June data started out with another strong jobs report, but once again with weak wage growth. Motor vehicle sales and both the ISM manufacturing and nonmanufacturing indexes were very positive as well.
May data included and increase in construction spending and factory orders.
My usual note: I look at the high frequency weekly indicators because while they can be very noisy, they provide a good Now-cast 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.
NOTE that 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.
Interest rates and credit spreads
- BAA corporate bond index 4.79% down -.05% w/w (1 yr range: 4.15 – 4.94)
- 10 year treasury bonds 2.82% down -.04% w/w (2.05 – 3.11)
- Credit spread 1.97% down -.01% w/w (1.56 – 2.30)
Yield curve, 10 year minus 2 year:
- 0.28%, down -0.05% w/w (0.28 – 1.30) (new expansion low)
- 4.69%, up +0.03% w/w (3.84 – 4.79)
BAA Corporate bonds remain neutral. If these go above 5%, they will become a negative. Mortgage rates and treasury bonds are still both negatives. The spread between corporate bonds and treasuries has now gone above 1.85%, and so I have switched it from positive to neutral. The only remaining positive is the yield curve, and if that declines to +0.25%, that too will become a neutral.
- Purchase apps down +1% to 244 w/w (225 – 262)
- Purchase apps 4 week avg. -2 to 248
- Purchase apps YoY -1%, 4 week YoY avg. +1%
- Refi app down -2% w/w
- Up +.1% w/w
- Up +3.8% YoY ( 3.3 – 6.5) (re-benchmarked, adding roughly +0.5% to prior comparisons)
Refi has been dead for some time. Purchase applications were strong almost all last year, began to falter YoY in late December, but rebounded during spring, ultimately making new expansion highs. The 4 week average declined from the peak enough to qualify as neutral for most of the past month, including this week. If it drops below 240 and is negative YoY, it will become a negative.
With the re-benchmarking of the last year, the growth rate of real estate loans changed from neutral to positive. If the YoY rate falls below +3.25%, I will downgrade back to neutral.
- -0.1% w/w
- -0.7% m/m
- -0.8% Real M1 last 6 months
- +0.9% YoY Real M1 (0.9 – 6.9) (new expansion low)
- +0.1% w/w
- +0.5% m/m
- +1.9% YoY Real M2 (0.9 – 4.1)
Since 2010, both real M1 and real M2 were resolutely positive. Both decelerated substantially in 2017. Real M2 growth has fallen below 2.5% and is thus a negative. Real M1 growth this week was again below 3.5% YoY, and again on a 6 month basis was negative, so real M1 overall is scored as neutral. Note that it is less than 1% above the point where it will turn outright negative.
Credit conditions (from the Chicago Fed)
- Financial Conditions Index up +0.03 to -0.78
- Adjusted Index (removing background economic conditions) up +.02 to -0.51
- Leverage subindex up +.05 to -0.26 (2 year high)
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. All three metrics presently show looseness and so are positives for the economy; HOWEVER, in the last two months, leverage has turned up by roughly +0.2 to a two year high.
Trade weighted US$
- Up +0.15 to 124.12 w/w +2.3% YoY (last week) (broad) (116.42 -128.62)
- Down -0.49 to 94.00 w/w, -2.08% YoY (yesterday) (major currencies)
The US$ appreciated about 20% between mid-2014 and mid-2015. It went mainly sideways afterward until briefly spiking higher after the US presidential election. Both measures had been positives since last summer, but in the last month the broad measure turned neutral.
- Up +0.68 to 86.21 (81.67 – 91.94)
- Up +5.38% YoY
- 124.23 down -5,81 w/w, up +9.28% YoY (112.03 – 149.10)
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the 2016 presidential election. The overall commodity index (which includes oil) is neutral. Industrial metals had been strongly positive and recently made a new high, but have declined significantly in the past several weeks, enough to change their rating to neutral.
- Up +1.5% w/w at 2759.82
After being neutral for several months, by an ever-so-slight margin stock prices made a new 3 month high on June 12, and so have returned to being positive.
