Weekly High Frequency Indicators: M1, Mortgage Applications Bring Long-Term Forecast Back To Neutral

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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.

Both the nowcast and the short-term forecast remain positive.

Meanwhile, an anomalous spike in real M1 and a surge in mortgage applications prompted by a decline in mortgage rates raise the long-term forecast to neutral.

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

The nowcast and the short-term forecast (less than one year out) remain positive, but the long-term forecast has slipped even further into negative territory.

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's 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's scored neutral if it's moving in the right direction and is close to making a new high.

Recap of monthly reports

November data included increases in real and nominal retail sales, industrial production, and capacity utilization. October retail sales were revised upward and production downward. The JOLTS report for October was all positive.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 5.16% unchanged w/w (1-year range: 4.15 - 5.29)
  • 10-year treasury bonds 2.89% up +.03% w/w (2.05 - 3.24)
  • Credit spread 2.27% down -.03% w/w (1.56 - 2.30)

Yield curve, 10-year minus 2-year:

  • 0.16%, up +0.02% w/w (0.12 - 1.30)

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

  • 4.71%, down -0.15% w/w (3.84 - 5.05)

BAA Corporate bonds are above 5%, and so have joined mortgage rates and Treasury bonds as negative. The spread between corporate bonds and Treasuries has now risen above 2.10%, and so is also negative. The yield curve remains the only interest rate indicator that is not negative.

NOTE: If mortgage rates fall back below 4.5%, they will move from negative to neutral.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps up +3% to 245 w/w (214 - 262) (SA)
  • Purchase apps YoY up +4% (NSA)
  • Purchase apps 4-week avg. up +9 to 233 (SA)
  • 4 week YoY avg. up +0.3% (NSA)
  • Refi apps up +2% w/w (SA)

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

Real Estate Loans (from the FRB)

  • Down -0.2% w/w 3493
  • Up +2.8% YoY ( 2.7 - 6.5) (re-benchmarked, adding roughly +0.5% to prior comparisons)

Refi has recently been at or near 20-year lows, although with a decline in mortgage rates, had a nice pop this week. Purchase applications began to falter YoY last December, but rebounded during spring, ultimately making new expansion highs. During summer they declined through neutral to negative, then rose into positive, before turning negative again in the last month. The decline in mortgage rates last week was enough for a pop in applications enough to bring this indicator back up to neutral this week.

With the re-benchmarking of the last year, the growth rate of real estate loans changed from neutral to positive. It remained below +3.25% this week, and so stays negative.

Money supply

M1

  • +3.6% w/w
  • +1.0% m/m
  • +3.3% YoY Real M1 (-0.7 - 6.9)

M2

  • +0.4% w/w
  • +0.6% m/m
  • +2.0% 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 fell below 2.5% earlier this year and has thus been rated negative. Real M1 briefly turned negative about two months ago, then rebounded, then was negative for two weeks, and then this week inexplicably, as three months ago, had a huge pop and is thus securely positive.

Credit conditions (from the Chicago Fed)

  • Financial Conditions Index up +.02 (less loose) to -0.76
  • Adjusted Index (removing background economic conditions) up +0.04 (less loose) at -0.54
  • Leverage subindex up +1 (less loose) to -0.32

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 turned more positive again since.

Short leading indicators

Trade weighted US Dollar

  • Down -0.31 to 128.29 w/w, +6.6% YoY (last week) (broad) (116.42 -128.62)
  • Up +0.85 to 97.47 w/w, +3.76% 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 +.2.22 to 81.27 (81.27 - 91.94) (new one-year low)
  • Down -3.07% YoY

Bloomberg Industrial metals ETF (from Bloomberg)

  • 113.99 down -0.61 w/w, down -10.50% 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)

  • Down -1.3% to 2599.95

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 a little over two months ago, when the sell-off started and they made several three-month lows. The rating for stocks therefore changed to neutral. It will not score negative unless and until more than three months passes from stocks' last high, and they make a new three-month low.

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

  • 206,000 down -25,000
  • Four-week average 224,750 down -3,250

Initial claims made 40 year-plus lows into September, but have risen since then by a little over 10%. On a YoY basis they are still lower. Under the circumstances, they are still within the range of normal noise and so remain positive. If the four-week average rises by 12.5% off its low, that will trigger a change of rating to neutral.

Temporary staffing index (from the American Staffing Association)

  • Down -1 to 101 w/w
  • Up +2.0% 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, although in the past few weeks it has backed off. If the YoY comparison falls below 1.5% (considering the comparison was over +4% recently), the rating will change to neutral.

Tax Withholding (from the Department of the Treasury)

  • $190.4 B for the last 20 reporting days vs. $194.5 B one year ago, down -$4.1 B or -2.1%
  • 20-day rolling average adjusted for tax cut [+$4 B]: down -$0.1 B or down less than -0.1%

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 Department 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 -1.20 to $51.16 w/w, down -11.7% YoY
  • Gas prices down -$.03 to $2.42 w/w, down -$0.06 YoY
  • Usage four-week average down less than -0.1% 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. In the last two months, however, prices have plummeted. This is a negative for the oil patch, but a positive for consumers, so the rating changes from neutral to positive. Usage turned negative in the first half of 2017, then turned positive, but turned negative again for over the last two months, until turning positive last week. This week is about as neutral as usage can get!

Bank lending rates

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. Earlier this year the TED spread has whipsawed between being positive or negative, but more recently was very positive. It has risen again in the last month, but is still positive.

Coincident indicators

Consumer spending

Both the Retail Economist and Johnson Redbook Indexes generally improved from weak to moderate or strong positives during 2017 and have remained positive this year. A few months ago both were exceptionally positive, but the Retail Economist measure has decelerated since then.

Transport

Railroads (from the AAR)

  • Carloads up +0.3% YoY
  • Intermodal units up +5.7% YoY
  • Total loads up +3.1% 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 had been positive ever since - until about two months ago. Since then, except for one week last month, it has weakened nearly precipitously, probably due to tariffs. For three of the last four weeks, including this week, it has been negative or, as in this week, neutral.

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 mid-year hit multi-year 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)

  • Down -0.8% w/w
  • Up +11.9% 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, Real M1 joined the Chicago Fed Adjusted Financial Conditions Index and the Leverage subindex as positives, purchase mortgage applications joined real estate loans and the yield curve as neutrals. Treasuries, corporate bonds, 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, staffing, and oil and gas prices are all positive (note that I'm weighting the benefit to consumers more than the distress to the oil patch). One measure of the US dollar and stock prices are neutral, as is gas usage. The broad trade weighted US dollar, both commodities indexes, and the spread between corporate and Treasury bonds are negative.

Among the coincident indicators, consumer spending, steel, and the TED spread are positive, joined this week by rail. The BDI is neutral. Tax withholding joined LIBOR and Harpex as negatives.

The nowcast remains positive and the short-term forecast a somewhat weaker positive.

This week the long leading indicators got a kick from mortgage applications, induced by lower mortgage rates, and by another anomalous big spike in real M1. On a monthly basis real retail sales per capita made a new high, and this is enough for me to raise the long-term forecast from negative to neutral this week.

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.