Weekly High Frequency Indicators: Interest Rates Jump To New Expansion Highs

Summary

• High frequency indicators can give us a nearly up-tp-the-moment view of the economy.
• They are divided into long leading, short leading, and coincident metrics.
• New highs in interest rates helped keep the long-term forecast neutral, while jumps in rail and several other indicators helped the short-term forecast and nowcast be positive.

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 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

October data started out with an excellent employment report including jobs added, the unemployment rate, and wages above 3% YoY for the first time in 10 years. The ISM manufacturing report also was very positive, although the new orders index was less positive than at any point in nearly two years. Motor vehicle sales were also at the highest level of the year. Factory orders, personal income and spending also were positive.

September construction spending was flat, although residential spending was positive.

In the rear view mirror, the Q3 employment cost index was very positive, and Q3 unit labor costs and productivity both increased.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 5.18% up +.06% w/w (1-yr range: 4.15 - 5.18) NEW HIGH
• 10-year treasury bonds 3.22% up +.14% w/w (2.05 - 3.24)
• Credit spread 1.96% down -.08% w/w (1.56 - 2.30)

Yield curve, 10-year minus 2-year:

• 0.30%, up +.03% w/w (0.18 - 1.30)

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

• 5.04%, up +0.10% w/w (3.84 - 5.04) NEW 6 YEAR HIGH

BAA Corporate bonds are above 5%, and so have joined mortgage rates and treasury bonds as negative. The spread between corporate bonds and treasuries is above 1.85%, and so also turned neutral. If it rises above 2.10%, it will be a negative. The yield curve, still back above 0.25%, is positive.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps down -2% to 225 w/w (225 - 262) (tied for 1 year low) (SA)
• Purchase apps YoY down -0.4% (NSA)
• Purchase apps 4-week avg. down -4 to 230 (SA)
• 4 week YoY avg. up +1% (NSA)
• Refi apps down -4% w/w (SA) (near 20 year lows)

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

Real Estate Loans (from the FRB)

• Up +0.1% w/w

• Up +3.3% YoY ( 2.7 - 6.5) (re-benchmarked, adding roughly +0.5% to prior comparisons)

Refi has been dead for some time, and is near 20-year lows. Purchase applications were strong almost all last year, began to falter YoY in late December, but rebounded during spring, ultimately making new expansion highs. During summer they declined all the way to negative before returning through neutral to positive a month ago, before declining to neutral again for the last three weeks.

With the re-benchmarking of the last year, the growth rate of real estate loans changed from neutral to positive. If fell below +3.25% last week, but rose just above it this week, and so is back to positive.

Money supply

M1

• +0.8% w/w
• +1.4% m/m
• +2.2% YoY Real M1 (-0.7 - 6.9)

M2

• +0.2% w/w
• +0.2% m/m
• +1.6% 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 briefly turned negative about two months ago, but has since rebounded, and it remains positive this week.

Credit conditions (from the Chicago Fed)

• Financial Conditions Index up +.03 to -0.84
• Adjusted Index (removing background economic conditions) up +.04 to -0.70
• Leverage subindex up +.03 to -0.34

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

Short leading indicators

Trade weighted US$

• Up +0.65 to 127.55 w/w, +5.2% YoY (last week) (broad) (116.42 -128.62)
• Up +0.13 to 96.47 w/w, +1.61% 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

• Down -1.12 to 83.88 (82.00 - 91.94)
• Down -3.24% YoY

Bloomberg Industrial metals ETF (from Bloomberg)

• 117.60 up +0.06 w/w, down -12.29% YoY (112.03 - 149.10)

Commodity prices surged higher after the 2016 presidential election. Both industrial metals, and the broader commodities indexes have both declined all the way to negative in the past year.

Stock prices S&P 500 (from CNBC)

• Up +2.5% to 2723.06

After being neutral for several months, stock prices made a new three-month high in mid-June and rose to a number of new all-time highs until three weeks ago, when the sell-off made a three-month low. The rating for stocks therefore changed to neutral.

Regional Fed New Orders Indexes

(*indicates report this week)

• Empire State up +6.0 to +22.5
• Philly down -2.1 to +19.3
• Richmond down -14 to +20
• Kansas City down -8 to +7
• *Dallas up +4.2 to +18.9
• Month-over-month rolling average: up +1 to +18

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

• 214,000 down -1,000
• 4-week average 213,750 up +2,000

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

Temporary staffing index (from the American Staffing Association)

• Up +1 to 103 w/w
• Up +4.1% 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)

• $163.2 B for the last 20 reporting days vs. $180.8 B one year ago, down -$17.6 B or -9.7%
• 20-day rolling average adjusted for tax cut (+$4 B): down -$13.6 B or -7.5%

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, and especially so this week.

I have discontinued the intramonth 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 -4.73 to $62.93 w/w, up +23.8% YoY
• Gas prices down -$.03 to $2.81 w/w, up $0.32 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 in the past two months. The YoY change is below 40%, so is neutral.

Bank lending rates

• 0.312 TED spread up +0.083 w/w
• 2.314 LIBOR up +0.019 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, most recently positive.

Coincident indicators

Consumer spending

• Johnson Redbook up +5.9% YoY
• Goldman Sachs Retail Economist down -2.9% w/w, up +0.8% 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 generally been exceptionally positive, but the Retail Economist measure has decelerated recently, enough so that this week it is neutral.

Transport

Railroads (from the AAR)

• Carloads up +2.6% YoY
• Intermodal units up +6.1% YoY
• Total loads up +4.4% YoY

Shipping transport

• Harpex down -7 to 503 (440 - 678)
• Baltic Dry Index down -46 to 1470 (~700 - 1775)

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 had been positive ever since - until three of the last four weeks, which weakened enough to cause this indicator to score neutral to mixed, probably due to tariffs. This week it rebounded to positive.

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 since declined sufficiently to be listed as a neutral 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)

• Up +1.2% w/w
• Up +11.3% 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 indexes, the Chicago Fed Adjusted Financial Conditions Index, the Leverage subindex, the yield curve, and real M1 are all positive, rejoined this week by real estate loans. Purchase mortgage applications are neutral. Treasuries, corporate bonds, refinance applications, mortgage rates, and real M2 all remain negative.

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

Among the coincident indicators, Redbook consumer spending, steel, the TED spread, rejoined this week by rail, are all positive. The BDI and the Retail Economist consumer spending index are neutral. LIBOR and Harpex, along with tax withholding remain negative..

The long leading forecast has been fluctuating recently, and is neutral again this week. The short-term forecast, which weakened to neutral last week, rebounded to weakly positive this week The nowcast also remains weakly positive. I will be paying extra attention to the regional Fed indexes and retail spending this month to see if they telegraph a slowdown from the recent excellent economic and jobs growth.

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.