Weekly Indicators: More Evidence Of Commodity Price Peaks As Corporate Profits Make New All-Time High
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.
- There is increasing evidence that commodity prices, as well as transportation costs, have peaked.
- If so, inflationary pressures will start to abate.
Andrii Yalanskyi/iStock via Getty Images
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
October data started out with a strong employment report, and continuing strong ISM manufacturing and non-manufacturing reports.
September factory orders increased, but construction spending declined.
In the rear view mirror, Q3 unit labor costs increased sharply.
Note: I have discontinued comparisons with the "worst" readings since the onset of the coronavirus crisis began over one year ago, as they are no longer helpful. I am continuing to post the best readings during the pandemic in parentheses after the current week's number.
Coronavirus Vaccinations and Cases
- Vaccinations 7 day average: 0.865m/day, down -.104m/day w/w (including booster shots)
- At least 1 dose administered: 222.6m, up 1.7m w/w (80.3% of population age 18+)
- Fully vaccinated*: 193.2m, up +1.2m (69.9% of population age 18+) *not counting booster
- New cases 7 day average: 75,619, up +608 or +0.8% from one week ago
New cases are down about -55% since the peak of the Delta wave, and deaths are down -40%. Vaccinations had increased considerably in the past 5 weeks since boosters were first authorized, until the last few days, when they declined sharply.
Long leading indicators
Interest rates and credit spreads
Rates
- BAA corporate bond index 3.26%, unchanged w/w (1-yr range: 3.13-5.15)
- 10-year Treasury bonds 1.45%, down -0.12% w/w (0.52-1.74)
- Credit spread 1.81%, up +0.12% w/w (1.69-4.31)
(Graph at FRED Graph | FRED | St. Louis Fed)
Yield curve
- 10 year minus 2 year: +1.05%, down -0.02% w/w (0.12-1.58)
- 10 year minus 3 month: +1.40%, down -0.11% w/w (-0.20-1.72)
- 2 year minus Fed funds: +0.32%, down -0.10% w/w
(Graph at FRED Graph | FRED | St. Louis Fed)
30-Year conventional mortgage rate (from Mortgage News Daily) (graph at link)
- 3.09%, down -.13% w/w (2.75-3.45)
Corporate bonds made a series of multi-decade lows in 2020. Early this year, they increased to the middle of that range, and so changed to neutral, but have declined back to positive. There is simply no concern about corporate ability to honor bond payments ahead.
Treasury bonds yields made 1 year highs in May at 1.74%, near the middle of their 5 year range, but they have declined enough toward the bottom end of that range to change back to positive. Mortgage rates have varied between neutral and positive, and also have declined back to positive again. Corporate, Treasury, and mortgage rates are all still somnolent, if above their lows.
The spread between corporate bonds and Treasuries turned very negative last March, but bounced back, and remains positive now. Meanwhile two of the three measures of the yield curve remain very positive, while the Fed funds vs. 2 year spread is neutral.
Housing
Mortgage applications (from the Mortgage Bankers Association)
- Purchase apps down -2% w/w to 272 (184-349) (SA)
- Purchase apps 4 wk avg. down -1 to 274 (SA) (341 high Jan 29, low 251 Aug 20)
- Purchase apps YoY -9% (NSA)
- Purchase apps YoY 4 wk avg. -10% (NSA)
- Refi apps down -4% w/w (SA) (18 month low)
- Refi apps YoY down -33% (SA)
*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted
(Graph at here)
Real Estate Loans (from the FRB)
- Up less than +0.1% w/w
- Up +1.4% YoY (-1.3 - 5.2)
(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed)
After soaring last year, earlier this year purchase mortgage applications declined to 2-year lows due to higher interest rates (and probably housing unaffordability as well). When applications fell below 290, their rating changed to negative, although they are well off their lows. Refi is also down to an 18 month low, so they remain negative.
From 2018 until late in 2020 real estate loans with few brief exceptions stayed positive. Since early this year they have varied between neutral and negative. Four weeks ago for the first time in many months they returned to positive.
