Weekly High-Frequency Indicators: Will 7-Year Highs In Interest Rates Fatally Wound Housing?

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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 continues to be very positive, and the short-term forecast (less than one year out) also is positive.

The long-term forecast has been fluctuating, this week being neutral again.

But it's difficult to see housing not suffering a further downturn based on even higher mortgage rates, if they last.

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 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.

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 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 is 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

September data started out with a mixed employment report, with modest m/m gains in employment, but substantial upward revisions. Unemployment made yet another new low, while underemployment rose slightly. YoY nominal wage gains were unchanged. Auto sales made substantial gains over the past month, but were below the pace of last year's blockbuster September. ISM manufacturing decelerated slightly, while services gains accelerated.

August data included positive overall construction spending, while the residential component declined significantly. Factory orders increased, while core durable goods spending decreased.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 5.03% up +.14% w/w (1-yr range: 4.15 - 5.03)*
  • 10-year treasury bonds 3.23% up +.17% w/w (2.05 - 3.24)*
  • Credit spread 1.80% down -.03% w/w (1.56 - 2.30)

Yield curve, 10-year minus 2-year:

  • 0.34%, up +.10% w/w (0.18 - 1.30)

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

  • 5.02%, up +0.24% w/w (3.84 - 5.02)*

*NEW 7 YEAR HIGHS

BAA Corporate bonds having gone above 5%, they have become a negative, joining mortgage rates and treasury bonds. The spread between corporate bonds and treasuries is back below 1.85%, and so turned positive, as is the yield curve, which is back above 0.25%.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps up +0.2% at 241 w/w (225 - 262) (SA)
  • Purchase apps YoY up +3% (NSA)
  • Purchase apps 4-week avg. up +3 to 238 (SA)
  • 4 week YoY avg. up +4% (NSA)
  • Refi apps down -0.1% w/w (SA)

*(SA)=seasonally adjusted, (NSA)= not seasonally adjusted

Real Estate Loans (from the FRB)

  • Unchanged w/w
  • Up +3.6% 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 they declined, even turning negative for three weeks, before returning to neutral for four weeks, and positive for the second week this week.

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

Money supply

M1

  • +0.1% w/w
  • +0.5% m/m
  • +1.5% YoY Real M1 (-0.7 - 6.9)

M2

  • +0.1% w/w
  • +0.2% m/m
  • +1.2% 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. Several weeks ago, for the first time since this expansion began, Real M1 briefly turned negative one month ago, but has since rebounded strongly.

Credit conditions (from the Chicago Fed)

  • Financial Conditions Index up +.02 to -0.86
  • Adjusted Index (removing background economic conditions) unchanged at -0.73
  • Leverage subindex unchanged at -0.37

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 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. Several months ago, the leverage subindex turned up to near neutral, but has faded towards positive again since.

Short leading indicators

Trade weighted US Dollar

  • Down -0.72 to 125.73 w/w, +5.4% YoY (last week) (broad) (116.42 -128.62)
  • Up +0.44 to 95.64 w/w, +1.98% YoY (yesterday) (major currencies)

The US dollar briefly spiked higher after the US presidential election. Both measures had been positives since last summer, but recently the broad measure turned neutral, followed more recently by the measure against major currencies, which has risen above +5% YoY and is thus negative.

Commodity prices

Bloomberg Commodity Index

  • Up +1.70 to 86.90 (82.00 - 91.94)
  • Up +2.74% YoY

Bloomberg Industrial metals ETF (from Bloomberg)

  • 121.10 up +0.63 w/w, down -6.29% YoY (112.03 - 149.10)

Commodity prices surged higher after the 2016 presidential election. Industrial metals had been strongly positive and recently made a new high, but have declined so much recently that they have turned negative. The overall index also briefly turned negative, but is slightly positive again.

Stock prices S&P 500 (from CNBC)

  • Down -1.0% w/w to 2885.57

After being neutral for several months, stock prices made a new three-month high in mid June and have continued the positive run, ultimately rising to a number of new all-time highs.

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 (but not this month). It has generally been very positive for most of this year. It has cooled from white-hot to red-hot to simply positive in the last several months.

Employment metrics

Initial jobless claims

  • 207,000 down -7,000
  • Four-week average 207,000 up +750

Initial claims have repeatedly made more 40-year-plus lows, and so are very positive.

Temporary staffing index (from the American Staffing Association)

  • Unchanged at 100 w/w
  • Up +3.6% 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 and in the last several months very positive.

Tax Withholding (from the Dept. of the Treasury)

  • $186.5 B for the last 20 reporting days vs. $189.6 B one year ago, down -$3.1 B or -1.6%
  • 20-day rolling average adjusted for tax cut (+$4 B): up +$0.9 B or +0.5%

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 up +0.79 to $74.34 w/w, up +49.0% YoY
  • Gas prices up +$.03 to $2.87 w/w, up $0.30 YoY
  • Usage four-week average down -1.5% YoY

The price of gas bottomed over 2 1/2 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 usually been positive since then, although not this week. The YoY change went back above 40% recently, so the rating has turned negative.

Bank lending rates

  • 0.240 TED spread down -0.016 w/w
  • 2.281 LIBOR up +0.039 w/w (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, most recently positive.

Coincident indicators

Consumer spending

  • Johnson Redbook up +5.7% YoY
  • Goldman Sachs Retail Economist up +3.6% w/w, up +2.9% 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. Recently they have been exceptionally positive, although the GS measure cooled a little this week.

Transport

Railroads (from the AAR)

  • Carloads up +0.5 YoY
  • Intermodal units up +6.8% YoY
  • Total loads up +3.7% 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 been positive ever since.

Harpex made multi-year lows in early 2017, and after oscillating improved to new multi-year highs earlier this year, but has now fallen enough to rate negative. BDI traced a similar trajectory, and made three-year highs near the end of 2017, and at midyear hit multiyear highs, but has declined in the last two months sufficiently to be listed as a negative now.

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 +8.5% 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 coincident indicators, positives include consumer spending, rail, steel, the TED spread, and the Baltic Dry Index. Tax withholding is mixed. LIBOR and Harpex remain negative.

Among the short leading indicators, the regional Fed new orders indexes, the Chicago National Conditions Index, jobless claims, stock prices, staffing and the spread between corporate and Treasury bonds are all positive. Gas prices and one measure of the US dollar are neutral. Oil prices, the broad trade weighted US dollar, and one commodities index are negative.

Among the long leading indexes, the Chicago Fed Adjusted Financial Conditions Index, the Leverage subindex, real M1, real estate loans, and purchase mortgage applications are all positive, rejoined this week by the yield curve. Treasuries, refinance applications, mortgage rates, and real M2 all remain negative, joined this week for the first time by corporate bonds.

The nowcast remains strongly positive. The short-term forecast also is positive. The longer-term forecast has been fluctuating, this week once again being neutral. If mortgage rates in particular remain above 5%, it's difficult to imagine more housing indicators not 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.