Weekly Indicators: Broader Yield Inversions, But Oil Prices Decline

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

June data included very big increases to both consumer and producer prices. Nominal retail sales were also very positive, but in real terms were negative for the second month in a row. Industrial production declined. Consumer sentiment as measured by the University of Michigan improved slightly.

Coronavirus Vaccinations & 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 increased by over 20% in the last week to 125,200, as Ba.4&5 now constitute over 80% of all new infections. Deaths also increased by about 20% to 418.

Long Leading Indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 5.27%, down -0.07 w/w (1-yr range: 3.13-5.48)
• 10-year Treasury bonds 2.93%, down -0.15 w/w (1.08-3.48)
• Credit spread 2.34%, up + 0.08 w/w (1.65-4.31)

(Graph at Moody’s Seasoned Baa Corporate Bond Yield | FRED | St. Louis Fed )

Yield curve

• 10 year minus 2 year: -0.20%, down -0.06 w/w (-0.20 – 1.59) (22 year low)
• 10 year minus 3 month: +0.39%, down -0.59% w/w (-0.99 – 2.04)
• 2 year minus Fed funds: +1.55%, up +0.03% w/w

(Graph at 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity | FRED | St. Louis Fed )

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

• 5.72%, down -0.12% w/w (2.75-6.28)

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

Similarly, treasury bonds and mortgage rates are also near 5 or even 10-year peaks, so their rating is also negative.

The spread between corporate bonds and Treasuries remains positive. The yield curve at the important 2- to 10-year level remains inverted – at the worst level since 2000 – so is negative.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps down -4% w/w to 227 (210-349) (SA)
• Purchase apps 4 wk avg. unchanged at 238 (SA) (341 high Jan 29, low 214 6/10/22)
• Purchase apps YoY -18% (NSA)
• Purchase apps YoY 4 wk avg. -17% (NSA)
• Refi apps up +2% w/w (SA)
• Refi apps YoY down -80% (SA)

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

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

Real Estate Loans (from the FRB)

• Down less than -0.1% w/w
• Up +8.0% YoY (-0.9 – 8.2)

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

The highest mortgage rates in 12 years pretty much killed both purchase and refinance mortgage applications, the four week averages of which are 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. Notably, their YoY gain did decelerate slightly this week.

Money supply

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

• Real M1 m/m down -0.9%, YoY Real M1 down -1.4%
• Real M2 m/m down -0.9%, YoY Real M2 down -2.0%

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. Real M1 also turned negative as of May.

Corporate profits (Q1 actual & Q2 actual + estimated S&P 500 earnings from I/B/E/S via FactSet at p. 28)

• Q1 2022, unchanged at 54.02, down -2.5% q/q (from 55.37 in Q4)
• Q2 2022 7% actual + 93% estimated up +.01 to 55.78, up 3.3% 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. Q2 estimates were added in last month as part of the average. The current average of the 2 quarters is +0.4, meaning 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 +.03 (less loose) to -0.09 (-0.09 – -0.72)
• Adjusted Index (removing background economic conditions) down -0.03 (less tight) to +0.16 (+0.19 – -0.75) (new two-year high)
• Leverage subindex up +0.28 (tight) at +0.81 (+0.81 – -0.39) (new 13-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 the leverage index, a negative number is good, a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. Leverage is at its highest since the Great Recession, obviously very negative.

Short Leading Indicators

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

• Miller Score (formerly “C-Score”): down -5 w/w to 168, -2 m/m (125 6/23/22 – 517on 7/23/21)
• St. Louis Fed Financial Stress Index: down -0.1523 to -1.3012 (-0.2562 12/3/21 – -1.6510 6/10/22)
• BCIp from Georg Vrba: unchanged at 91.0 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 had mainly been a function of soaring gas prices and very low weekly unemployment claims; both of those have now somewhat reversed; but the negative factors now include several significant Fed rate hikes).

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, albeit a very weak one.

Trade weighted US$

• Up +0.97 to 122.55 w/w, +8.6% YoY (last week) (broad) (111.02 – 126.47) (Graph at Nominal Broad U.S. Dollar Index
• Up +1.12 to 108.06 w/w, up +16.6% YoY (major currencies) (graph at link) (89.54 -105.11)

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 are negative.

Commodity prices

Bloomberg Commodity Index

• Down -2.44 to 113.47 (79.11-135.43)
• Up +20.2% YoY (Best: +52.3% June 4)

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

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

• 140.30, down -10.47 w/w (131.43-230.32)
• Down -10.6% YoY (Best +69.0% May 7)

During the Boom last year, commodity prices soared, and total commodities were very positive. As of this week, total commodities (which include oil) are back in the middle of their range, and the decline in industrial metals has put that indicator in the bottom 1/3rd of its 52 week range, so a 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 since then, but there have been ongoing new 3 month and even 1-year lows, so this indicator has been a negative.

