Weekly High Frequency Indicators: All Time Frames Remain Positive; Pandemic And Policy Responses Still Determinative

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.
• Despite deterioration in several high-profile indicators, all time frames are positive.
• The pandemic and the public policy reactions to it remain determinative of both the nowcast and the outlook.

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.

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

Recap of monthly reports

November data included a decline in retail sales, but an increase in industrial production, capacity utilization, and housing starts and permits. Partly as a result of the good housing data, November’s Index of Leading Indicators also increased - the seventh increase in a row.

Note: For most indicators, I have now added both the weeks of the best and worst readings since the coronavirus crisis began in parentheses following this week’s number. This will tell us whether gains are continuing, leveling off, or whether we are starting to turn back down.

Long-leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 3.17%, up +0.03% w/w (1-yr range: 3.12-5.18)
• 10-year Treasury bonds 0.94%, up +0.04% w/w (0.54-2.79)
• Credit spread 2.23%, down -0.01% w/w (1.96-4.31)

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

Yield curve

• 10 year minus 2 year: +0.83%, up +0.05% w/w (-0.04-0.67)
• 10 year minus 3 month: +0.76%, down -0.06% w/w (-0.04-0.70)
• 2 year minus Fed funds: +0.07%, unchanged w/w

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

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

• 2.77%, down -0.02% w/w (2.77-4.63) (new all-time low)

Corporate bonds spiked to near five-year highs early this year, but subsequently made multi-decade lows, which they are near to again.

The spread between corporate bonds and Treasuries turned very negative in March, but has also bounced back, and is positive now. Two of the three measures of the yield curve remain solidly positive, while the Fed funds vs. two-year spread is neutral. Mortgage rates are also extremely positive, at new all-time lows.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps up +2% w/w to 331 (184-343) (SA)
• Purchase apps 4 wk avg. up +7 to 329 (SA)
• Purchase apps YoY +26% (NSA) (Worst: -35% on 4/18)
• Purchase apps YoY 4 wk avg. +26% (NSA)
• Refi apps +1% w/w (SA)

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

(Graph here)

Real Estate Loans (from the FRB)

• Down less than -0.1% w/w
• Up +1.2% YoY (1.1-5.2)

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

Purchase mortgage applications, after declining sharply in March and April, rebounded to repeated new decade highs. Refi has also improved from neutral to positive.

With the exception of several weeks in 2019, until recently real estate loans have generally stayed positive for the past several years. But now having decreased by more than 1/2 of their YoY peak, they are neutral.

Money supply

M1

• +0.6% w/w
• +15.4% m/m
• +64.4% YoY Real M1 (-0.1 to 64.4) (tied for New High)

M2

• +1.2% w/w
• +1.0% m/m
• +24.8% YoY Real M2 (2.0-24.9)

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

In 2019, both M1 and M2 improved from negative to neutral and ultimately positive. Fed actions to combat the economic crash amplified that.

Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via FactSet at p. 27)

• Q3 2020 actual unchanged at 39.41 w/w, up 39.7% q/q, down -8.1% from Q4 2018 peak
• Q4 2020 estimated up +0.13 w/w to 37.39, down -5.1% q/q

FactSet estimates earnings, which are replaced by actual earnings as they are reported, and are updated weekly. The "neutral" band is +/-3%. I also average the previous two quarters together until at least 100 companies have actually reported.

Q3 earnings were up over 10% q/q so this indicator changed all the way back to positive and are also up more than 3% from Q2 when averaged with Q4.

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

• Financial Conditions Index down -.01 (looser) to -0.62 (Best this week)
• Adjusted Index (removing background economic conditions) down -.01 (looser) to -0.56 (Best: -0.70 on Sept 25. Note: This series has just undergone revisions)
• Leverage subindex down -0.03 (less tight) to +0.13

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. In early April, all turned negative. Since then, both the adjusted and unadjusted indexes quickly rebounded to positive.

