Deterioration Spreading Among Short Leading Indicators

June 18, 2022 admin Stock News 0

Commodity price falling concept with oil barrel and steel with arrow down

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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

May data included a decline in both housing permits and starts, *possibly* the first indication that actual starts will start trending down, and a very bad read on both nominal and real retail sales. Industrial production increased, but the manufacturing component decreased slightly. Producer prices continued to rise sharply.

Coronavirus Vaccinations And Cases

I have discontinued the tracking of vaccinations, since they have virtually come to a halt at roughly 66% of the populace, and 75% of adults, being vaccinated (not counting booster shots). Less than half of children age 5-17 have been vaccinated.

Infections, at 105,000, are roughly 5% lower than last week, even as Ba.2.12.1 is being gradually replaced by Ba.4/5. Deaths remain very low, historically speaking, at 309.

Long Leading Indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 5.41%, up +0.30% w/w (1-yr range: 3.13-5.48) (new 6 year high intraweek)
  • 10-year Treasury bonds 3.23%, up +0.07 w/w (1.08-3.48) (new 10 year high intraweek)
  • Credit spread 2.18%, up +0.23 w/w (1.65-4.31)

(Graph at FRED Graph)

Yield curve

  • 10 year minus 2 year: +0.07%, down -0.03 w/w (-0.12 – 1.59)
  • 10 year minus 3 month: +1.60%, down -0.21% w/w (-0.99 – 2.04)
  • 2 year minus Fed funds: +2.33%, down -0.01% w/w

(Graph at FRED Graph)

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

  • 6.03%, up +0.18% w/w (2.75-6.28) (new 10 year high intraweek)

Corporate bonds are at the top of their 5 year range, so negative.

Similarly, treasury bonds and mortgage rates are also at 5 or even 10 year peaks, so their rating has also changed to negative.

The spread between corporate bonds and Treasuries remains positive. The yield curve at the important 2 to 10 year levels is back into neutral territory.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps up +8% w/w to 227 (210-349) (SA)
  • Purchase apps 4 wk avg. up +8 to 222 (SA) (341 high Jan 29, low 214 6/10/22)
  • Purchase apps YoY -16% (NSA)
  • Purchase apps YoY 4 wk avg. -15% (NSA)
  • Refi apps up +4% w/w (SA)
  • Refi apps YoY down -76% (SA)

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

(Graph at here)

Real Estate Loans (from the FRB)

  • Up +0.2% w/w
  • Up +7.7% YoY (-0.9 – 8.0)

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

The highest mortgage rates in 12 years have pretty much killed both purchase and refinance mortgage applications, the four week averages of which are at or close to 6 and 20 year lows, respectively. We have seen this feed into all of the monthly housing sales and construction reports.

From 2018 until late in 2020 real estate loans with few brief exceptions stayed positive. Earlier last year they varied between neutral and negative, but for the past several months have been very positive. This is being helped by inflation in house prices; thus the turn in the indicator will be when that cools.

Money supply

The Federal Reserve has discontinued this weekly series. Data is now only released monthly. April data was released three weeks ago:

  • Real M1 m/m down -0.8%, YoY Real M1 up +0.7%
  • Real M2 m/m down -0.7%, YoY Real M2 down -0.2%

No recession has happened without a YoY real M1 negative, or YoY real M2 below +2.5%. Real M2 fell below that threshold in March and is a negative. Real M1 has also made a 9 month low, and so moves from positive to neutral. Taken together real money supply has become a negative.

Corporate profits (Q1 99% actual +1% estimated S&P 500 earnings from I/B/E/S via FactSet at p. 26)

  • Q1 2022, unchanged at 54.02, down -2.5% q/q (from 55.37 in Q4)
  • Q2 2022 estimated up +.13 to 55.53, up 2.8% 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, which has now happened for Q1. Now that we are in the last month of the quarter, I’ve also included Q2 estimates in the average. Profits are now within the -3/+3% q/q metric, and so are neutral.

