Weekly Indicators: Omicron Bears Down As Interest Rates Signal Changes
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.
- Several interest rate indicators are changing from positive to neutral, as they have failed to make new lows since the beginning of 2021.
- More urgently, Omicron has caused restaurant reservations to plunge.
- A de facto economic lockdown may take place in the next few weeks, as so many employees get sick that business must curtail services or close.
MARHARYTA MARKO/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
November data included the FHFA and Case Shiller house price indexes, both with continuing strong increases, and the Chicago PMI also continuing strong.
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
At least 1 dose administered: 243.5m, up +2.0m w/w (85.5% of population age 18+)
Fully vaccinated*: 205.8m, up +1.1m (72.8% of population age 18+)
*not counting booster shots
The arrival of Omicron has changed the picture considerably.
Long leading indicators
Interest rates and credit spreads
Rates
- BAA corporate bond index 3.37%, up +0.05 w/w (1-yr range: 3.13-5.15)
- 10-year Treasury bonds 1.51%, up +0.2% w/w (0.52-1.74)
- Credit spread 1.86%, up +0.03% w/w (1.65-4.31)
(Graph at FRED Graph | FRED | St. Louis Fed)
Yield curve
- 10 year minus 2 year: +0.78%, down -0.01% w/w (0.12 - 1.58) (1.59% 3/21/21 - 0.72% 12/27/21) (12 month low intraweek)
- 10 year minus 3 month: +1.46%, up +0.04% w/w (-0.20 - 1.72)
- 2 year minus Fed funds: +0.65%, up +0.04% w/w
(Graph at FRED Graph | FRED | St. Louis Fed)
30-Year conventional mortgage rate (from Mortgage News Daily) (graph at link)
- 3.27%, up +0.02% w/w (2.75-3.45)
Corporate bonds made a series of multi-decade lows in 2020. After making a 70 year low at the end of 2020, in 2021, they remained between the bottom and middle of their 5 year range, and remained near the lower end of that range during the last 6 months of 2021. There is simply no concern about corporate ability to honor bond payments ahead; but on the other hand, they failed to make a new low in 2021. Therefore their rating changes to neutral
Treasury bonds yields made an all-time low in mid-2020. They increased towards and then fluctuated near the middle of their 5 year range throughout 2021. Mortgage rates made an all-time low the week of January 7, 2021, and have remained near the bottom of their 5 year range since then. In one week, mortgage rates will have failed to have made a new low for 1 year, and at that point their rating will change from positive to neutral as well.
The spread between corporate bonds and Treasuries remains positive, as do two of the three measures of the yield curve remain very positive, while the Fed funds vs. 2 year spread is neutral. In the past 5 months, 2 year Treasuries have increased roughly 0.60% in yields, causing the 10 year minus 2 year spread to compress, but it still remains positive. I will pay more attention to this in 2022, as the bond market anticipates Fed tightening.
Housing
Mortgage applications (from the Mortgage Bankers Association) (no report this week)
- Purchase apps down -3% w/w to 288 (184-349) (SA)
- Purchase apps 4 wk avg. down -2 to 298 (SA) (341 high Jan 29, low 251 Aug 20)
- Purchase apps YoY -9% (NSA)
- Purchase apps YoY 4 wk avg. -8.5% (NSA)
- Refi apps up +2% w/w (SA)
- Refi apps YoY down -42% (SA)
*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted
(Graph at here)
Real Estate Loans (from the FRB)
- Up +0.1% w/w
- Up +2.6% YoY (-1.3 - 5.2)
(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed)
After soaring in 2020, early in 2021 purchase mortgage applications declined to 2 year lows due to higher interest rates (and probably housing unaffordability as well). All measures are within the middle 1/3rd of their 52 week range, so the rating has changed from negative to neutral. Refi remains down near 24 month lows, so they remain negative.
From 2018 until late in 2020 real estate loans with few brief exceptions stayed positive. Earlier this year they varied between neutral and negative, but for the past several months have been positive.
Money supply
The Federal Reserve has discontinued this weekly series. Data is now only released monthly. November data was released this week:
- M1 m/m up +1.3%, YoY up +15.7%
- M2 m/m up +1.2%, YoY up +13.1%
Corporate profits (Q3 actual + Q$ estimated S&P 500 earnings from I/B/E/S via FactSet at p. 27) (No report until January 7, 2022)
- Q3 2021 actual, 53.86, up +2.0% q/q
- Q4 2021 estimated, up +.16 to 51.25, down -4.8% 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. Thus the current rating, averaging +1.4%, is neutral.
