Weekly High Frequency Indicators: Flight To Quality Improves Long-Term Outlook

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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.

This past week was marked by a “flight to quality” in the bond market, meaning lower long-term rates.

The question remains whether the recent improvement in short-term indicators has been a countertrend bounce since the government shutdown or a real longer-term signal.

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's 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'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

April data included increases slightly below expectations in both the CPI and PPI. The March JOLTS survey showed a decline in most jobs related metrics. Wholesale sales jumped sharply, while inventories declined slightly.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 4.66% down -.01% w/w (1-year range: 4.15 - 5.29)
  • 10-year Treasury bonds 2.47% down -.06% w/w (2.40 - 3.24)
  • Credit spread 2.19% up +.05% w/w (1.56 - 2.46)

Yield curve, 10-year minus two-year:

  • 0.20%, up +.01% w/w (0.04 - 1.30)

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

  • 4.20%, down -.09 w/w (4.03 - 5.05)

BAA Corporate bonds and treasury bonds remain neutral. The spread between corporate bonds and Treasuries is still above 2.10%, and so remains negative. The two- vs. 20-year yield curve also is neutral. Note that I will not change corporate ratings to positive unless they fall below 4.25%. Mortgage rates fell back to 4.2%, (1/2 of the way to their post-Brexit low), so they return to positive from neutral.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps +4% w/w to 270 (214 - 281) (SA)
  • Purchase apps 4 wk avg. 270 ((SA))
  • Purchase apps YoY +5% ((NSA))
  • Purchase apps YoY 4 wk avg. +4% ((NSA))
  • Refi apps +1% w/w ((SA))

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

Real Estate Loans (from the FRB)

  • Up +0.1% w/w 4485
  • Up +3.4% YoY ( 2.7 - 6.5)

Purchase applications generally declined from expansion highs through neutral to negative from the beginning of summer to the end of 2018. With lower rates this year, their rating has climbed back to positive. Meanwhile, after lower rates recently caused a spike upward, refi is back to near 20-year lows and so is a negative again.

With the re-benchmarking of the last year, the growth rate of real estate loans turned from neutral to positive. For two weeks it fell back below +3.25%, and so went back from positive to neutral, but this week it rebounded, so is positive.

Money supply

M1

  • +0.8% w/w
  • +2.4% m/m
  • +2.0% YoY Real M1 (-0.7 - 3.8)

M2

  • +0.4% w/w
  • +0.1% m/m
  • +2.0% YoY Real M2 (0.9 - 3.1)

Since 2010, both real M1 and real M2 were resolutely positive. Both decelerated substantially in 2017. Real M2 growth fell below 2.5% almost all last year, and has with few exceptions stayed below that benchmark. Thus it been rated negative. Real M1 briefly turned negative about three months ago. Both real M1 and M2 then improved all the way to positive for one month, then M1 was roughly zero YoY for one week. For the last three weeks real M1 surged back again to positive.

Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via FactSet.com)

  • Q1 2019 estimated (10%) plus actual (90%), up +19 w/w to 38.72, down -6.3% q/Q4
  • Total decline from Q3 2018 peak is -9.7%

I initiated coverage of this metric recently on an experimental basis. FactSet estimates earnings, which are replaced by actual earnings as they are reported, and are updated weekly. Because estimates are revised as earnings come in, and in any given quarter tend to be revised down over all timeframes by an average of -3%, I'm treating any quarter-over-quarter change in "estimates" of +/-2% as neutral. For example, Q1 earnings estimates have increased over 4.5% in the past four weeks. Only about 50 companies are left to report for Q1.

Credit conditions (from the Chicago Fed)

  • Financial Conditions Index up+1 (less loose) to -0.87
  • Adjusted Index (removing background economic conditions) up +.01 (less loose) to -0.69
  • Leverage subindex down -.02 (looser) to -0.43

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. Late last year, the leverage subindex turned up to near neutral, then turned more positive.

Short leading indicators

Trade weighted US Dollar

  • Up +0.56 to 127.97 w/w, +6.8% YoY (last week) (broad) (115.19 -129.13)
  • Down -0.17 to 97.32 w/w, +5.2% YoY (major currencies)

The US dollar briefly spiked higher after the US presidential election. Both measures had been positives last summer, but by last autumn the broad measure turned neutral, followed more recently by the measure against major currencies. As of roughly eight months ago, both are negative.

Commodity prices

Bloomberg Commodity Index

  • Down -1.18 to 78.66 (76.27 - 91.94)
  • Down -12.6% YoY

Bloomberg Industrial metals ETF (from Bloomberg)

  • 113.45 down -1.97 w/w, down -16.1% YoY (106.51 - 149.10)

Commodity prices surged higher after the 2016 presidential election. Both industrial metals, and the broader commodities indexes both declined to very negative in the past year. Industrial metals had briefly improved enough to be scored neutral for one week, but are back to negative.

Stock prices S&P 500 (from CNBC)

  • Down -1.1% to 2881.40

At the end of 2018, having not made a new high in three months, while having made a new 52-week low on Christmas Eve, stocks’ rating became negative. Since then they have made repeated new three-month and all-time highs, and thus their rating returned to positive.

