November 29, 2020

Weekly High Frequency Indicators: Slow Improvement Has Continued

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

September data consisted of the ISM services report, which increased further. August data consisted of the JOLTS report, showing layoffs reduced to a normal level, hires essentially unchanged, but quits and job openings down. The overall JOLTS pattern is consistent with early in the last two recoveries.

New 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 3.46%, up +0.03% w/w (1-yr range: 3.12-5.18)
  • 10-year Treasury bonds 0.78%, up +0.08% w/w (0.54-2.79)
  • Credit spread 2.69%, down -0.04% w/w (1.96-4.31)

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

Yield curve

  • 10 year minus 2 year: +0.63%, up +0.10% w/w (-0.04-0.67)
  • 10 year minus 3 month: +0.67%, down -0.03% w/w (-0.04-0.70)
  • 2 year minus Fed funds: +0.09%, up +0.01% w/w

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

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

  • 3.01%, up +0.02% w/w (2.81-4.63)

Corporate bonds fell to an expansion low late in 2019, but also spiked to near five-year highs early this year. Since then they have made repeated multi-decade lows.

The spread between corporate bonds and Treasuries turned very negative in March, but has also bounced back. 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.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps down -2% w/w to 315 (184-326) (SA)
  • Purchase apps 4 wk avg. down -2 to 319 (SA)
  • Purchase apps YoY +21% (NSA) (Worst: -35% on 4/18)
  • Purchase apps YoY 4 wk avg. +17% (NSA)
  • Refi apps +8% w/w (SA)

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

(Graph here)

Real Estate Loans (from the FRB)

  • Up less than +0.1% w/w
  • Up +3.2% YoY (2.8-5.2)

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

Purchase mortgage applications had been solidly positive in late 2019 and early this year. When the crisis started, they reverted back to negative. Since then, they have rebounded to new decade highs, most recently one week ago. Refi has also improved from neutral to positive.

With the exception of several weeks in 2019, real estate loans have generally stayed positive for the past several years.

Money supply

M1

  • -1.2% w/w
  • +2.8% m/m
  • +39.1% YoY Real M1 (-0.1 to 41.9)

M2

  • -0.4% w/w
  • +2.4% m/m
  • +22.1% 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. 26)

  • Q2 2020 actual unchanged at 28.22, down -15.3% q/q, down -34.1% from Q4 2018 peak
  • Q3 2020 estimated up +.19 to 33.30 w/w, up 18.0% q/q, down -22.3% from Q4 2018 peak

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.

Averaged together, Q2 and Q3 earnings are almost unchanged from Q1, so this indicator has changed from negative to neutral.

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

  • Financial Conditions Index unchanged (loose) at -0.49 (Best: -.60 on July3)
  • Adjusted Index (removing background economic conditions) unchanged ( loose) at -0.88 (Best: -1.01 on Sep 25)
  • Leverage subindex unchanged (tight) at +0.34 (Tied for Best)

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$

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 now. The broad measure also turned positive four weeks ago, but has since reverted to neutral.

Commodity prices

Bloomberg Commodity Index

  • Up +3.45 to 73.25 (58.87-83.08)
  • Down -6.0% YoY (Worst: -26.0% on April 25)

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

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

  • 119.41, up +4.95 w/w (88.46-124.03)
  • Up +3.7% YoY (Worst: -23.6% on April 11)

Both industrial metals and the broader commodities indexes declined to very negative into 2019, but rebounded considerably in the past four months. Five weeks ago industrial metals turned positive, reverted to neutral last week, and back to positive this week. Total commodities remain neutral as well.

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

There have been repeated recent three-month highs until five weeks ago, so this metric remains positive, despite the recent sell-off.

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. 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. After money supply, it is the most positive indicators of all right now.

Employment metrics

Initial jobless claims

  • 840,000, down -9,000 w/w (Worst: 6.867 M on April 4)
  • 4-week average 857,000, down -13,250 w/w (Worst: 5.786 M on April 25)

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

The pace of new claims has slowed to 1/8 of its record 19 in early May. Continuing claims are also down by roughly 1/2 from their worst readings. The continued pandemic lows confirm the rating change on this metric back to positive, even though the pace of change is glacial.

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

  • Up +1 to 79 w/w
  • Down -17.6% 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 five months, and one week ago improved to neutral.

