Weekly High Frequency Indicators: Mortgage Applications And Real M1 Close To Turning Negative

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 continues to be very positive. The short-term forecast also is positive, but weakened slightly.
• The long-term forecast remains neutral, but two metrics are within 1% of turning negative.

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 is scored positively if it is within the top 1/3 of that range, negative in the bottom 1/3, and neutral in between. Where it is not seasonally adjusted, and there are seasonal issues, waiting for the YoY change. Thus I make use of a convention: Data is scored neutral if it is less than half 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

July data included increases as expected in the CPI, although the YoY core rate increased slightly further over 2%. PPI was flat.

The June JOLTS report was excellent except as compared with that of May. Wholesale sales declined slightly, and inventory rose slightly, but not enough to disturb the inventory/sales ratio, which remained at a 3 1/2 year low.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 4.78% down -.04% w/w (1-yr range: 4.15 - 4.94)
• 10-year treasury bonds 2.88% down -.07% w/w (2.05 - 3.11)
• Credit spread 1.90% up +0.03% w/w (1.56 - 2.30)

Yield curve, 10-year minus 2-year:

• 0.27%, down -0.03% w/w (0.24 - 1.30)

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

• 4.70%, down -0.02% 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 is above 1.85%, and remains neutral. The yield curve is above +0.25%, so is positive.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps down -2% to 234 w/w (225 - 262)
• Purchase apps 4-week avg. down -7% to 242
• Purchase apps YoY down -2%, 4 week YoY avg. up +0.5%
• Refi apps down -5% w/w

Real Estate Loans (from the FRB)

• Down -0.3% w/w

• Up +3.4% YoY ( 2.7 - 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. Since then it has gradually declined, enough to become a neutral - and a negative four-week YoY change, and a four-week level below 240 will turn this into a negative.

With the re-benchmarking of the last year, the growth rate of real estate loans changed from neutral to positive, but for the second week the YoY rate fell below +3.25%, so is neutral.

Money supply

M1

• Unchanged w/w
• +0.7% m/m
• -0.4% Real M1 last 6 months
• +0.7% YoY Real M1 (0.1 - 6.9)

M2

• Unchanged w/w
• +0.1% m/m
• +0.9% 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 was again below 3.5% YoY, and negative on a six-month basis this week, so remains neutral.

Credit conditions (from the Chicago Fed)

• Financial Conditions Index unchanged at -0.84
• Adjusted Index (removing background economic conditions) down -.04 to -0.6
• Leverage subindex down -.01 to -0.27

The Chicago Fed's Adjusted Index's real breakeven point is roughly -0.25. In the leverage index, 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. However, in the last two months, leverage has turned up by roughly +0.2 and is near a multi-year high.

Short leading indicators

Trade weighted US$

• Up +0.26 to 124.21 w/w +3.9% YoY (last week) (broad) (116.42 -128.62)
• Up +1.09 to 96.31 w/w, +3.45% YoY (yesterday) (major currencies)

The US dollar briefly spiked higher after the US presidential election. Both measures had been positive since last summer, but recently the broad measure turned neutral, followed more recently by the measure against major currencies. A value above 5% YoY will turn this metric into a negative.

Commodity prices

Bloomberg Commodity Index

• Down -0.67 to 84.23 (81.67 - 91.94)
• Up +0.83% YoY

Bloomberg Industrial metals ETF (from Bloomberg)

• 121.77 up +0.85 w/w, down -1.34% YoY (112.03 - 149.10)

Commodity prices 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 so much in the past two months that they are now a negative.

Stock prices S&P 500 (from CNBC)

• Down -0.3% w/w 2833.28

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 continued the positive run in the last month.

Regional Fed New Orders Indexes

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

• Empire State down -3.1 to +18.2
• Philly up +13.5 to +31.4
• Richmond unchanged at +22
• Kansas City down -6 to +21
• Dallas down -6.3 to +23.3
• Month-over-month rolling average: unchanged at +24

The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month-over-month direction. It has generally been very positive for most of this year. It has cooled a little in the last month.

Employment metrics

Initial jobless claims

• 213,000 down -5,000
• Four-week average 214,250 down -250

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

Temporary staffing index (from the American Staffing Association)

• Up +1 to 97 w/w
• Up +2.7% 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)

• $174.8 B for the last 20 reporting days vs. $177.8 B one year ago, down -$3.0 B or -1.7%
• 20-day rolling average adjusted for tax cut [+$4 B]: up +$1.0 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 -0.96 to $67.72 w/w, up +37.8% YoY
• Gas prices unchanged at $2.85 w/w, up $0.47 YoY
• Usage four-week average down -0.7% YoY

The price of gas bottomed more than two years ago at $1.69. Generally prices 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 (but not this week). The YoY change went back above 40% recently, so the rating has turned negative.

Bank lending rates

• 0.333 TED spread down -0.043 w/w
• 2.07 LIBOR down -0.01 w/w

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 again positive.

Coincident indicators

Consumer spending

• Johnson Redbook up +5.6% YoY
• Goldman Sachs Retail Economist (NYSE:GS) up +1.4% w/w, up +2.6% 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 +3.0 YoY
• Intermodal units up +5.4% YoY
• Total loads up +4.2% YoY

Shipping transport

• Harpex down -11 to 584 (440 - 678)
• Baltic Dry Index down -62 to 1694 (~700 - 1710)

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 multiyear 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)

• Down -0.4% w/w
• Up +4.3% 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 Leverage subindex, and the yield curve are positive, rejoined this week by real estate loans. Corporate bonds, real M1, and purchase mortgage applications are neutral. Treasuries, refinance applications, mortgage rates, 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, one measure of commodities, and the spread between corporate and Treasury bonds are neutral, along with the US dollar. Oil prices remain negative, joined this week by the industrial metals commodity index.

Among the coincident indicators, positives include consumer spending, Harpex, rail, steel, the TED spread, and the Baltic Dry Index. LIBOR remains the sole negative. Tax withholding was mixed this week.

The nowcast as it has for many months remains very positive. The short-term forecast also remains positive, although commodities and the US dollar are weaker than recently.

The longer-term forecast recently turned from positive to neutral, and so remains. But two more series - mortgages and real M1 - are within 1% of turning negative.

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.