Regional Fed New Orders Indexes

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

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. It was "very" positive for most of last year. Since last summer it gradually cooled to weakly positive. For five weeks it has alternated between neutral and weakly positive, but in April it turned solidly positive.

Employment metrics

Initial jobless claims

  • 228,000 down -2,000
  • 4-week average 220,250 up +7,750

Initial claims had generally been very positive in 2017 and 2018. In November they briefly spiked, and did so again at the end of January, the worst of which was probably connected to the government shutdown. They made new 49-year lows in the three weeks just before Easter, but jumped in the three weeks afterward. I think the case that both the lows and the jump are residual seasonality due to the very late date for Easter this year has been made. Since year-over-year claims are about unchanged from one year ago, the overall trend appears to be weakness.

Temporary staffing index (from the American Staffing Association)

  • Unchanged at 93 w/w
  • Down -2.5% YoY

This index was positive with a few exceptions all during 2017. It was negative for over a month at the beginning of 2018, but returned to a positive since for most the year. In the last five months it has gradually declined, turning neutral in January and fully negative since early February. Once again they had their most negative reading yet this week.

Tax Withholding (from the Department of the Treasury)

  • $193.0 B for the last 20 reporting days vs. $181.3 B one year ago, up +$11.7 B or +6.5%

With the exception of the month of August and late November, this was positive for almost all of 2017. It was generally negative last year once the effects of the tax cuts started in February 2018. Straight YoY comparisons have become valid again since this February, and with the exception of one week, have been positive.

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

  • Oil down -$3.72 to $61.94 w/w, down -0.5% YoY
  • Gas prices up +$.01 to $2.90 w/w, up +$0.05 YoY
  • Usage 4-week average up +0.3% YoY

The price of gas bottomed over three years ago at $1.69. Generally prices went sideways with a slight increasing trend in 2017 and 2018. While at the end of last year, prices plummeted, oil has now gone up YoY, so is neutral. Usage was positive YoY during most of 2016, but has oscillated between negative and positive for the last several months. This week once again it was positive.

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. Early last year the TED spread has whipsawed between being positive or negative, but recently has remained positive.

Coincident indicators

Consumer spending

  • Johnson Redbook up +5.9% YoY
  • Retail Economist down -1.3% w/w, up +2.6% YoY

Both the Retail Economist and Johnson Redbook Indexes were positive all during 2018. The Retail Economist measure decelerated in the past few months, turning neutral, but has improved enough to score positive in the last three weeks. Johnson Redbook did fall sharply at the beginning of this year, and varied between being positive or neutral for several months before improving to positive several weeks ago.

Transport

Railroads (from the AAR)

  • Carloads up +1.0% YoY
  • Intermodal units down -4.9% YoY
  • Total loads down -2.0% YoY

Shipping transport

In 2018 rail, after some weakness in January and February, it remained positive until autumn, when it weakened precipitously, probably due to tariffs. It rebounded strongly in January, but since then it has turned neutral or negative, and was mixed again this week. Note that rail traffic, particularly in the western US, is likely impacted by the widening of the Panama Canal, which has allowed ships to bypass West Coast ports and proceed directly to Gulf and East Cost ports.

Harpex made multi-year lows in early 2017, and after oscillating improved to new multi-year highs earlier in 2018, but recently enough to rate negative. In the past three weeks it has rebounded enough to be neutral. BDI traced a similar trajectory and made three-year highs near the end of 2017, and at midyear 2018 hit multiyear highs. Since then it declined all the way to negative, but has improved enough as of this week to rate neutral.

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 +1.1% w/w
  • Up +6.6% YoY

Steel production was generally positive in 2017. It turned negative in January and early February of 2018, but with the exception of three weeks recently has been positive since then. Recently the YoY comparison abruptly declined to less than half of it recent range over 10% YoY, and was neutral, and has been varying between neutral and positive since, as it was this week.

Summary And Conclusion:

Among long leading indicators, purchase mortgage applications, mortgage rates, the Chicago Fed Adjusted Financial Conditions Index and Leverage subindex, real estate loans, and real M1 are positives. The yield curve, corporate bonds and treasuries are neutral. Corporate profits, real M2, and mortgage refinancing are negative.

Among the short leading indicators, stock prices, the Chicago National Conditions Index, initial jobless claims (just barely!), oil prices, gas usage, and the regional Fed new orders indexes are positives. Gas prices are neutral. Both measures of the US dollar, the general commodity index, the spread between corporate and Treasury bonds, industrial metals, and temporary staffing are negative.

Among the coincident indicators, consumer spending, steel production, tax withholding, and the TED spread are positive. Harpex and the BDI are neutral. Rail is mixed. LIBOR is negative.

Driven by the “flight to quality” in bonds, the long-term forecast improved to positive this week. The short-term forecast also remains slightly above neutral. The nowcast also is positive. The picture for 2020 looks increasingly positive. I'm watching initial claims, and will watch the regional Fed reports, particularly closely to see whether the recent improvement has been temporary or not.

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.