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

  • Financial Conditions Index up +.02 (less loose) to -0.26 (-0.17 – -0.72)
  • Adjusted Index (removing background economic conditions) up +0.06 (less loose) to -0.03 (0.06 – -0.75)
  • Leverage subindex down -.39 (less tight) to +0.30 (+0.69 – -0.39)

In these indexes, lower = better for the economy. 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. This is now sufficiently close to zero to qualify as neutral. With few exceptions, both the adjusted and un-adjusted indexes had been positive ever since mid-2020, but in the past two months, that has changed.

Short Leading Indicators

Economic Indicators from the late Jeff Miller’s “Weighing the Week Ahead”

  • Miller Score (formerly “C-Score”): down -27 w/w to 170, -84 m/m (170 this week – 585 on 7/2/21)
  • St. Louis Fed Financial Stress Index: up +0.1358 to -1.5130 (-0.2562 12/3/21 – -1.6510 6/10/22)
  • BCIp from Georg Vrba: down -3.5 to 96.5 iM’s Business Cycle Index (100 is max value, below 25 is recession signal averaging 20 weeks ahead)

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 last year, it is negative. (Its relentless decline has mainly been a function of soaring gas prices and very low weekly unemployment claims).

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$

In early 2021, both the broad rating and the USD against major currencies turned higher YoY, and so changed to neutral. With both measures now well above +5% YoY, these ratings have turned negative.

Commodity prices

Bloomberg Commodity Index

  • Down -8.65 to 126.78 (79.11-135.43)
  • Up +39.4% YoY (Best: +52.3% June 4)

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

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

  • 168.92, down -1.94 w/w (131.43-230.32)
  • Up +12.3% YoY (Best +69.0% May 7)

During the Boom last year, commodity prices soared. Total commodities are extremely positive, with a recent downturn in the indexes having reversed higher to new highs. The decline in industrial metals in the past several weeks has been enough to put this indicator in neutral territory (the middle 1/3rd of its 52 week range), and it is close to turning negative.

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

This last high for this index was January 3. As there has not been a new three month high during the past three months, but there have been ongoing new 3 month and even 1 year lows, so this indicator has switched to negative.

Regional Fed New Orders Indexes

(*indicates report this week)

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. These had usually been extremely positive ever since June 2020, but in the last several months have fallen, and precipitously so in the past month. The indicator is now neutral and will be a negative if it falls below -5.

Employment metrics

Initial jobless claims

  • 229,000, down -3,000 w/w
  • 4-week average 218,500, up +2,750 w/w

(Graph at St. Louis FRED)

New claims making new all-time lows on a 4 week average basis seven weeks ago. It remains close to that figure. Although there has been a trend in the last several months slightly higher, this metric remains positive until it fails to make a new 3 month low. It will not turn negative unless and until the 4 week average is higher YoY.

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

  • Unchanged at 106 w/w
  • Up +11.0% YoY

This gradually improved to neutral at the beginning of 2021, and positive since then.

Tax Withholding (from the Dept. of the Treasury)

  • $224.6 B for the last 20 reporting days this year vs. $218.4 B one year ago, +$6.2 B or +2.8%

YoY comparisons turned positive in the beginning of 2021, and have remained that way – usually very strongly so – almost every week since. These are now normally reliable. The YoY% change fell below 5% two weeks ago, then rose back above 5% last week, but this week had its worst comparison since the pandemic recession, and so is neutral again.

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

  • Oil down -$10.41 to $109.90 w/w, up +67.9% YoY
  • Gas prices up +$.13 to $5.01 w/w, up $1.94 YoY (new all-time high)
  • Usage 4-week average down -1.1% YoY

(Graphs at This Week In Petroleum Gasoline Section – U.S. Energy Information Administration (EIA))

Both gas and oil prices remain firm negatives, particularly with oil still close to new multi-year highs.

While there is some anecdotal evidence of consumers cutting back on other types of purchases due to the cost of filling up their fuel tank, a hallmark of an oil shock is an overreaction by consumers – and we do not appear to be there at this point.