Short-leading indicators

Trade weighted US$

• Up +0.36 to 112.46 w/w, -2.8% YoY (last week) (broad) (113.48 - 125.23) (Graph at Trade Weighted U.S. Dollar Index: Broad, Goods (DISCONTINUED) | FRED | St. Louis Fed ) (Worst: +7.9% on May 1)
• Down -0.96 to 90.01 w/w, down -7.9% YoY (major currencies) (graph at link) (Worst: +3.5% on April 4)

Both measures of the US$ were negative early in 2019. In late summer, both improved to neutral on a YoY basis. Against major currencies it has recently fluctuated between positive and neutral. It is positive again this week. The broad measure also turned positive seven weeks ago, then reverted to neutral, but was positive again this week.

Commodity prices

Bloomberg Commodity Index

• Up +2.45 to 77.32 (58.87-83.08)
• Down -3.5% YoY (Worst: -26.0% on April 25; Best: -3.5% this week)

(Graph at BCOM | Bloomberg Commodity Index Overview | MarketWatch)

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

• 137.98, up +3.15 w/w (88.46-137.98) (new one-year high)
• Up +20.7% YoY (Worst: -23.6% on April 11; Best +20.7% this week)

Both industrial metals and the broader commodities indexes declined to very negative into 2019, but rebounded considerably since April. Total commodities have remained neutral, while industrial commodities briefly turned positive in August, and again for the past six weeks.

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

• Up +1.3% to 3709.41 (new all-time high)

There have been repeated recent three-month highs, including this week, so this metric remains positive.

Regional Fed New Orders Indexes

(*indicates report this week)

• *Empire State down -0.3 to +3.4
• *Philly down -35.6 to +2.3
• Richmond down -20 to +12
• Kansas City down -7 to +19
• Dallas down -12.7 to +7.2
• Month-over-month rolling average: down -7 to +9

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. In April the average was even more negative than at its worst reading of the Great Recession. It rebounded by more than half in May, and at the end of June, it rebounded all the way to positive. New orders have pulled back in the last two and a half months, but are still positive.

Employment metrics

Initial jobless claims

• 885,000, up +23,000 w/w (Worst: 6.867 M on April 4)
• 4-week average 812,500, up +34,250 w/w (Worst: 5.786 M on April 25)

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

New claims made a new pandemic low this week, but are still above their worst levels of the Great Recession. Continuing claims are also down by over 1/2 from their worst readings. The continued pandemic lows have made this metric positive - through last week. The big jump this week warrants changing this measure to neutral. If weekly claims go back over 900,000, and the 4-week average over 850,000, I will change this to negative.

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

• Unchanged at 88 w/w
• Down -8.1% YoY (Worst: 36.3% on May 28; best this week)

This index turned negative in February 2019, worsened in the second half of the year, and plummeted beginning in March. It has gradually been becoming “less awful” over the past six months, and three months ago improved to neutral.

Tax Withholding (from the Dept. of the Treasury)

• $204.1 B for the last 20 reporting days vs. $213.4 B one year ago, down -$9.3 B or -4.4% (Worst: -16.0% on July 3; Best Oct 30)

YoY comparisons turned firmly negative in the second week of April. The comparative YoY readings, except for one week, have generally improved to less than 1/2 of their worst, making this indicator neutral.

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

• Oil up +$2.40 to $49.01 w/w, down -12.4% YoY
• Gas prices unchanged at $2.16 w/w, down -$0.38 YoY (Worst: -$1.12 on May 1)
• Usage 4-week average down -13.3% YoY (Worst: -43.7% on May 1; Best -6.7% Oct 9)

(Graphs at This Week In Petroleum Gasoline Section)

Gas prices remain very low, relatively speaking. Usage turned very negative at the beginning of April, but has since rebounded by much more than half since its low point, and so has become neutral. On the other hand, this was the worst YoY comparative week for gas usage in five months. If the comparisons get worse than -15% YoY, I will flip this to negative again.

Bank lending rates

• 0.159 TED spread up +0.010 w/w (0.12-1.90) (graph at link)
• 0.152 LIBOR down -0.002 w/w (0.13-2.50) (graph at link)

TED was above 0.50 before both the 2001 and 2008 recessions. Since early 2019, the TED spread has remained positive, except the worst of the coronavirus downturn. Both TED and LIBOR have declined far enough after that to turn back positive.

