Weekly High Frequency Indicators: Long-Term Forecast Turns More Positive, While Tariffs Hit Short-Term Forecast


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 also are 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’s scored positively if it’s within the top 1/3 of that range, negative in the bottom 1/3, and neutral in between. Where it’s not seasonally adjusted, and there are seasonal issues, waiting for the YoY change sign will lag the turning point. Thus I make use of a convention: Data is scored neutral if it’s 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’s 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’s scored neutral if it is moving in the right direction and is close to making a new high.

Recap of monthly reports

May reports included positive industrial production and real retail sales, an uptick in present consumer sentiment, and a downtick in future expectations, and small increases in both producer and consumer prices.

Total business sales in April decreased while inventories increased. The JOLTS report showed very positive hires and quits, but layoffs increased and job openings continued to fade.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 4.52% down -.04% w/w (1-year range: 4.15 – 5.29)
  • 10-year Treasury bonds 2.08% unchanged w/w (2.08 – 3.24) TIED FOR ONE YEAR LOW
  • Credit spread 2.44% down -.04% w/w (1.56 – 2.48)

Yield curve

  • 10 year minus 2 year: 0.24%, up +.01% w/w (0.04 – 1.30)
  • 10 year minus 3 month: -0.10%, up +0.09% w/w

30-year conventional mortgage rate (from Mortgage News Daily)

  • 3.92%, up +.06 w/w (3.86 – 5.05).

BAA Corporate bonds and Treasury bonds remain neutral. The spread between corporate bonds and treasuries is negative. The two- vs. 20-year yield curve also is neutral (unlike many other treasury spreads). While I dislike cherry picking, the fact remains that this spread has been an anomaly this year. As a result I’m also including the 10-year minus three-month spread. Note that I will not change corporate ratings to positive unless they fall below 4.25%. Mortgage rates are below 4.2%, (1/2 of the way to their post-Brexit low), so they have returned to positive.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps +10% w/w to 280 (214 – 281) (SA)
  • Purchase apps 4 wk avg. 265 ((SA))
  • Purchase apps YoY +10% (NSA)
  • Purchase apps YoY 4 wk avg. +6% ((NSA))
  • Refi apps +47% (!!!) w/w ((SA))

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

Real Estate Loans (from the FRB)

  • Up +3.7% YoY ( 2.7 – 6.5)

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. Meanwhile, lower rates once again have caused a spike upward in refi, which this week improved to neutral.

With the re-benchmarking of the last year, the growth rate of real estate loans turned from neutral to positive. For two weeks it fell back below +3.25%, and so went back from positive to neutral, but has rebounded to positive.

Money supply

M1

  • +2.7% w/w
  • +1.9% m/m
  • +4.1% YoY Real M1 (-0.7 – 4.1)

M2

  • +0.2% w/w
  • +0.8% m/m
  • +2.5% YoY Real M2 (0.9 – 3.1)

Since 2010, both real M1 and real M2 were resolutely positive. Both decelerated substantially in 2017. Real M2 growth fell below 2.5% almost all last year, and has with few exceptions stayed below that benchmark, before rising to it this week. It thus improves from negative to neutral. Real M1 briefly turned negative about four months ago. Both real M1 and M2 then improved all the way to positive for one month, then M1 was roughly zero YoY for one week. For the last month real M1 surged back again to positive, making its most positive reading this week.

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

  • Q1 2019 actual, unchanged w/w at 38.80, down -6.1% Q4 2018
  • Q2 2019 estimated at 40.49, up +4.4% q/q, down -5.5% from Q4 2018 peak

I initiated coverage of this metric recently 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 am expanding the “neutral” band to +/-3% as well as averaging the two quarters together, until at least 100 companies have actually reported. Because the rebound is less than half of the decline from the Q4 peak, I am scoring the Q2 estimates as neutral.

Credit conditions (from the Chicago Fed)

  • Financial Conditions Index unchanged at -0.83
  • Adjusted Index (removing background economic conditions) up +0.03 to -0.68
  • Leverage subindex down -0.01 to -0.45

The Chicago Fed’s Adjusted Index’s real breakeven 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. Late last year, the leverage subindex turned up to near neutral, then turned more positive.

Short leading indicators

Trade weighted US Dollar

  • Up +0.04 to 129.20 w/w, +56% YoY (last week) (broad) (115.19 -129.20), new 17-year high.
  • Up +1.00 to 97.57 w/w, +2.9% YoY (major currencies)

The US dollar briefly spiked higher after the US presidential election. Both measures had been positives last summer, but by last autumn the broad measure turned neutral, followed more recently by the measure against major currencies. As of roughly eight months ago, both were negative. As of four weeks ago, the measure against major currencies has weakened enough to score neutral.

Commodity prices

Bloomberg Commodity Index

  • Up +0.68 to 77.15 (76.27 – 91.94)
  • Down -13.5% YoY

Bloomberg Industrial metals ETF (from Bloomberg)

  • 109.47 Up +0.24 w/w, down -21.7% YoY (106.51 – 149.10)

Commodity prices surged higher after the 2016 presidential election. Both industrial metals and the broader commodities indexes both declined to very negative in the past year. Industrial metals had briefly improved enough to be scored neutral for one week, but both are back to very negative, implying a lot of weakness in global trade.

