Weekly Indicators: More Slow Deterioration Of Financial Indicators

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

April data included declines in housing permits, starts, and existing home sales, but a continued increase in prices. Industrial production and retail sales, including real retail sales, increased sharply.

Coronavirus Vaccinations and Cases

Note: 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 101,000, are roughly 12% higher than last week, and over 70,000 above their recent low, as extremely infectious variant BA.2.12.1 continues to spread. Deaths have started to increase as well.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 5.21%, up +0.17% w/w (1-yr range: 3.13-5.25) (new 3 year high intraweek)
• 10-year Treasury bonds 2.79%, down -0.15 w/w (1.08-3.13)
• Credit spread 2.42%, up +0.32 w/w (1.65-4.31)

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

Yield curve

• 10 year minus 2 year: +0.20%, down -0.15 w/w (-0.12 – 1.59)
• 10 year minus 3 month: +1.75%, down -0.20% w/w (-0.99 – 2.04)
• 2 year minus Fed funds: +1.78%, down -0.08% w/w

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

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

• 5.35%, down -0.03% w/w (2.75-5.64)

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

Similarly, treasury bonds and mortgage rates are also near their 5 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 narrowed back into neutral territory again this week.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps down -12% w/w to 226 (226-349) (SA) (new 2 year low)
• Purchase apps 4 wk avg. down -7 to 241 (SA) (341 high Jan 29, low 241 this week)
• Purchase apps YoY -15% (NSA)
• Purchase apps YoY 4 wk avg. -13% (NSA)
• Refi apps down -15% w/w (SA) (close to 10 year low)
• Refi apps YoY down -76% (SA)

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

(Graph at https://www.yardeni.com/pub/mortgageapprate.pdf )

Real Estate Loans (from the FRB)

• Up +0.3% w/w
• Up +7.5% YoY (-0.9 – 7.5)

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

The highest mortgage rates in nearly 12 years have essentially killed both purchase and refinance mortgage applications, the four week averages of which are at or close to 3 year lows. We have seen this feed into all of the monthly housin
g 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. March data was released three weeks ago:

• M1 m/m up +0.2%, YoY Real M1 up +2.3%
• M2 m/m up +0.3%, YoY Real M2 up +1.2%

No recession has happened without a YoY real M1 negative, or YoY real M2 below +2.5%. Real M2 has just fallen below that threshold, and thus becomes a negative. Real M1 has also made a 6+ month low, and so moves from positive to neutral.

Corporate profits (Q1 91% actual +9% estimated S&P 500 earnings from I/B/E/S via FactSet at p. 29)

• Q1 2022, up +0.05 to 53.96, down -2.5% q/q (from 55.37 in Q4)

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. Profits are now higher than the -3% q/q metric, and so are neutral.

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

• Financial Conditions Index unchanged ( loose) at -0.23 (-0.23 – -0.72) (tied for one year high)
• Adjusted Index (removing background economic conditions) down -0.05 (less tight) to +0.01(0.06 – -0.75)
• Leverage subindex unchanged (tight) at +0.34 (+0.34 – -0.39) (tied for one year high)

In these indexes, lower = better for the economy. The Chicago Fed’s Adjusted Index’s real break-even point is roughly -0.25. In any event it is now a positive number, so a negative indicator. 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 month, that has changed.

Short leading indicators

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

• Miller Score (formerly “C-Score”): down -9 w/w to 254, -73 m/m (254 this week – 608 on 6/18/21)
• St. Louis Fed Financial Stress Index: up +0.4537 to -0.8100 (-0.2562 12/3/21 – -1.4327 4/29/22)
• BCIp from Georg Vrba: up +4.1 to 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 last year, it is 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$

• Up +0.98 to 121.00 w/w, +8.8% YoY (last week) (broad) (111.02 – 126.47) (Graph at Nominal Broad U.S. Dollar Index
• Down -1.52 to 103.05 w/w, up +14.5% YoY (major currencies) (graph at link) (89.54 -104.57)

