Weekly High Frequency Indicators: Yield Curve And Real M1 Deteriorate Further, But Mortgage Applications Rebound

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by: New Deal Democrat

Summary

High frequency indicators can give us a nearly up-to-the-moment view of the economy.

The metrics are divided into long leading, short leading, and coincident indicators.

The nowcast and short-term forecast both remain very positive.

But the long-term forecast has deteriorated to neutral, and is close to turning negative for the first time during this expansion.

Purpose

I look at the high-frequency weekly indicators because while they can be very noisy, they provide a good "nowcast" of the economy, and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available. They also are 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.

A Note on Methodology

Data is presented in a "just the facts, ma'am" format with a minimum of commentary so that bias is minimized.

Where relevant, I include 12-month highs and lows in the data in parentheses to the right. All data taken from St. Louis FRED unless otherwise linked.

A few items (e.g., Financial Conditions indexes, regional Fed indexes, stock prices, the yield curve) have their own metrics based on long-term studies of their behavior.

Where data is seasonally adjusted, generally it's scored positively if it's within the top 1/3 of that range, negative in the bottom 1/3, and neutral in between. Where it's not seasonally adjusted, and there are seasonal issues, waiting for the YoY change to change sign will lag the turning point. Thus I make use of a convention: Data is scored neutral if it is less than 1/2 as positive/negative as at its 12-month extreme.

With long leading indicators, which by definition turn at least 12 months before a turning point in the economy as a whole, there's an additional rule: Data is automatically negative if, during an expansion, it has not made a new peak in the past year, with the sole exception that it is scored neutral if it is moving in the right direction and is close to making a new high.

Recap of monthly reports

June data included increases in both producer and consumer prices, the latter to new six-year highs YoY, but a decline in sentiment as measured by the University of Michigan. May data consisted of a very positive JOLTS report.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 4.75% down -.04% w/w (1-yr range: 4.15 - 4.94)
  • 10-year Treasury bonds 2.83% up +.01% w/w (2.05 - 3.11)
  • Credit spread 1.92% down -.05% w/w (1.56 - 2.30)

Yield curve, 10-year minus two-year:

  • 0.24%, down -0.04% w/w (0.24 - 1.30) (new expansion low)

30-Year conventional mortgage rate (from Mortgage News Daily)

  • 4.63%, down -0.06% w/w (3.84 - 4.79)

BAA Corporate bonds remain neutral. If these go above 5%, they will become a negative. Mortgage rates and treasury bonds are still both negatives. The spread between corporate bonds and treasuries has now gone above 1.85%, and so I have switched it from positive to neutral. The only remaining positive had been the yield curve, but in accord with my prior benchmark, since it has declined below +0.25%, so it too has become a neutral.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps up +7% to 262 w/w (225 - 262)
  • Purchase apps four-week average +3 to 251
  • Purchase apps YoY +8%, four-week YoY average +3%
  • Refi app down -4% w/w

Real Estate Loans (from the FRB)

  • Down -0.2% w/w
  • Up +3.7% YoY ( 3.3 - 6.5) (re-benchmarked, adding roughly +0.5% to prior comparisons)

Refi has been dead for some time. Purchase applications were strong almost all last year, began to falter YoY in late December, but rebounded during spring, ultimately making new expansion highs. The four-week average declined from the peak enough to qualify as neutral for most of the past month, but rebounded strongly this week, enough to once again score positive.

With the re-benchmarking of the last year, the growth rate of real estate loans changed from neutral to positive. If the YoY rate falls below +3.25%, I will downgrade back to neutral.

Money supply

M1

  • +0.3% w/w
  • -1.2% m/m
  • +0.2% Real M1 last 6 months
  • +0.1% YoY Real M1 (0.1 - 6.9) (new expansion low)

M2

  • +0.1% w/w
  • +0.5% m/m
  • +1.4% YoY Real M2 (0.9 - 4.1)

Since 2010, both real M1 and real M2 were resolutely positive. Both decelerated substantially in 2017. Real M2 growth has fallen below 2.5% and is thus a negative. Real M1 growth this week was again below 3.5% YoY, but on a six-month basis turned positive, so real M1 overall is scored as positive this week. Note that it's only -0.2% above the point where it will turn outright negative.

Credit conditions (from the Chicago Fed)

  • Financial Conditions Index unchanged at -0.78
  • Adjusted Index (removing background economic conditions) unchanged at -0.51
  • Leverage subindex up +.02 to -0.24 (2-year high)

The Chicago Fed's Adjusted Index's real break-even point is roughly -0.25. In the leverage index, a negative number is good, a positive is 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. However, in the last two months, leverage has turned up by roughly 0.2 to a two-year high.

Short leading indicators

Trade weighted US$

  • Down -0.57 to 123.55 w/w +1.5% YoY (last week) (broad) (116.42 -128.62)
  • Up +0.71 to 94.71 w/w, -0.47% YoY (yesterday) (major currencies)

The US dollar appreciated about 20% between mid-2014 and mid-2015. It went mainly sideways afterward until briefly spiking higher after the US presidential election. Both measures had been positives since last summer, but in the last month the broad measure turned neutral.

Commodity prices

Bloomberg Commodity Index

  • Down - 2.38 to 83.83 (81.67 - 91.94)
  • Up +2.33% YoY

Bloomberg Industrial metals ETF (from Bloomberg)

  • 121.50 down -2.83 w/w, up +9.28% YoY (112.03 - 149.10)

Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the 2016 presidential election. The overall commodity index (which includes oil) is neutral. Industrial metals had been strongly positive and recently made a new high, but have declined significantly in the past several weeks, enough to change their rating to neutral.