Tax Withholding (from the Dept. of the Treasury)

  • $181.3 B for the last 20 reporting days vs. $187.7 B one year ago, down -$6.4 B or -3.5% (Worst: -16.0% on July 3; Best -2.0% on Aug 14)

YoY comparisons turned firmly negative in the second week of April. In the past six weeks the comparative YoY readings had generally improved to less than 1/2 of their worst, except for last week. This indicator is neutral.

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

  • Oil up +$3.56 to $40.54 w/w, down -27.9% YoY
  • Gas prices unchanged at $2.17 w/w, down -$0.47 YoY (Worst: -$1.12 on May 1)
  • Usage 4-week average down -6.7% YoY (Worst: -43.7% on May 1; Best this week, after plateauing between -8.8% and -10.2% for nine weeks)

(Graphs at This Week In Petroleum Gasoline Section)

At the beginning of this year, prices went higher YoY, but since abruptly turned lower; thus they turned positive. 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.

Bank lending rates

  • 0.130 TED spread down -0.02 w/w (0.14-1.51) (graph at link)
  • 0.150 LIBOR up +0.01 w/w (0.13-2.50) (graph at link)

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. After being whipsawed between being positive and negative in 2018, since early 2019, the TED spread remained positive. It briefly turned negative during the worst of the coronavirus downturn, but both TED and LIBOR have declined far enough to turn back positive.

Business formations

The five-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 -0.12 to -4.18 w/w (Worst: -11.48; Best this week)

Restaurant reservations YoY (from Open Table)

  • Oct 1 -41% (Best)
  • Oct 8 -42%

With the reopening of restaurants in some states, the comparisons gradually improved each week, through three weeks ago. For one week it was neutral, then for two weeks back to negative, but recently rose again to neutral.

Consumer spending

In April the bottom fell out below the Retail Economist reading, followed a few weeks later by Redbook. Redbook turned positive for two weeks before turning neutral for the past two weeks. It went back to positive this week. I am watching sales for signs that the cutoff of special unemployment aid at the end of July is having a negative impact. The rebound in the past few weeks has been surprising.

Transport

Railroads (from the AAR)

  • Carloads down -5.9% YoY (Worst: -30.2% on May 22; Best this week)
  • Intermodal units up +6.9% YoY (Worst: -22.4% on May 1; Best +24.8% on Sep 11)
  • Total loads up +0.8% YoY (Worst: -39.4% on May 8; Best +8.6% on Sep 11)

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

Shipping transport

Since January 2019 rail had been almost uniformly negative, and worsened in April, but has gotten “less awful” since. Intermodal is now positive. Total rail carloads have also improved by more than 50% from their worst readings, so they have turned from negative to neutral.

Harpex made new three-year highs in mid-2019 and remained near those highs until the beginning of this year, before declining to a new one-year low several months ago. It has improved enough in the past month to be positive. 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 several weeks ago to positive.

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)

  • Up +0.3% w/w
  • Down -17.7% YoY (Worst: -39.4% on May 8; Best this week)

The YoY comparison in production was generally positive early this year, but in March it turned negative again. The bottom fell out in April. There has been slow but continuing improvement in the several months, and finally last week it has improved enough to be rated neutral.

Summary And Conclusion

The nowcast remains the decisive time frame, at its reading is determined by the (lack of) progress against the pandemic.

Among the coincident indicators, the unadjusted Chicago Fed Financial Index, the TED spread, and LIBOR, Redbook consumer spending, and interodal rail loads are positive. Total and rail carloads, restaurant reservations, Harpex, and steel are all neutral, joined this week by tax withholding. There are no remaining negatives.

Among the short-leading indicators, gas and oil prices, business formations, stock prices, the regional Fed new orders indexes, initial jobless claims, the US$ against major currencies, and industrial commodities are positives. The spread between corporate and Treasury bonds and gas usage, total and industrial commodities, staffing, and the broad US$ are neutral. Again, 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, real estate loans, and purchase mortgage applications and refinancing, and the Adjusted Chicago Financial Conditions Index are all positives. Corporate profits and the two-year Treasury minus Fed funds yield spread are neutral. The Chicago Financial Leverage subindex is the sole negative.

All three time frames are now firmly positive.

As I mentioned last week, this week I added “best” pandemic readings for many of the indicators (in particular except for interest rates), and I will probably add more next week. Doing so has indicated that almost all of them have had their best readings in the past five weeks, and about half of those this week or last week. Thus, while the course of the pandemic continues to be the decisive issue for the economy, for now that indicates slow improvement has continued. Most notably consumer spending, surprisingly, has held up, even after the termination of emergency Congressional assistance.

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.

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