Weekly Indicators: Yield Curve Steepens And Mortgage Rates Make New Highs

April 16, 2022 admin Stock News 0

Interest rate financial and mortgage rates concept. Hand putting wood cube block increasing on top with icon percentage symbol upward direction

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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

The March ISM non-manufacturing report continued positive. In February factory orders declined.

NOTE: As of one week ago, I discontinued all special comparisons with 2019 and early 2020.

Coronavirus Vaccinations and Cases

Note: I have discontinued the tracking of vaccinations, since they have virtually come to a halt at roughly 65% 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 35,600, are 7,200 above last week, at a level last seen in mid July 2021. Deaths, at 497, are 8% below last week, at a level last seen in early July 2021. Subvariant BA.2 has risen to about 90% of all cases in the US, a percentage where in Europe cases began to peak. There is no evidence of a peak in any US state yet.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 4.64%, up +0.20% w/w (1-yr range: 3.13-4.64) (new 3 year high)
  • 10-year Treasury bonds 2.83%, up +0.12 w/w (1.08-2.20) (new 3 year high intraweek)
  • Credit spread 1.81%, up +0.08 w/w (1.65-4.31)

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

Yield curve

  • 10 year minus 2 year: +0.37%, up +0.18 w/w (-0.12 – 1.59)
  • 10 year minus 3 month: +2.04%, up +0.19% w/w (-0.99 – 2.04) (new 1 year high)
  • 2 year minus Fed funds: +2.13%, down -0.07% w/w

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

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

  • 5.15%, up +0.09% w/w (2.75-5.06) (tied for 10 year high)

Corporate bonds failed to make a new low in 2021. Therefore their rating changed to neutral. As of this week they are in the top 1/3rd of their 5 year range, changing their rating to negative.

Treasury bonds fluctuated near the middle of their 5 year range in later 2021. Similarly, mortgage rates made an all time low during the first week of 2021. Neither made a new low since then, so their ratings also changed from positive to neutral. Both mortgages and 10 year Treasuries are now in the top 1/3rd of their 5 year range, and mortgages are more than 2% higher than their lows of 2021, so their rating has changed further to negative.

The spread between corporate bonds and Treasuries remains positive, and the yield curve at the important 2 to 10 year levels widened further this week, although several portions of the intermediate to longer end of the yield curve remain inverted.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps up +1% w/w to 263 (184-349) (SA)
  • Purchase apps 4 wk avg. down -2 to 264 (SA) (341 high Jan 29, low 251 Aug 20)
  • Purchase apps YoY -6% (NSA)
  • Purchase apps YoY 4 wk avg. -9% (NSA)
  • Refi apps down -5% w/w (SA) (3 year low)
  • Refi apps YoY down -62% (SA)

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

(Graph at here)

Real Estate Loans (from the FRB)

  • Up +0.3% w/w
  • Up +5.5% YoY (-0.9 – 5.5) (new 1 year high)

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

Early in 2021 purchase mortgage applications declined to 2 year lows due to higher interest rates (and probably housing unaffordability as well). Purchase apps are now back down to the lowest 1/3rd of their 52 week range, so the rating is negative. Refi is at 36 month lows, so they remain negative.

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 positive.

Money supply

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

  • M1 m/m up +0.4%, YoY Real M1 up +4.8%
  • M2 m/m up +0.4%, YoY Real M2 up +3.1%

No recession has happened without a YoY real M1 negative, or YoY real M2 below +2.5%. If real M2 falls below 3% YoY, I will change its rating to neutral.

Corporate profits (Q4 actual +Q1 7% actual +93% estimated S&P 500 earnings from I/B/E/S via FactSet at p. 28)

  • Q4 2021, unchanged at 55.37, up +2.8% q/q
  • Q1 2022, down -0.15 to 51.60, down -6.8% 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. For Q4 and Q1 together, the average is -2.0%, which is within the neutral range.

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

  • Financial Conditions Index unchanged (loose) at -0.38 (-0.33 – -0.72)
  • Adjusted Index (removing background economic conditions) down -0.02 (looser) to -0.30 (-0.19 – -0.75)
  • Leverage subindex down -0.01 (looser) to -0.30 (+0.09 – -0.39)

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. With few exceptions, both the adjusted and un-adjusted indexes had been positive ever since mid-2020.

Short leading indicators

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

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. In the past few months, with the measure against major currencies usually above +5% YoY, this rating turned negative.