Q3 earnings have so far come in well ahead of estimates, but are less than 3% above Q2, so are a neutral.
Credit conditions (from the Chicago Fed) (graph at link)
- Financial Conditions Index down -0.01 (looser) to -0.58 (0.33 - -0.73)
- Adjusted Index (removing background economic conditions) up +0.01 (less loose) to -0.66 (0.58 - -0.79)
- Leverage subindex up +.02 (less loose) to -0.13 (+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 the late Jeff Miller's "Weighing the Week Ahead"
- Miller Score (formerly "C-Score"): down -11 w/w to 296, +3 m/m (274 on 12/17/21 - 1050 on 1/8/21)
- St. Louis Fed Financial Stress Index: down -0.0688 to -0.6940 (-0.3137 12/10/21 - -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$
- Down -0.26 to 115.95 w/w, +3.5% YoY (last week) (broad) (111.02 - 126.47) (Graph at Nominal Broad U.S. Dollar Index
- Down -0.39 to 95.67 w/w, up +6.4% 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. Over the past couple of months, both the broad rating and the USD against major currencies turned higher YoY, and so changed to neutral. With the measure against major currencies above +5% YoY, this rating has turned negative.
Commodity prices
Bloomberg Commodity Index
- Up +0.27 to 99.17 (58.87-106.44)
- Up +27.1% YoY (Best: +52.3% June 4)
(Graph at BCOM | Bloomberg Commodity Index Overview | MarketWatch)
Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)
- 172.89, up +1.27 w/w (88.46-184.18)
- Up +30.3% YoY (Best +69.0% May 7)
Since April 2020 both industrial metals and the broader commodities indexes rebounded sharply. Both total and industrial commodities are extremely positive, with a recent downturn in the indexes having reversed higher.
Stock prices S&P 500 (from CNBC) (graph at link)
- Up +0.9% to 4766.18 (new record highs intraweek)
There have been repeated all-time highs, including this week, so this metric is positive.
Regional Fed New Orders Indexes
(*indicates report this week)
- Empire State down -1.7 to +27.1
- Philly down -33.7 to +13.7
- *Richmond up +10 to +17
- Kansas City up 31 to +27
- *Dallas down -1.5 to +18.1
- Month-over-month rolling average: up +3 to +21
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 continued excellent surveys reversed that to very positive again.
Employment metrics
Initial jobless claims
- 198,000, down -8,000 w/w
- 4-week average 199,250, down -7,250 w/w (new 50 year 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)
- Down -1 to 106 w/w
- Up +18.2% YoY (Best +57.4% May 21)
This gradually improved to neutral at the beginning of 2021, and positive since February. It is about 11% higher than its reading at this time in 2019.
Tax Withholding (from the Dept. of the Treasury)
- $292.9 B for the last 20 reporting days vs. $217.2 B one year ago, up +$75.7 B or +34.9% (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 up +$1.69 to $75.45 w/w, up +59.5% YoY (high of $84.65 Oct 26)
- Gas prices down -$.02 to $3.27 w/w, up $1.03 YoY ($3.41 6 year high Nov 11)
- Usage 4-week average up +17.1% YoY (Best +67.5% April 30)
- Usage up +1.6% vs. 2019 (Best +3.0% July 8)
(Graphs at
This Week In Petroleum Gasoline Section - U.S. Energy Information Administration ((EIA)))Both gas and oil prices remain firm negatives, although both have backed off recent 6 year+ highs. As to gas usage, both 2020 and 2019 comparisons continue to be useful.
Bank lending rates
- 0.189 TED spread up +0.027 w/w (0.074-1.92) (graph at link)
- 0.1019 LIBOR down -.0001 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 declined precipitously, and although both have risen somewhat in the past several months, both are still positive.
Coincident indicators
St. Louis FRED Weekly Economic Index
- Up +0.88 to +7.91 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)
- Dec 23 seven day average -6% YoY (Best +31% Oct 21)
- Dec 30 seven day average -27% YoY (worst YoY reading since April 2021)
The comparison year for this metric is 2019 and not 2020. Compared with the depths of the pandemic, in 2021 reservations rebounded to neutral, then positive for a number of months, before declining back to neutral - and negative for several weeks recently. This week it plummeted to an 8 month low, as Omicron apparently finally hit.
This was the very first weekly indicator to signal collapse when COVID and the ensuing lockdowns started in March 2020. Note I am now measuring its 7 day average to avoid daily whipsaws.