Stock prices S&P 500 (from CNBC)

  • Up +1.5% w/w at 2801.31

After being neutral for several months by an ever-so-slight margin, stock prices made a new three-month high on June 12 and have returned to being positive. Friday they closed at nearly a six-month high.

Regional Fed New Orders Indexes

(*indicates report this week) (no reports this week)

The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month-over-month direction. After being very positive for most of this year, it has moderated slightly in the last few weeks.

Employment metrics

Initial jobless claims

  • 214,000 down -17.000
  • Four-week average 223,000 down -1,500

Initial claims have recently made several 40-plus year lows and so are very positive. The year-over-year percent change in these metrics had been decelerating but is now back on its multi-year pace.

Temporary staffing index (from the American Staffing Association)

  • Unchanged at 97 w/w
  • Up +1.8% YoY

This index was generally neutral from May through December 2016, and then positive with a few exceptions all during 2017. It was negative for over a month at the beginning of this year, but returned to a positive since then.

Tax Withholding (from the Dept. of the Treasury)

  • $186.9 B for the last 20 reporting days vs. $189.8 B one year ago, down -$2.9 B or -1.5%
  • 20-day rolling average adjusted for tax cut (+$4 B): up +$1.1 B or +0.6%

With the exception of the month of August and late November, this was positive for almost all of 2017. It has generally been negative since the effects of the recent tax cuts started in February.

I have discontinued the intra-month metric for the remainder of this year, since the kludge to guesstimate the impact of the recent tax cuts makes it too noisy to be of real use.

I have been adjusting based on Treasury Dept. estimates of a decline of roughly $4 billion over a 20-day period. Until we have YoY comparisons, we have to take this measure with a big grain of salt.

Oil prices and usage (from the E.I.A.)

  • Oil down -$3.31 to $70.62 w/w, up +54.6% YoY
  • Gas prices up +$.02 to $2.86 w/w, up $0.56 YoY
  • Usage four-week average up +1.7% YoY

The price of gas bottomed over two years ago at $1.69. With the exception of last July, prices generally went sideways with a slight increasing trend in 2017. Usage turned negative in the first half of 2017, but has almost always been positive since then. The YoY change went back above 40% recently, so the rating has turned negative.

Bank lending rates

  • 0.411 TED spread down -0.017 w/w
  • 2.007 LIBOR up +0.003 w/w (tied for new expansion high)

Both TED and LIBOR rose in 2016 to the point where both were usually negatives, with lots of fluctuation. Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions. The TED spread was generally increasingly positive in 2017, while LIBOR was increasingly negative. This year the TED spread has whipsawed between being positive or negative. This week it was positive.

Coincident indicators

Consumer spending

  • Johnson Redbook up +5.2% YoY
  • Goldman Sachs index down -0.7% w/w, up +3.1% YoY

Both the Goldman Sachs and Johnson Redbook Indexes generally improved from weak to moderate or strong positives during 2017 and have remained positive this year.

Transport

Railroads (from the AAR)

  • Carloads up +5.4 YoY
  • Intermodal units up +12.0% YoY
  • Total loads up +8.6% YoY

Shipping transport

Rail was generally positive since November 2016 and remained so during all of 2017 with the exception of a period during autumn when it was mixed. After some weakness in January and February this year, rail has returned to positive.

Harpex made multi-year lows in early 2017, then improved, declined again, and then improved yet again to recent highs. BDI traced a similar trajectory, and made three-year highs near the end of 2017, declined early this year, but recently has hit multi-year highs.

I'm 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 (from the American Iron and Steel Institute)

  • Up +0.6% w/w
  • Up +3.4% YoY

Steel production improved from negative to "less bad" to positive in 2016 and with the exception of early summer, remained generally positive in 2017. It turned negative in January and early February, but with the exception of three weeks recently has been positive since then.

Summary And Conclusion:

Among the long leading indicators, the Chicago Fed Adjusted Financial Conditions Index, and real estate loans remain positives, rejoined this week by purchase mortgage applications - but the Chicago Fed Financial Leverage Index, while still positive, is significantly less so than in the last two years. Corporate bonds, mortgage rates, and real M1 are neutral. Real M1 is on the cusp of turning negative. This week the yield curve became flat enough to turn into a neutral. Treasuries, refinance applications, and real M2 are all negative.

Among the short leading indicators, the regional Fed new orders indexes, the Chicago National Conditions Index, jobless claims, stock prices, and staffing are all positive. Gas prices, the commodities indexes, and the spread between corporate and Treasury bonds are neutral. The US dollar is mixed. Oil prices are strongly negative.

Among the coincident indicators, positives include consumer spending, Harpex, and rail, steel, the TED spread, the Baltic Cry Index, and tax withholding. LIBOR remains negative.

As has been the case for many months, both the nowcast and the short-term forecast remain positive. Manufacturing in particular is doing very well, and the new nearly six-month high in the S&P index also is a vote of confidence.

The longer-term forecast, however, has been deteriorating, recently turning from positive to neutral. Should M1 go down just -0.2%, should the yield curve continue to deteriorate, and should purchase mortgage applications falter, it will turn negative for the first time during this expansion.

Have a nice weekend!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.