Commodity prices

Bloomberg Commodity Index

  • Up +6.02 to 132.43 126.41 (79.11-129.85) (new 1 year high)
  • Up +531% YoY (Best: +52.3% June 4)

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

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

  • 211.99, down -0.97 w/w (131.43-230.32)
  • Up +42.6% YoY (Best +69.0% May 7)

Since April 2020 both industrial metals and the broader commodities indexes rebounded sharply. Both total and industrial commodities are extremely positive, with a recent downturn in the indexes having reversed higher, to new highs. I am scoring them in accord with normal practice as positive, because this increase is due to a war interrupting normal trade, this needs to be taken with extra caution.

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 now switched to negative.

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. These have usually been extremely positive ever since June 2020.

Employment metrics

Initial jobless claims

  • 185,000, up +18,000 w/w
  • 4-week average 172,250, up +2,000 w/w

(Graph at St. Louis FRED)

The last few years of jobless claims were re-benchmarked this past week, resulting in new claims making new all-time lows on a 4 week average basis. Needless to say, this metric is positive.

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

  • Down -1 to 105 w/w
  • Up +13.2% 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)

  • $227.1 B for the last 20 reporting days vs. $202.7 B one year ago, up +$24.4 B or +12.0% (Best +37.6% April 30, 2021)

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 +$8.54 to $106.54 98.00 w/w, up +83.4% YoY
  • Gas prices down -$.08 to $4.09 w/w, up $1.24 YoY
  • Usage 4-week average down -2.3% 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 remain near multi-year highs, 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 yet.

Bank lending rates

  • 0.315 TED spread down -0.014 w/w (0.02 -.568) (graph at link)
  • 0.594 LIBOR up +.106 w/w (0.0753- 0.594) (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.

The increases since to the Russian invasion of Ukraine, have added more stress. The TED spread turned negative three weeks ago, but has rebounded all the way back to positive. Meanwhile LIBOR has turned from positive all the way to negative.

Coincident indicators

St. Louis FRED Weekly Economic Index

  • Down -0.39 to +4.41 w/w (+4.41 this week – +12.30 April 29, 2021) (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)

  • Apr 7 seven day average -1% YoY (Best +31% Oct 21)
  • Apr 14 seven day average -2% 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 month have improved to neutral.

This was the very first weekly indicator to signal collapse when COVID and the ensuing lockdowns started in March 2020. 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.

Cam Hui, a former Seeking Alpha contributor who currently authors the Humble Student of the Markets newsletter, alerted me to the Chicago Fed’s weekly retail sales estimate above. This is a welcome addition, since several weekly surveys of consumer spending have discontinued publication in the past several years. It is designed so that its month over month estimate should be very close to the Census Bureau’s monthly report.

Transport

Railroads (from the AAR)

  • Carloads up +1.4% YoY
  • Intermodal units down -3.1% YoY
  • Total loads down -1.0% YoY (Best +34.0% April 23)

(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. With carloads up but intermodal down, this indicator is a neutral.

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 go back to 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 +0.9% 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. Three weeks 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 X ✓
10 year Treasury ✓
10 yr-2 yr Treasury ✓ X
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 Ind. ✓
Leverage Index ✓
Totals: 8 1 5

Short LeadingIndicators 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 ✓
Initial jobless claims ✓
Temporary staffing ✓
Gas prices ✓
Oil prices ✓
Gas Usage ✓
Totals: 8 1 5

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

The coincident shock caused by Russia’s invasion of Ukraine, and the responses to it, continued to abate this week. Meanwhile, the yields on US Treasury bonds continued to increase, especially at the long end. This had the effect of turning yield curve measures very positive, but at the same time measures not dependent on yield curve inversions, but instead on the yields of corporate bonds turned very negative.

The net effect is that the long leading forecast remains weakly positive. But since mortgage rates have continued to rise, causing mortgage applications to continue to sink, we should see some substantial negative effects in coming monthly reports on housing permits, starts, and sales, which will be reported next week.

The short leading forecast remains positive, as manufacturing-related metrics and jobless claims remain very strong, although stocks have turned negative.

The coincident indicators, hit by the effects of the Russian invasion of Ukraine, and probably by US fiscal consolidation, are only weakly positive.

The outlook for the rest of 2022 remains that of a weakening, but positive, economy, and the outlook for 2023 remains weak as well, but not negative (but stay tuned for Q1 corporate profit reports, and the March updates to real money supply).

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