Weekly High Frequency Indicators: Falling Long-Term Interest Rates Continue To Be The Dominating Theme

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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 short-term forecast continues to be very volatile, while the long-term forecast continues to improve.

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

Recap of monthly reports

July reports included positive housing permits but mixed housing starts. Retail sales improved strongly. Industrial production declined yet again, and is below its December peak. Present consumer sentiment and future expectations both declined sharply (near a two-year low) in the University of Michigan’s preliminary monthly survey. CPI came in somewhat “hot.”

In the rearview mirror, both Q2 productivity and unit labor costs increased substantially. Unit labor costs also were backwardly revised sharply higher for the last five years, especially since the beginning of 2018.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 3.79%, down -.18% w/w (1-year range: 379-5.29) (new expansion low)
  • 10-year Treasury bonds 1.56%, down -.17% w/w (1.56-3.24) (new one-year low)
  • Credit spread 2.24%, down -.01% w/w (1.56-2.48)

Yield curve

  • 10 year minus 2 year: 0.08%, down -0.02% w/w (0.04-1.30)
  • 10 year minus 3 month: -0.22%, up +0.04% w/w (-0.28 - 1.00)

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

  • 3.58%, down -.06% w/w (3.58-5.05) (new two-year low)

BAA Corporate bonds and Treasury bonds turned positive three weeks ago. In particular, that corporate bonds fell to yet another new expansion low is extremely bullish for the next year or more. The spread between corporate bonds and Treasuries is negative. The 2- vs. 20-year yield curve is neutral. The 10-year minus three-month spread is very negative. Mortgage rates are very close to their post-Brexit low, so they are very positive.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps +2% w/w to 253 (214-281) (SA)
  • Purchase apps 4 wk avg. -3 to 255 ((SA))
  • Purchase apps YoY +12% (NSA)
  • Purchase apps YoY 4 wk avg. +8% (NSA)
  • Refi apps +37% w/w ((SA))

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

Real Estate Loans (from the FRB)

  • Down less than -0.1% w/w
  • Up +3.5% 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, lower rates once again caused a spike upward in refi, returning it to neutral.

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, then rebounded to positive, last week went back to neutral, and back to positive this week.

Money supply

M1

  • +0.3% w/w
  • +1.8% m/m
  • +4.3% YoY Real M1 (-0.7 to 4.1) New 12 month high

M2

  • +0.2% w/w
  • +0.6% m/m
  • +3.8% YoY Real M2 (0.9-3.8) New 12 month high

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 until recently. As of this week, it's back above 3.0%, and so is positive. Real M1 briefly turned negative about four 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 two months real M1 has been positive.

Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via Factset.com) (no report this week)

  • Q2 2019 estimated (10%) + actual (90%), up +0.20 to 41.30, up +6.4% q/q, down -3.8% from Q4 2018 peak

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. Based on the preliminary results, I have expanded the "neutral" band to +/-3% as well as averaging the previous two quarters together, until at least 100 companies have actually reported.

Because the q/q rebound has risen by more than half of the decline from the Q4 peak, this rating has improved from neutral to positive.

Credit conditions (from the Chicago Fed)

  • Financial Conditions Index up +.05 (less loose) to -0.80
  • Adjusted Index (removing background economic conditions) up +.02 (less loose) to -0.67
  • Leverage subindex up +.02 (less loose) to -0.37

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

Short leading indicators

Trade weighted US Dollar

  • Up +1.23 to 129.54 w/w, +4.2% YoY (last week) (broad) (115.19-129.54) New 1 year high
  • Up +0.66 to 98.20 w/w, +2.2% 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 were negative. Within the past two months, both of improved to neutral on a YoY basis.

Commodity prices

Bloomberg Commodity Index

  • Down -0.65 to 76.77 (76.27-91.94)
  • Down -7.9% YoY

Bloomberg Industrial metals ETF (from Bloomberg)

  • 114.08, up +1.55 w/w, down -2.3% YoY (106.51-149.10)

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

Stock prices S&P 500 (from CNBC)

  • Down -1.0% to 2888.68

At the end of 2018, stocks' rating became negative. This year, they have made repeated new three-month and several all-time highs, and thus their rating is positive.

