Weekly High Frequency Indicators: Volatile Short-Term Forecast Rebounds

Jan. 18, 2020 1:50 AM ETSPY, QQQ, DIA, SH, IWM, TZA, SSO, TNA, VOO, SDS, IVV, SPXU, TQQQ, UPRO, PSQ, SPXL, UWM, RSP, SPXS, SQQQ, QID, DOG, QLD, DXD, UDOW, SDOW, VFINX, URTY, EPS, TWM, SCHX, VV, RWM, DDM, SRTY, VTWO, QQEW, QQQE, FEX, ILCB, SPLX, EEH, EQL, QQXT, SPUU, IWL, SYE, SMLL, SPXE, UDPIX, JHML, OTPIX, RYARX, SPXN, HUSV, RYRSX, SCAP, SPDN, SPXT, SPXV17 Likes
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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 recently strongly positive long-term forecast remains intact.
  • The recently volatile short-term forecast rebounds from neutral to positive.
  • Thus the forecast remains slowdown only vs. recession.

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

December data included blowout positive readings for both housing starts and permits, while industrial production declined. CPI and PPI came in positive as expected. Nominal retail sales were solidly positive, but adjusted for inflation were barely above zero.

In November, manufacturers and wholesalers sales were also positive, while inventories declined, a positive. In the JOLTS report, new openings declined sharply, while hires rose slightly (but were still negative YoY). Quits, however, improved, while layoffs declined (also positive).

Important Note: For all series where a graph is available, I have provided a link to where the relevant graph can be found.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 3.81%, down -0.07% w/w (1-yr range: 3.73-5.18)
  • 10-year Treasury bonds 1.82%, unchanged w/w (1.47-2.79)
  • Credit spread 1.99%, down -0.07% w/w (1.96-2.46).

(Graph at FRED Graph | FRED | St. Louis Fed)

Yield curve

  • 10 year minus 2 year: +0.26%, up +0.01% w/w (-0.04-0.34)
  • 10 year minus 3 month: +0.26%, down -0.02% w/w (-0.52-0.39)
  • 2 year minus Fed funds: -0.02%, unchanged (-1.0% required for recession signal)

(Graph at FRED Graph | FRED | St. Louis Fed)

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

  • 3.70%, down -0.05% w/w (3.46-4.63)

BAA Corporate bonds and Treasury bonds turned positive several months ago. In particular, that corporate bonds recently fell to yet another new expansion low is extremely bullish into Q3 2020. The spread between corporate bonds and Treasuries, after one week being negative, is back to neutral. All three yield curve measures are positive. Mortgage rates are still not too far from their post-Brexit low, so they remain positive.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps +16% w/w to 307 (231-307) (SA) (new expansion high)
  • Purchase apps 4 wk avg. up +9 to 272 (SA)
  • Purchase apps YoY +8% (NSA)
  • Purchase apps YoY 4 wk avg. +4% (NSA)
  • Refi apps +43% w/w (!!) (SA)

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

(Graph here)

Real Estate Loans (from the FRB)

  • Up less than +0.1% w/w
  • Up +3.1% YoY (2.8-4.3)

(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed)

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. This week they score neutral, but this is probably a one week artifact of seasonality. Meanwhile, lower rates once again caused a spike upward in refi, returning it to neutral.

For two weeks in 2019, the growth rate in loans fell below +3.25%, and so went back from positive to neutral, but then rebounded to positive and has generally stayed there since.

Money supply

M1

  • -0.8% w/w
  • -0.6% m/m
  • +4.0% YoY Real M1 (-0.1 to 6.4)

M2

  • Up less than +0.1% w/w
  • +0.5% m/m.
  • +4.8% YoY Real M2 (2.0-5.9)

(Graph at FRED Graph | FRED | St. Louis Fed)

In 2018 and early in 2019, real M1 turned neutral and very briefly negative. Real M2 growth fell below 2.5% almost all during 2018 and early 2019, and so was rated negative. In the past eight months, both have continued to improve, and for the past few months, both have turned and remained positive.

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

  • Q3 2019 actual earnings, unchanged w/w at 42.18, up +1.7% q/q, down -1.6% from Q4 2018 peak
  • Q4 2019 9% actual + 91% estimated earnings, down -0.20 to 40.40, down -4.2% q/q, down -5.8% from Q4 2018 peak

(Graph: P. 25 at here)

I initiated coverage of this metric last year 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 expanded the "neutral" band to +/-3% as well as averaging the previous two quarters together, until at least 100 companies have actually reported.

Surprisingly, instead of rising as quarterly profits begin to be reported, the Q4 estimate declined by -0.5%. Using the above method, the average of Q3 and Q4 earnings is -3.4% off the peak, so this metric is negative.

Credit conditions (from the Chicago Fed) (graph at link)

  • Financial Conditions Index unchanged (loose) at -0.79
  • Adjusted Index (removing background economic conditions) unchanged (loose) at -0.58
  • Leverage subindex up +.02 to (less loose) at -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 break-even point has been -0.5 for the unadjusted Index. All three metrics presently show looseness and so are positives for the economy. Late in 2017, and again in autumn 2019, the leverage subindex turned up to near neutral, but remains positive. In the past, an inverted yield curve has led to a contraction in lending, but not this time, according to these measures (as opposed to the Senior Loan Officer Survey, which did show a slight contraction in Q3).