Money supply
The Federal Reserve has discontinued this weekly series. Data is now only released monthly. September data was released one week ago:
- M1 m/m up +0.9%, YoY up +15.8%
- M2 m/m up +0.8%, YoY up +12.8%
Corporate profits (Q3 actual + estimated S&P 500 earnings from I/B/E/S via FactSet at p. 25)
- Q3 2021 89% actual + 11% estimated, up +1.16 to 53.47, up +1.9% 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 have so far come in well ahead of estimates, and as of this week they made an all time high, so are positive.
Credit conditions (from the Chicago Fed) (graph at link)
- Financial Conditions Index unchanged (loose) at -0.69 (0.33 - -0.73)
- Adjusted Index (removing background economic conditions) up +.01 (less loose) to -0.72 (0.58 - -0.79)
- Leverage subindex down -0.01 (looser) to -0.21 (+0.66 - -0.36)
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 2020 all turned negative, but both the adjusted and un-adjusted indexes quickly rebounded to positive, and have remained so since. Leverage has been so close to zero now as to have changed from positive to neutral. If it declines below -0.25, it will change back to a positive.
Short leading indicators
Economic Indicators from Jeff Miller's "Weighing the Week Ahead"
- Miller Score (formerly "C-Score"): down -42 w/w to 336, down -133 m/m (336 this week - 1478 on 11/13/20)
- St. Louis Fed Financial Stress Index: up +0.1293 to -1.0052 (-1.1357 10/29.21)
- BCIp from Georg Vrba: unchanged at 100.0 iM's Business Cycle Index (100 is max value, below 25 is recession signal)
The Miller Score is designed to look 52 weeks ahead for whether or not a recession is possible. Any score over 500 means no recession. With this number having fallen below that threshold several months ago, this metric is now negative.
The St. Louis Financial Stress index is one where a negative score is a positive for the economy, and during its limited existence, has risen above zero before a recession by less than one year. Thus the present reading is also a positive for the economy.
Trade weighted US$
- Up +0.47 to 114.51 w/w, +0.8% YoY (last week) (broad) (111.02 - 126.47) (Graph at Nominal Broad U.S. Dollar Index
- Up +0.08 to 94.22 w/w, up +2.1% YoY (major currencies) (graph at link) (89.68 -102.82)
Both measures of the US$ were negative for 2 months right after the pandemic started in 2020. In late spring 2020 both improved to neutral, and then positive since last August. This week the broad rating changed to neutral. Four weeks ago the USD against major currencies returned to slightly higher YoY, which changed its rating to neutral also.
Commodity prices
Bloomberg Commodity Index
- Down -0.62 to 102.74 (58.87-104.73)
- Up +41.1% YoY (Best: +52.3% June 4)
(Graph at BCOM | Bloomberg Commodity Index Overview | MarketWatch)
Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)
- 161.51, down -4.88 w/w (88.46-184.18)
- Up +31.6% YoY (Best +69.0% May 7)
Both industrial metals and the broader commodities indexes were negative in much of 2019, but since April 2020 rebounded sharply. Both total and industrial commodities are extremely positive, with total commodities making another new one year high several weeks ago, and YoY gains near their peaks as well. Both of these retreated somewhat sharply again this week.
Stock prices S&P 500 (from CNBC) (graph at link)
- Up +2.0% to 4697.53 (new all time high)
There have been repeated all time highs, including this week, so this metric is positive.
Regional Fed New Orders Indexes
(*indicates report this week) (no reports this week)
- Empire State up -9.4 to +24.3
- Philly up +14.9 to +30.8
- Richmond up +29 to +10
- Kansas City up +20 to +27
- Dallas up +5.4 to +14.9
- Month-over-month rolling average: up +11 to +22
The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. Until the past several months, these had been extremely positive since June 2020. But 3 excellent surveys reversed that to very positive again this week.