Regional Fed New Orders Indexes
(*indicates report this week) (no reports this week)
- Empire State up +5.3 to +21.3
- Philly down -22.7 to +17.9
- Richmond up +6 to +22
- Kansas City down -11 to +27
- Dallas up +1.9 to +29.6
- Month over month rolling average: unchanged at +24
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction. After being very positive for most of this year, it has moderated slightly in the last few weeks.
- 231,000 up +4.000
- 4 week average 224,500 up +2,500
Initial claims have recently made several 40+ year lows and so are very positive. The YoY% change in these metrics had been decelerating but is now back on its multi-year pace.
- Unchanged at 97 w/w
- Up +1.1% YoY
- $181.0 B for the last 20 reporting days vs. $184.2 B one year ago, down -$3.2 B or -1.7%
- 20 day rolling average adjusted for tax cut [+$4 B]: up +$0.8 B or +0.4%
I have discontinued the intramonth metric for the remainder of this year, since the kludge to guesstimate the impact of the recent tax cuts makes it too noisy to be of real use.
I have been adjusting based on Treasury Dept. estimates of a decline of roughly $4 Billion over a 20 day period. Until we have YoY comparisons, we have to take this measure with a big grain of salt.
- Oil down -$0.46 to $73.93 w/w, up +61.1% YoY
- Gas prices up +$.01 to $2.84 w/w, up $0.58 YoY
- Usage 4 week average up +1.2% YoY
The price of gas bottomed over 2 years ago at $1.69. With the exception of last July, prices generally went sideways with a slight increasing trend in 2017. Usage turned negative in the first half of 2017, but has almost always been positive since then. The YoY change went back above 40% recently, so the rating has turned negative.
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. This year the TED spread has whipsawed between being positive or negative. This week it was positve.
- Johnson Redbook up +4.4% YoY
- Goldman Sachs up +0.3% w/w, up +3.6% YoY
- Carloads up +0.7 YoY
- Intermodal units up +8.5% YoY
- Total loads up +4.6% YoY
Rail was generally positive since November 2016 and remained so during all of 2017 with the exception of a period during autumn when it was mixed. After some weakness in January and February this year, rail has returned to positive.
Harpex made multi-year lows in early 2017, then improved, declined again, and then improved yet again to recent highs. BDI traced a similar trajectory, and made 3 year highs near the end of 2017, declined early this year, but recently has hit multiyear highs.
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.
- Up +0.5% w/w
- Up +1.9% YoY
Steel production improved from negative to “less bad” to positive in 2016 and with the exception of early summer, remained generally positive in 2017. It turned negative in January and early February, but with the exception of three weeks recently has been positive since then.
Among the long leading indicators, the Chicago Fed Adjusted Financial Conditions Index, real estate loans, and the yield curve remain positives — but the the Chicago Fed Financial Leverage Index, while still positive, is significantly less so than in the last two years. Corporate bonds, credit spreads,mortgage rates, and real M1 are neutral, rejoined this week by purchase mortgage applications. Real M1 is on the cusp of turning negative. Treasuries, refinance applications, and real M2 are all negative.
Among the short leading indicators, the regional Fed new orders indexes, the Chicago National Conditions Index, jobless claims, stock prices (just barely), and staffing are all positive. Gas prices, the commodities indexes, and the spread between corporate and Treasury bonds are neutral. The US$ is mixed. Oil prices are strongly negative.
Among the coincident indicators, positives include consumer spending, Harpex, and rail, steel, the TED spread, and tax withholding. The Baltic Dry Index also turned positive this week. LIBOR remains negative.
The longer term forecast, however, led by real M1, the yield curve, the credit spread, purchase mortgage applications, and now one financial conditions index, continues to deteriorate. The first three are all very close to downgrades. About a month ago the deterioration was enough to downgrade the forecast from positive to neutral. *IF* this trend continues, it is within the range of reasonable possibility that the forecast turns negative within the next month.
Have a nice weekend!