Regional Fed New Orders Indexes

(*indicates report 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. Later last year it gradually cooled to weakly positive. This year it has been waxing and waning between positive and flat. In July it was flat, but this month so far has increased to positive again.

Employment metrics

Initial jobless claims

  • 220,000, up +11,000
  • Four-week average 213,7500, up +1,750

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. The overall trend is still weakly positive, despite some challenging YoY comparisons, and the one-week number this week was actually slightly above last year’s.

Temporary staffing index (from the American Staffing Association)

  • Up 2 to 95 w/w
  • Down -4.2% 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 for most of the rest of the year. In the last five months, it has gradually declined, turning neutral in January and then negative since early February. It had been improving a little, but for the past three weeks in a row has fallen back to its worst YoY readings so far this year.

Tax Withholding (from the Department of the Treasury)

  • $171.5 B for the last 20 reporting days vs. $164.0 B one year ago, up +$7.5 B or +4.6%

This 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 up +$0.49 to $54.90 w/w, down -11.8% YoY
  • Gas prices down -$.07 to $2.62 w/w, down -$0.22 YoY
  • Usage 4-week average up +0.6% YoY

After bottoming in 2016, generally prices went sideways with a slight increasing trend in 2017 and 2018. While at the end of last year, prices plummeted, oil rose to up YoY, before declining recently. Gas prices probably made their seasonal high for this year two months ago. Usage was positive YoY during most of 2016, but has oscillated between negative and positive for the last several months. This week 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. After being whipsawed between being positive or negative last year, this year it has remained positive.

Coincident indicators

Consumer spending

  • Johnson Redbook up +4.4% YoY
  • Retail Economist down -2.7% w/w, up +1.7% YoY

Both the Retail Economist and Johnson Redbook Indexes were positive all during 2018. The Retail Economist measure decelerated earlier this year, turning neutral, but improved enough to score positive in April and May. It has been varying between neutral and weakly positive, and this week declined to neutral again. 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 months ago.

Transport

Railroads (from the AAR)

  • Carloads down -3.9% YoY
  • Intermodal units down -4.6% YoY
  • Total loads down -4.3% 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 almost uniformly negative, suggesting that the trade war with China is having a major impact. Rail traffic in the western US also 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 Coast ports. By contrast, truck traffic is still (very slightly) positive YoY - the trend there is neutral to slightly positive.

Harpex made multi-year lows in early 2017, and after oscillating improved to new multi-year highs earlier in 2018, but earlier this year turned negative. In the past two months, it rebounded enough to be neutral, and now is positive. BDI traced a similar trajectory, and made three-year highs near the end of 2017, and again at midyear 2018, before declining all the way back to negative. In the past two months it has made repeated three year 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 -1.6% w/w
  • Up +0.3% 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 1/2 of its recent range over 10% YoY, and was neutral, and has been varying between neutral and positive since. For the past two months, it has been neutral.

Summary And Conclusion

The was no change among the long leading indicators. Corporate bonds, Treasuries, purchase mortgage applications, mortgage rates, corporate profits, the Chicago Fed Adjusted Financial Conditions Index and Leverage subindex, real M1 and real M2, and real estate loans are positives. The yield curve is neutral or negative, depending on the maturity. Mortgage refinancing is neutral.

Among the short leading indicators, stock prices, the Chicago National Conditions Index, gas and oil prices, and initial claims are positives, rejoined by the regional Fed new orders indexes and gas usage. The US dollar is neutral. The spread between corporate and Treasury bonds, commodities, and temporary staffing are negative.

Among the coincident indicators, Redbook consumer spending, tax withholding, Harpex, BDI, and the TED spread are positive. Steel and Retail Economist consumer spending are neutral. Rail and LIBOR are negative.

The nowcast remains positive. The short-term forecast, which has been very volatile recently, turned from negative to positive this week. The “high frequency” long leading indicators are very positive.

This week I’d like to emphasize that in this weekly report we trade off some accuracy for very timely updates. In the quarterly data we saw a major downward revision in unit labor costs, which is the denominator for adjusted corporate profits, a long leading indicator. Several short leading indicators, like the manufacturing work week and durable goods orders, also have no analog in the weekly data. But both sets of indicators have been suggesting that the rest of this year will be challenging, while later next year is beginning to shape up as more positive.

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.