Consumer spending
- Johnson Redbook up +21.4% YoY (New 12 month high)
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 - and none so far due to Omicron.
Transport
Railroads (from the AAR)
- Carloads up +8.7% YoY (Best +35.3% June 4)
- Intermodal units down -0.4% YoY (Best +38.3% April 23)
- Total loads up +3.7% YoY (Best +34.0% April 23)
(Graph at Railfax Report - North American Rail Freight Traffic Carloading Report)
Shipping transport
- Harpex up +24 to 3805 (412-3999)
- Baltic Dry Index down -2 to 2217 (393-5650) (graph at link)
Rail carloads turned positive early in 2021. 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. With the exception of July and August, in which it was better, total rail traffic has been roughly even compared with 2019's pre-pandemic levels for the same week. This week it was over 10% higher than 2019, almost certainly due to the vagaries of Christmas week.
Earlier in 2021 Harpex repeatedly rose to new multiyear highs, before leveling off in October. It declined from that peak, but in the past few weeks has increased slightly again. Meanwhile, BDI traced a similar trajectory, repeatedly making new multi-year highs. But seven weeks ago it peaked, and fell over 50% since then, largely stabilizing at roughly that level.
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 -0.2% w/w
- Up +11.8% 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 leadingIndicators | Positive | Neutral | Negative | |
|---|---|---|---|---|
| Corporate bonds | X | ✓ | ||
| 10 year Treasury | X | ✓ | ||
| 10 yr-2 yr Treasury | ✓ | |||
| 10 yr-3mo Treasury | ✓ | |||
| 2 Yr Treasury-Fedfunds | ✓ | |||
| Mortgage rates | ✓ | |||
| Purchase Mtg. Apps. | ✓ | |||
| Refi Mtg Apps. | ✓ | |||
| Real Estate Loans | ✓ | |||
| Real M1 | ✓ | |||
| Real M2 | ✓ | |||
| Corporate Profits | ✓ | |||
| Adj. Fin. Conditions Ind. | ✓ | |||
| Leverage Index | ✓ | |||
| Totals: | 7 | 6 | 1 | |
| Short LeadingIndicators | Positive | Neutral | Negative | |
|---|---|---|---|---|
| Credit Spread | ✓ | |||
| Miller Score | ✓ | |||
| St. L. Fin. Stress Index | ✓ | |||
| US$ Broad | ✓ | |||
| 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 | |
| CoincidentIndicators | Positive | Neutral | Negative | |
|---|---|---|---|---|
| Weekly Econ. Index | ✓ | |||
| Open Table | X | ✓ | ||
| Redbook | ✓ | |||
| Rail | ✓ | |||
| Harpex | ✓ | |||
| BDI | ✓ | |||
| Steel | ✓ | |||
| Tax Withholding | ✓ | |||
| TED | ✓ | |||
| LIBOR | ✓ | |||
| Financial Cond. Index | ✓ | |||
| Totals: | 8 | 2 | 1 | |
There were several changes this week, as restaurant reservations finally plummeted due to Omicron. Several long term interest rates also have failed to make new lows for a long enough time to change their ratings to neutral.
For the moment, the long leading forecast remains positive, as interest rates remain low compared with the past 5 years. Credit provision remains very accommodative. Meanwhile yields on bonds from 1 year duration out through the intermediate maturities have continued to increase, indicating investors expect the Fed to begin to raise rates, as the Miller score has been suggesting for months. Mortgage rates are likely to change from positive to neutral as well next week, and if there are no other changes, the long leading forecast may change to neutral as well.
The short leading forecast remains very positive. Commodity prices turned stronger, all production related indicators continue strong, the stock. market made new records, and the 4 week average of initial jobless claims made a 50 year low.
Among the coincident indicators, consumer spending as measured by Redbook remains very strong; but restaurant reservations finally plunged due to Omicron, although seasonal variations no doubt also played a role.
In general I am satisfied that the long and short leading indicators are doing their job. But there is no question that the economy is likely to be severely blindsided if Omicron cases, which doubled in the past week to 400,000 per day, continue to double for the next several weeks. We could see a de facto lockdown if so many employees are sick that entire sectors have to suddenly cut back production or service, as is already happening with some stores and airlines.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (16)
You’ll be much happier. The pandemic ends when we say it’s over. When we stop freaking out. Until we all grow up, quit acting like kids afraid of the boogeyman, and begin acting with some courage, this will never end.