Regional Fed New Orders Indexes

(*indicates report this week)

• Empire State up +0.9 to +6.2
• Philly down -34.5 to -12.4
• Richmond down -22 to -16
• Kansas City down -23 to -8
• Dallas down -10.5 to -7.3
• Month-over-month rolling average: unchanged at -8

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 two months. The indicator having fallen below -5, moves from neutral to negative.

Employment metrics

Initial jobless claims

• 244,000, up +9,000 w/w
• 4-week average 235,750, up +3,250 w/w

(Graph at St. Louis FRED)

New claims made new all-time lows on a 4 week average basis eight weeks ago. Now that this metric had failed to make a new 3 month low, its rating changes to neutral. 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 +9.5% YoY

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

Tax Withholding (from the Dept. of the Treasury)

• $240.8 B for the last 20 reporting days this year vs. $213.6 B one year ago, +$27.2 B or +12.7%

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% several times in the past several months, making it a neutral, but three weeks ago, it once again rebounded to positive.

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

• Oil down -$7.39 to $97.42 w/w, up +51.2% YoY ($62.32 – $123.70)
• Gas prices down -$.12 to $4.65 w/w, up $1.51 YoY
• Usage 4-week average down -8.8% YoY

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

Gas prices remain firm negatives, remaining close to all-time highs. Oil has declined sharply, however, and so it changes to a neutral.

A hallmark of an oil shock is an overreaction by consumers, and it is possible that with the precipitous decline in gas usage, we have begun to get that.

Bank lending rates

• 0.467 TED spread down -0.108 w/w (0.02 -.685)
• 2.160 LIBOR up +.0973 w/w (0.0753- 2.160) (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. Three weeks ago it declined enough two weeks ago to be neutral, then increased back to negative, but declined into neutral range again this week.

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

Coincident Indicators

St. Louis FRED Weekly Economic Index

• Down -0.57 to +2.60 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)

• July 7 seven day average -5% YoY (Best +31% Oct 21)
• July 14 seven day average -4% 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. This metric is within its neutral range.

Consumer spending

• Johnson Redbook up +13.0% YoY (high 21.4% on Dec 28, 2021; low 11.4% June 11,2022)

In April 2020 the bottom fell out in the Redbook index. It has remained positive almost without exception since the beginning of 2021.

Transport

Railroads (from the AAR)

• Carloads down -1.3% YoY
• Intermodal units down -4.7% YoY
• Total loads down -3.1% YoY (Best +34.0% April 23, 2021)

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

Shipping transport

• Harpex down -5 to 4455 (1038- 4586) https://harpex.harperpetersen.com/harpexVP.do
• Baltic Dry Index down -63 to 2010 (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 four 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 rebounded enough to be neutral, but several weeks ago declined into the bottom 33% of its range, and so fell back to negative.

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)

• Down -1.1% w/w
• Down -6.1% 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 & 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 leading Indicators	Positive	Neutral	Negative
Corporate bonds			✓
10 year Treasury			✓
10 yr-2 yr Treasury			✓
10 yr-3mo Treasury	✓
2 Yr Treasury-Fed funds	✓
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	1	10

Short Leading Indicators	Positive	Neutral	Negative
Credit Spread	✓
Miller Score			✓
St. L. Fin. Stress Index	✓
US$ Broad			✓
US$ Major currencies			✓
Total commodities	x	✓
Industrial commodities			✓
Stock prices			✓
Regional Fed New Orders			✓
Initial jobless claims		✓
Temporary staffing	✓
Gas prices			✓
Oil prices		✓	x
Gas Usage		x	✓
Totals:	3	3	8

Coincident Indicators	Positive	Neutral	Negative
Weekly Econ. Index		✓
Open Table		✓
Redbook	✓
Rail			✓
Harpex	✓
BDI			✓
Steel			✓
Tax Withholding	✓
TED		✓	x
LIBOR			✓
Financial Cond. Index		✓
Totals:	3	4	4

The long leading forecast continued to worsen with the further deterioration of credit conditions and inversions in the Treasury spread that at times included the entire range between 1 and 10 years. My “Recession Watch” start time of Q1 of next year continues. The short term forecast also remains negative for the third week, as commodities weakened to neutral, although oil prices have declined significantly.

The continuation and intensification of the negative trends in both leading timeframes increases the confidence that a recession is coming very soon. But notably, important coincident indicators remain positive. I do not think we are in a recession now, although we are not at a much better level.

Hopes for a “soft landing” must hinge on a continued decline in the price of oil, that both helps downshift inflation and enables consumers to spend more.