Employment metrics
Initial jobless claims
- 269,000, down -14,000 w/w (new pandemic low)
- 4-week average 284,750, down -15,000 w/w (new pandemic low)
(Graph at St. Louis FRED)
New claims have declined to repeated new pandemic lows since February. They remain very positive.
Temporary staffing index (from the American Staffing Association) (graph at link)
- Up +1 to 105 w/w
- Up +24.8% YoY (Best +57.4% May 21)
This index plummeted beginning in March 2020. It gradually improved to "less awful," then neutral at the turn of the year, and positive since February. It is about 9% higher than its reading at this time in 2019.
Tax Withholding (from the Dept. of the Treasury)
- $220.3 B for the month of October vs. $186.6 B one year ago, up +$36.6 B or +18.1%
- $223.1 B for the last 20 reporting days vs. $186.5 B one year ago, up +$33.7 B or +19.6% (Best +37.6% April 30)
YoY comparisons turned firmly negative in April 2020. The report turned positive in the beginning of 2021. Unfortunately, like many other reports, the YoY comparisons have temporarily been much less reliable. They are gradually becoming more reliable again.
Oil prices and usage (from the E.I.A.)
- Oil down -$1.99 to $81.37 w/w, up +96.0% YoY
- Gas prices up +$.01 to $3.39 w/w, up $1.28 YoY (6+ year high)
- Usage 4-week average up +11.6% YoY (Best +67.5% April 30)
- Usage down -0.6% vs. 2019 (Best +3.0% July 8)
(Graphs at This Week In Petroleum Gasoline Section - U.S. Energy Information Administration (EIA))
At 6+ year highs, both gas and oil prices are firm negatives. Oil prices have risen nearly 15% in the last 3 weeks. The YoY comparisons of gas usage earlier this year were near the -10% YoY range. YoY comparisons are gradually becoming more useful, while comparisons with 2019 are better.
Bank lending rates
- 0.109 TED spread up +0.025 w/w (0.074-1.92) (graph at link)
- 0.0896 LIBOR up +.0032 w/w (0.073-1.70) (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 precipitously, and are now very positive.
Coincident indicators
St. Louis FRED Weekly Economic Index
- Up +.38 to +7.23 w/w (Best +12.30 April 29)
In the 5 years before the onset of the pandemic, this Index varied between +.67 and roughly +3.00. Just after the Great Recession, its best comparison was +4.63. The big positive numbers earlier this year were in comparison to the pandemic shutdown of March and April 2020. This metric is gradually becoming more meaningful now. Should it decline to less than half its best YoY level, or 6.15, this would trigger a rating change to neutral.
Restaurant reservations YoY (from Open Table)
- Oct 28 +31% (Best +31% this week) *NOTE: average for the 7 day week was unchanged YoY
- Nov 4 -10%
The comparison year for this metric is 2019 and not 2020. Compared with the depths of the pandemic, in the past five months there has been a recovery back to neutral, and since the beginning of spring, positive (note: a slightly negative rating YoY qualifies as positive, since the measure is the range of readings in the past year).
This was the very first weekly indicator to signal collapse when COVID and the ensuing lockdowns started in March 2020. Based on a cutoff point of -10% YoY, this metric has just barely returned to being negative.
Consumer spending
- Johnson Redbook up +15.7% YoY (Best +19.4% July 8)
In April 2020 the bottom fell out in the Redbook index. It has remained positive almost without exception since the beginning of this year. There was never any perceptible change at all due to the Delta wave.
Transport
Railroads (from the AAR)
- Carloads up +4.9% YoY (Best +35.3% June 4)
- Intermodal units down -7.3% YoY (Best +38.3% April 23)
- Total loads down -2.0% YoY (Best +34.0% April 23)
(Graph at Railfax Report - North American Rail Freight Traffic Carloading Report)
Shipping transport
- Harpex down -63 to 3936 (412-3999) https://harpex.harperpetersen.com/harpexVP.do
- Baltic Dry Index down -861 to 2769 (393-5650) (graph at link) (down over -50% in the past month)
Rail carloads turned positive earlier this year. Intermodal, reflecting trans-ocean shipping concerns, had generally been positive for several months, before turning back negative. After being generally positive for about 4 months, total traffic has also turned back negative. Total rail traffic is virtually unchanged compared with 2019's pre-pandemic levels for the same week. It had generally weakened vs. its 2019 baseline over the last 3 months. The comparisons with 2020 are now more challenging as well.