Short leading indicators

Trade weighted US$

Both measures of the US$ were negative early in 2019. In late summer, both of improved to neutral on a YoY basis. The measure against major currencies took a major spill recently. After one week positive (a lower $ is an economic positive), it turned back to neutral. The broad measure is neutral as well.

Commodity prices

Bloomberg Commodity Index

  • Down -0.97 to 79.82 (75.97-83.08)
  • Down -1.9% YoY

(Graph at Bloomberg Commodity Index)

Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)

  • 116.40, up +0.67 w/w, up +3.5% YoY (108.79-124.03)

Commodity prices surged higher after the 2016 presidential election. Both industrial metals and the broader commodities indexes declined to very negative into 2019. Industrial metals improved enough to be scored neutral recently and are now positive. The broader commodity index is back to negative.

Stock prices S&P 500 (from CNBC) (graph at link)

  • Up +2.0% to 3329.62 (New all-time high)

In 2019 stocks made repeated new 3-month and all-time highs.

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 2018, but cooled beginning late last year. All during 2019 it had been waxing and waning between positive and flat - until three weeks ago, when it turned negative.

Employment metrics

Initial jobless claims

  • 204,000, down -10.000
  • 4-week average 216,250, down -7,750

(Graph at FRED Graph | FRED | St. Louis Fed)

In November 2018 initial claims briefly spiked, and did so again at the end of January 2019 (probably connected to the government shutdown). They made new 49-year lows in April. The numbers weakened recently, but this week there was a strong positive reversal, taking this metric back to positive from negative.

Temporary staffing index (from the American Staffing Association) (graph at link)

  • Down -4 to 87 w/w
  • Down -6.2% YoY

Beginning in November 2018, this index gradually declined to neutral in January and has been negative since February. Since the beginning of the third quarter, it has generally had its worst YoY readings since 2016, and finally exceeded them to the downside three months ago. The big downside swoon w/w these past two weeks is just seasonality.

Tax Withholding (from the Dept. of the Treasury)

  • $243.2 B for the last 20 reporting days vs. $227.0 B one year ago, up +$16.2 B or +7.1%

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 three weeks have been positive.

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

  • Oil down -$0.48 to $59.17 w/w, up +7.8% YoY
  • Gas prices down -$.02 to $2.57 w/w, up +$0.33 YoY
  • Usage 4-week average down -0.9% YoY

(Graphs at This Week In Petroleum Gasoline Section)

After bottoming in 2016, generally prices went sideways with a slight increasing trend in 2017 and 2018. Prices bottomed in January 2019, peaked at the end of April and slowly declined through the rest of the year. One month ago they went higher YoY. If they turn higher by more than 40% YoY, they will be an economic negative. For now they are neutral. Gas prices made their seasonal high for this year in spring. Usage was positive YoY during most of 2016, but has oscillated between negative and positive for the last several months. Recently it was positive for the past six weeks before turning negative this week.

Bank lending rates

  • 0.310 TED spread down -0.040 w/w (graph at link)
  • 1.66 LIBOR down -0.02 w/w (graph at link)

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 in 2018, since early 2019 it has remained positive.

Coincident indicators

Consumer spending

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. This week is positive again. Johnson Redbook fell sharply at the beginning of this year before improving to positive beginning in spring and remaining there since.

Transport

Railroads (from the AAR)

  • Carloads down -10.1 YoY
  • Intermodal units down -9.1% YoY
  • Total loads down -9.6% YoY

(Graph at Railfax Report - North American Rail Freight Traffic Carloading Report)

Shipping transport

In autumn 2018 rail started to weaken precipitously, probably due to tariffs. It rebounded strongly last January, but in the year since then, it has been almost uniformly negative. In the last several months the YoY comparisons have generally been even worse.

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 few months, it rebounded all the way back to 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 three months it made repeated three year highs, before backing off in the past month, enough to be scored neutral, and now negative.

I am 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 +1.3% w/w
  • Up +2.8% 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 had been varying between neutral and positive since. In the summer, it varied between neutral and negative, but until last week recently has been almost exclusively negative.

Summary And Conclusion

Among the long leading indicators, corporate bonds, Treasuries, the yield curve, mortgage rates, the Chicago Fed Adjusted Financial Conditions Index and Leverage subindex, real M1 and real M2, and real estate loans are all positives. Purchase mortgage applications were blowout positives. Refinancing is neutral. After a rebound of several quarters, corporate profits have returned to negative.

Among the short leading indicators, the Chicago Financial Conditions Index, industrial commodities, initial claims, the spread between corporate and Treasury bonds, and stock prices are positive. The US$ and oil and gas prices are neutral. Temporary staffing, industrial commodities, the Fed new orders indexes, and gas usage are negative.

Among the coincident indicators, consumer spending, tax withholding, Harpex, steel, and the TED spread are positive. The Baltic Dry Index, rail and LIBOR are negative.

The long leading forecast remains positive. The recently volatile short-term forecast has improved back to positive. The coincident indicators are positive. As of this week, there is little sign that the weakness in the producer sector has spread out to affect consumers. The conclusion that this remains a passing slowdown vs. a recession remains most likely.

This article was written by

New Deal Democrat profile picture
3.43K Followers
New Deal democrat As a professional who started an individual investor for almost 30 yeas ago, I quickly focused on economic cycles and the order in which they typically proceed. I have been writing about the economy for nearly 15 of those years, developing several alternate systems that include mid-cycle, long leading, short leading, coincident, lagging and long lagging indicators. I also focus particularly on their effects on average working and middle class Americans.
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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.

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