Bank lending rates

  • 0.580 TED spread up +0.097 w/w (0.02 -.580) (new 2 year high)
  • 1.180 LIBOR up +.055 w/w (0.0753- 1.180) (graph at link) (new multi-year high)

TED was above 0.50 before both the 2001 and 2008 recessions. Since early 2019 the TED spread had remained positive, except the worst of the coronavirus downturn, until earlier this spring. After declining enough last week to go back to neutral, this week it made a new high and is negative again.

The increases since to the Russian invasion of Ukraine have added more stress. LIBOR has also turned from positive all the way to negative.

Coincident Indicators

St. Louis FRED Weekly Economic Index

  • Down -1.16 to +2.54 w/w (+2.54 6/17/22 – +10.40 5/29/21)

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. After a very positive 2021, it declined to less than half its best YoY level, thus changing to neutral.

Restaurant reservations YoY (from Open Table)

  • June 9 seven day average -4% YoY (Best +31% Oct 21)
  • June 16 seven day average -9% YoY (Worst -29% Jan 13)

The comparison year for this metric is 2019 and not 2021. Compared with the depths of the pandemic, in 2021 reservations rebounded to neutral, and even positive for a number of months, before declining back to neutral. During the Omicron tsunami they turned very negative, but in the past several months have improved to neutral.

Note I am now measuring its 7 day average to avoid daily whipsaws.

Consumer spending

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 either the Delta or the Omicron waves.

Transport

Railroads (from the AAR)

  • Carloads down -2.8% YoY
  • Intermodal units down -4.4% YoY
  • Total loads down -3.6% YoY (Best +34.0% April 23, 2021)

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

Shipping transport

Rail carloads turned positive early in 2021, before gradually fading to negative from August through the end of the year and the beginning of this year. The total loads index has been consistently negative for the past three months.

Earlier in 2021 Harpex repeatedly rose to new multiyear highs, before leveling off in October. It declined from that peak, but has increased to near record highs again. Meanwhile, BDI traced a similar trajectory, repeatedly making new multi-year highs. But several months ago it fell about 75%, warranting a change to negative. It has now rebounded enough to be neutral.

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) (no update this week)

  • Up +0.2% w/w
  • Down -3.3% YoY

Since the end of March 2021, against terrible comparisons, this metric had been positive, typically running at a double digits higher YoY percentage growth. Several months ago, after almost continuous deterioration, it turned negative.

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 ✓
10 year Treasury ✓
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 Index ✓
Leverage Index ✓
Totals: 3 3 8

Short Leading Indicators 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 x ✓
Initial jobless claims ✓
Temporary staffing ✓
Gas prices ✓
Oil prices ✓
Gas Usage ✓
Totals: 5 3 6

CoincidentIndicators Positive Neutral Negative
Weekly Econ. Index ✓
Open Table ✓
Redbook ✓
Rail ✓
Harpex ✓
BDI ✓
Steel ✓
Tax Withholding x ✓
TED X ✓
LIBOR ✓
Financial Cond. Index ✓
Totals: 2 5 4

There was more damage across several time frames this week, mainly in the short range. The regional Fed new orders indexes weakened below zero, and the slight increasing trend in new jobless claims has continued. Last week, I wrote that “If those change to neutral or all the way to negative, that would indicate a recession is getting very close.” Well, we could possibly cross that threshold at the end of this month. It is noteworthy that industrial commodities are also weakening, and are close to the bottom of their neutral range as well.

Meanwhile, consumer coincident indicators, particularly Redbook consumer spending are still holding up. Restaurant dining – usually one of the first and easiest of discretionary purchases to cut – also had a relatively punk week, but is still in the neutral range.

Last week, I also wrote that “I expect the Fed to keep stomping on the brakes,” and they certainly did so this week. Those people relying on the yield curve as their primary indicator should be reminded that the first two post-WW2 expansions were inflationary Booms that ended when consumers pulled back, even though the Fed held rates steady and there was never any yield curve inversion.

Still, unless we get a true “oil shock,” I still see the primary economic problem being next year rather than now or the immediate future.

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