Stock prices S&P 500 (from CNBC)

At the end of 2018, stocks’ rating became negative. In the past few months, they made repeated new three-month and several all-time highs, and thus their rating returned to positive (although it is certainly interesting that stocks have failed to make a truly significant new high in the past 16 months!). Despite lots of intraday volatility this week, the end result was mildly positive.

Regional Fed New Orders Indexes

(*indicates report this week) (no reports 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 last year. Since last summer it gradually cooled to weakly positive. For five weeks it alternated between neutral and weakly positive, then in April turned solidly positive. This month it slipped back but remains positive.

Employment metrics

Initial jobless claims

  • 222,000 up +4,000
  • Four-week average 217,750, up +2,750

Initial claims had generally been very positive in 2017 and 2018. In November they briefly spiked, and did so again at the end of January, the worst of which was probably connected to the government shutdown. They made new 49-year lows in the three weeks just before Easter, probably due to residual seasonality. The overall trend still appears to be weakly positive.

Temporary staffing index (from the American Staffing Association)

  • Unchanged at 94 w/w
  • Down -2.6% YoY

This index was positive with a few exceptions all during 2017. It was negative for over a month at the beginning of 2018, but returned to a positive for most of the rest of the year. In the last five months it has gradually declined, turning neutral in January and then negative – and until two weeks ago increasingly so – since early February.

Tax Withholding (from the Department of the Treasury)

  • $193.7 B for the last 20 reporting days vs. $179.5 B one year ago, up +$14.2 B or +7.9%

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 one week have been positive.

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

  • Oil up +$0.70 to $53.99 w/w, down -14.1% YoY
  • Gas prices down -$.08 to $2.73 w/w, down -$0.18 YoY
  • Usage four-week average down -0.2% YoY

The price of gas bottomed over three years ago at $1.69. Generally prices went sideways with a slight increasing trend in 2017 and 2018. While at the end of last year, prices plummeted, oil rose to up year-over-year before declining in the past month. Gas prices also may have made their seasonal high for this year a few weeks ago. Usage was positive YoY during most of 2016, but has oscillated between negative and positive for the last several months. This week once again it was negative.

Bank lending rates

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 beingTED whipsawed between being positive or negative last year, this year it remained positive, although it did spike somewhat this week.

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 was weakly positive last week, but fell back to neutral this week. Johnson Redbook did fall sharply at the beginning of this year and varied between being positive or neutral for several months before improving to positive several months ago.

Transport

Railroads (from the AAR)

  • Carloads down -9.1% YoY
  • Intermodal units down -8.0% YoY
  • Total loads down -8.5% YoY

Shipping transport

In 2018 rail, after some weakness in January and February, it remained positive until autumn, when it weakened precipitously, probably due to tariffs. It rebounded strongly in January, but since then it has turned neutral or negative. It’s now at its worst YoY levels yet, suggesting that the trade war with China is having a major impact. Rail traffic in the western US is likely also impacted by the widening of the Panama Canal, which has allowed ships to bypass West Coast ports and proceed directly to Gulf and East Cost ports.

Harpex made multi-year lows in early 2017, and after oscillating improved to new multi-year highs earlier in 2018, but recently enough to rate negative. In the past month it has rebounded enough to be neutral. BDI traced a similar trajectory and made three-year highs near the end of 2017, and at mid-year 2018 hit mult-iyear highs. Since then it declined all the way to negative, but has improved enough again to rate neutral.

I’m 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)

  • Down -0.8% w/w
  • Up +3.3% 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 it recent range over 10% YoY and was neutral, and has been varying between neutral and positive since. For the past two weeks it has been neutral.

Summary And Conclusion:

Among long leading indicators, purchase mortgage applications, mortgage rates, the Chicago Fed Adjusted Financial Conditions Index and Leverage subindex, real estate loans, real M1 and real M2, and mortgage refinancing are positives. The yield curve, corporate bonds and Treasuries are neutral. Corporate profits are negative.

Among the short leading indicators, stock prices, the Chicago National Conditions Index, gas and oil prices, initial claims, and the regional Fed new orders indexes are positives. One measure of the US dollar is neutral. The second measure of the US dollar, the general commodity index, the spread between corporate and Treasury bonds, industrial metals, gas usage, and temporary staffing are negative.

Among the coincident indicators, Redbook consumer spending, tax withholding, and the TED spread are positive. Harpex, the BDI, Retail Economist consumer spending, and steel are neutral. Rail and LIBOR are negative.

Between lower interest rates and improving real money supply, the overall long-term forecast has turned even more positive. The short-term forecast, however, remains negative, and the nowcast has declined form weakly positive to neutral.

As I have pointed out before, these metrics are good at forecasting the economy “if left to its own devices.” At present, however, it’s far from being left to its own devices, in particular because of chaotic trade and tariff policies. Even if one agrees with the trade objectives and the use of tariffs toward those objectives, however, the chaotic nature of their deployment is asymmetrically negative, as no one can be sure that even a fully agreed to trade deal can survive beyond the next tweet. Thus the near-term forecast is not better than, and may well be worse than, indicated by these indicators.

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.





Source link