicago Fed)

  • Financial Conditions Index up +0.01 to -0.87

  • Adjusted Index (removing background economic conditions) up +0.01 to -0.17

  • Leverage subindex up +0.01 to -0.62

In the adjusted and leverage indexes, which are more leading, a negative number is good, 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, although the adjusted index is only a weak positive.

Trade weighted US dollar

  • Down -0.14 to 119.28 w/w, -0.8% YoY (one week ago) (Broad)

  • Down -0.73 to 92.81 w/w, -3.2% YoY (yesterday) (major currencies)

The US dollar 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 5 months, and has turned into a positive as to major currencies for the last month, and has now been joined by the broad measure as well.

Commodity prices

JoC ECRI

  • Up +0.24 to 107.21 w/w

  • Up +13.26 YoY

BBG Industrial metals ETF

  • 131.76 up +3.82 w/w, up +35.4% YoY

Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the election. ECRI briefly turned down enough to be downgraded to neutral, but both are again positive.

Stock prices S&P 500

  • Up +1.4% w/w to 2476.55

Stock prices are positive, having made a string of new all-time highs beginning over one year ago.

Regional Fed New Orders Indexes

(*indicates report this week)

  • Empire State up +7.3 to +20.6

  • Philly up +18.3 to +20.4

  • Richmond down -1 to +17

  • Kansas City up +15 to +25

  • *Dallas down -2.3 to +14.3

  • Month-over-month rolling average: down -1 to +19

The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month-over-month direction. These have turned more positive in the last month.

Employment metrics

Initial jobless claims

  • 236,000 up +2,000

  • 4-week average 236,750 down -1,000

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

The American Staffing Association Index

  • Down -1 to 96 w/w

  • Up +0.84 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.

Tax Withholding

  • $190.4 B for the month of August 2017 vs. $192.9 B one year ago, down -$2.5 B or -1.3%

  • $158.4 B for the last 20 reporting days vs. $161.0 B one year ago, down -$2.6 B or -1.6%

Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, and occasionally even negative, in last part of 2015 through the first part of 2016. Before August, the last few months had shown marked improvement. Although August is a negative, I am discounting it because there was a huge spike in payment of withholding taxes at the end of July. Averaging the two months together is still quite positive. Obviously, I will pay extra attention to September to be sure.

Oil prices and usage

  • Oil down -$0.51 to $47.35 w/w, down -1.3% YoY

  • Gas prices up +%0.04 to $2.40 w/w, up +$0.16 YoY

  • Usage 4-week average up +0.3% YoY

The price of gas bottomed about 18 months ago at $1.69. With the exception of July, prices generally went sideways with a slight increasing trend for the last year. Usage turned negative in the first half of this year, but subsequently improved, and for four of the last five weeks turned positive again.

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 generally turned more and more negative.

Consumer spending

  • Johnson Redbook up +4.3% YoY

  • Goldman Sachs up +0.4% w/w

Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat in 2016, and more markedly so in the last several months. Both were positive again this week,

Transport

Railroad transport

  • Carloads up +1.0% YoY

  • Loads ex-coal down -1.2% YoY

  • Intermodal units up +3.6% YoY

  • Total loads up +2.3% YoY

Shipping transport

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 - until seven weeks ago, when it turned mixed again, as it was this week.

Harpex recently declined to repeated multi-year lows, then came back all the way to positive, declined again, but in the last month has come all the way back to positive again. BDI also surged back to being a positive before declining back to neutral earlier this year, but has turned up again 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.

Steel production

  • Down-1.3% w/w

  • Up +5.1% 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 several months, it has alternated between positive and negative.

SUMMARY:

Corporate bonds, Treasury yields, mortgage rates, and growth in real estate loans improved and remain neutral. The yield curve, money supply, and purchase mortgages also remain positive, as are the two more leading Chicago Fed Financial Conditions Indexes, although one has decelerated substantially. Refinance mortgage applications are the sole negative.

Short leading indicators, including stock prices, jobless claims, industrial metals, the regional Fed new orders indexes, spreads, financial conditions, staffing, the US dollar, oil and gas prices, and gas usage are all positive.

Among the coincident indicators, positives included most measures of rail, consumer spending, steel, the TED spread, the Baltic Dry Index and Harpex. LIBOR remains negative, joined once again by rail carloads ex-coal, and unusually by tax withholding.

Left to its own devices, the economy appears in very good shape over the near term, and retains a positive tone, if more mutedly so, in the longer term, though, housing and vehicle purchases are definite yellow flags about the health of the consumer.

The one huge immediate issue is that unless Washington acts, the U.S. is only four weeks away from a voluntary partial debt default, which would have both immediate and long-lasting negative effects.

New Deal Democrat, XE.com

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