In the past several months Harpex repeatedly rose to new multiyear highs - and even accelerated. Then for 3 weeks it rose only slightly - and this week not at all. Meanwhile, BDI traced a similar trajectory, repeatedly making new multi-year highs. But three weeks ago it appears to have peaked, and has fallen over 50% since then.
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 (American Iron and Steel Institute)
- Down -0.5% w/w
- Up +20.1% YoY
The bottom in production fell out in April 2020. Since the end of March this year, against terrible comparisons, it has been positive.
Summary and Conclusion
Below are this week's spreadsheets of the long leading, short leading, and coincident readings. Check marks indicate the present reading. If there has been a change this week, the prior reading is marked with an X:
| Long leading Indicators | Positive | Neutral | Negative | |
|---|---|---|---|---|
| Corporate bonds | ✓ | |||
| 10 year Treasury | ✓ | |||
| 10 yr-2 yr Treasury | ✓ | |||
| 10 yr-3mo Treasury | ✓ | |||
| 2 Yr Treasury-Fed funds | ✓ | |||
| Mortgage rates | ✓ | |||
| Purchase Mtg. Apps. | ✓ | |||
| Refi Mtg Apps. | ✓ | |||
| Real Estate Loans | ✓ | |||
| Real M1 | ✓ | |||
| Real M2 | ✓ | |||
| Corporate Profits | ✓ | X | ||
| Adj. Fin. Conditions Ind. | ✓ | |||
| Leverage Index | ✓ | |||
| Totals: | 10 | 1 | 2 | |
| Short Leading Indicators | Positive | Neutral | Negative | |
|---|---|---|---|---|
| Credit Spread | ✓ | |||
| Miller Score | ✓ | |||
| St. L. Fin. Stress Index | ✓ | |||
| US$ Broad | X | ✓ | ||
| US$ Major currencies | ✓ | |||
| Total commodities | ✓ | |||
| Industrial commodities | ✓ | |||
| Stock prices | ✓ | |||
| Regional Fed New Orders | ✓ | |||
| Initial jobless claims | ✓ | |||
| Temporary staffing | ✓ | |||
| Gas prices | ✓ | |||
| Oil prices | ✓ | |||
| Gas Usage | ✓ | |||
| Totals: | 9 | 2 | 3 | |
| Coincident Indicators | Positive | Neutral | Negative | |
|---|---|---|---|---|
| Weekly Econ. Index | ✓ | |||
| Open Table | X | ✓ | ||
| Redbook | ✓ | |||
| Rail | ✓ | |||
| Harpex | ✓ | |||
| BDI | ✓ | |||
| Steel | ✓ | |||
| Tax Withholding | ✓ | |||
| TED | ✓ | |||
| LIBOR | ✓ | |||
| Financial Cond. Index | ✓ | |||
| Totals: | 9 | 1 | 1 | |
There were three rating changes this week, two towards weakness and one towards strength. All three time frames remain positive.
There are two important bullish phenomena occurring. The first is that corporate profits just made a new high. With interest rates somnolent and credit freely flowing, the producer side of the economy continues to suggest strength continuing forward by one year.
Secondly, for the second week in a row oil has declined, joining shipping costs and all commodities, not just industrial metals, in retreating from highs. Gas prices should follow suit within the next few weeks. Note that the BDI has fallen by more than -50% from a peak just one month ago. This suggests that the supply chain bottleneck has passed its peak. If so, one would expect the huge increases in house and car prices to begin to abate soon.
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