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

• Up +2.24 to 130.55 (79.11-132.43)
• Up +43.6% YoY (Best: +52.3% June 4)

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

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

• 178.07, up +7.32 w/w (131.43-230.32)
• Up +18.9% YoY (Best +69.0% May 7)

Since April 2020 both industrial metals and the broader commodities indexes rebounded sharply. Total commodities are extremely positive, with a recent downturn in the indexes having reversed higher, to new highs recently. The decline in industrial metals in the past two weeks was enough to put this indicator in neutral territory (the middle 1/3rd of its 52 week range).

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 several new 3 month lows, this indicator has switched to negative.

Regional Fed New Orders Indexes

(*indicates report this week) (no reports this week)

• Empire State down -33.9 to -8.8
• Philly up +4.3 to +22.1
• Richmond down -4 to +6
• Kansas City down -23 to +10
• Dallas up +1.6 to +12.1
• Month-over-month rolling average: down -6 to +8

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month di
rection. These have usually been extremely positive ever since June 2020. It is less positive now – but still positive!

Employment metrics

Initial jobless claims

• 218,000, up +21,000 w/w
• 4-week average 199,500, up +8,250 w/w

(Graph at St. Louis FRED)

New claims making new all-time lows on a 4 week average basis five weeks ago. It remains close to that figure. This metric remains positive.

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

• Unchanged at 105 w/w
• Up +11.6% YoY (Best +57.4% May 21)

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

Tax Withholding (from the Dept. of the Treasury) https://fsapps.fiscal.treasury.gov/dts/files/22042900.pdf

• $224.5 B for the last 20 reporting days this year vs. $208.8 B one year ago, +$15.7B or +7.5%

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. If the YoY% change falls below 5%, I will change this to neutral.

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

• Oil up +$0.02 to $110.44 w/w, up +84.0% YoY
• Gas prices up +$.16 to $4.49 w/w, up $1.46 YoY (new all-time high)
• Usage 4-week average down -1.2% YoY (Best +67.5% April 30)

(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.

We aren’t quite at the level yet that I would consider an “oil shock.” In the first place, it hasn’t lasted long enough at these elevated rates. Also, while we just made an all-time nominal high, and I would expect consumers to cut back a little 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 are not there at this point.

Bank lending rates

• 0.505 TED spread down -0.001 w/w (0.02 -.568) (graph at link)
• 0.960 LIBOR up +.090 w/w (0.0753- 0.960) (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.

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 -0.07 to +4.12 w/w (+4.12 5/20/22 – +10.40 5/29/21) (new 1 year low)

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)

• May 12 seven day average -4% YoY (Best +31% Oct 21)
• May 19 seven day average -5% 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

• Johnson Redbook up +12.7% YoY (high 21.4% on Dec 28, 2021)

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 -5.2% YoY
• Intermodal units down -5.5% YoY
• Total loads down -5.4% YoY (Best +34.0% April 23)

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

Shipping transport

• Harpex unchanged at 4395 (1038- 4586) https://harpex.harperpetersen.com/harpexVP.do
• Baltic Dry Index up +172 to 3289 (1302-5650) (graph at link)

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 in the past few weeks has increased slightly 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 +0.5% w/w
• Down -2.7% 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:

The only change in any of the three timeframes this week was the 10 minus 2 year Treasury spread. Both the nowcast and the short term forecast are neutral, while the long leading forecast is negative for the fourth week in a row.

I have seen commentary this week to the effect of “everybody is expecting a recession.” I caution against being swayed by the drama, or jumping the gun. Although the indicators have certainly been deteriorating, there is nothing that suggests a downturn is imminent. And my short leading indicators are not an outright downturn this year. The leading components of production, consumption, and employment all remain positive. It is primarily the financial and monetary components that have been turning.

The outlook for the rest of 2022 remains a weak positive economy, while a recession may be in the offing beginning in Q2 of 2023.