Business formations

• 5-week average up +38.1% YoY (Census Bureau Business Formation Statistics) (Worst: -27.1% on April 18; Best +92.9% on Aug 7)

The 5-week average of this statistic cuts down on most of that noise while retaining at least a short-leading signal that appears to turn 1-3 months before the cycle. This turned negative YoY in March as soon as coronavirus turned into a real issue, but by July turned back strongly positive.

Coincident indicators

St. Louis FRED Weekly Economic Index

• Down -0.31 to -2.70 w/w (Worst: -11.48; Best -2.31 on Dec 4)

Restaurant reservations YoY (from Open Table)

• Dec 10 -68%
• Dec 17 -71% (Best -40% on Oct 15)

The comparisons gradually improved each week from spring into summer. Since then the improvement has been much more gradual, but still the comparisons rose enough to turn neutral. In the past four weeks, there has been a pronounced retrenchment, enough two weeks ago to change the rating to negative. Some of this is probably cold weather causing few people to take advantage of outside dining; some is probably the out-of-control pandemic itself.

Consumer spending

• Johnson Redbook up +2.5% YoY (Worst:-9.7% June 12; Best +9.1% on Dec 2)

In late April, the bottom fell out in the Redbook index. It turned positive for two weeks before turning neutral and then positive. The rebound in the past several months has continued.

Transport

Railroads (from the AAR)

• Carloads down -2.2% YoY (Worst: -30.2% on May 22; Best -1.4% Dec 11)
• Intermodal units up +11.1% YoY (Worst: -22.4% on May 1; Best +24.8% on Sept 11)
• Total loads up +4.9% YoY (Worst: -39.4% on May 8; Best +8.6% on Sept 11)

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

Shipping transport

• Harpex up +12 to 1032 (412-1,032) (new 10 year high) Harper Petersen & Co
• Baltic Dry Index up +140 to 1,301 (393-2,499) (graph at link)

Since January 2019 rail had been almost uniformly negative, and worsened in April, but got “less awful” since. This week carloads turned positive. Intermodal has generally been positive for several months. Total rail carloads had also improved by more than 50% from their worst readings, so were neutral. Six weeks ago they turned positive.

Harpex declined to a new one-year low earlier this year, then improved gradually. In the past month it has repeatedly spiked to new multiyear highs. BDI traced a similar trajectory, making new three-year highs into September 2019, then declining to new three-year lows at the beginning of February. In summer the BDI improved enough to warrant changing its rating from negative to neutral, and for a few weeks to positive. Five weeks ago, it fell back again to neutral.

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 beginning American Iron and Steel Institute)

• Down -0.8% w/w
• Down -13.7% YoY (Worst: -39.4% on May 8; Best -13.2% Nov 27)

The bottom in production fell out in April. There has been slow but continuing improvement since then, and finally two months ago, it improved enough to be rated neutral.

Summary And Conclusion

Among the coincident indicators, the unadjusted Chicago Fed Financial Index, the TED spread, LIBOR, Redbook consumer spending, and for the first week all categories of rail traffic are positive. Harpex, the BDI, steel, and tax withholding are all neutral. Restaurant reservations are negative.

Among the short-leading indicators, gas and oil prices, business formations, stock prices, the regional Fed new orders indexes, the US$ both broadly and against major currencies, industrial commodities, and the spread between corporate and Treasury bonds are positives. New jobless claims, gas usage, total commodities, and staffing are neutral. There are no negatives.

Among the long-leading indicators, corporate bonds, Treasuries, mortgage rates, two out of three measures of the yield curve, real M1 and real M2, purchase mortgage applications and refinancing, corporate profits, and the Adjusted Chicago Financial Conditions Index are all positives. The 2-year Treasury minus Fed funds yield spread and real estate loans are neutral. The Chicago Financial Leverage subindex is the sole negative.

Although several highly visible indicators - jobless claims and restaurant reservations - have deteriorated, there has been no widespread decline in the indicators. So both the long- and short-term forecasts, as well as the coincident nowcast, all remain positive.

The pandemic and public policy reactions thereto remain in control of the data, driven by Congressional stimulus negotiations, approvals and beginning distributions of vaccines, and announcements of Biden’s cabinet picks.

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.