QQQ - Weekly Indicators: Strong And Weak Sectors Together Just Drifting

2023-06-03 08:00:00 ET

Summary

• High-frequency weekly indicators provide a good now cast of the economy and can signal changes before monthly or quarterly data is available.
• Long-leading indicators, short-leading indicators, and coincident indicators all remain negative, consistent with a near-term recession.
• Bright spots include corporate earnings, which may be bottoming, and stock prices, which have put in several new 6+ month highs.

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 started out with a further decline in the ISM Manufacturing Index, but a strong Establishment portion of the jobs report. But the Household portion was actually negative, with a sharp increase in the unemployment rate.

April data included an increase in construction spending, but real residential construction spending declined slightly. Consumer confidence as measured by the Conference Board declined.

In the rear-view mirror, house prices through March as measured by the FHFA increased, but were mixed as measured by Case Shiller. Q1 unit labor costs increased sharply, and productivity accordingly decreased.

Long Leading Indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 5.76%, down -0.17 w/w (1-yr range: 5.00-6.59)
• 10-year Treasury bonds 3.70%, down -0.11% w/w (2.60-4.25)
• Credit spread 2.06%, down -0.06 w/w (1.76-2.42).

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

Yield curve

• 10 years minus 2 year: -0.81%, down -0.05% w/w (-0.86 - 1.59)
• 10 years minus 3 months: -1.69%, down -0.18% w/w (-1.69 - 2.04)
• 2 years minus Fed funds: -0.58%, down -0.07% 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).

• 6.88%, down -0.26% w/w (5.05-7.38).

At the end of February there was a significant change in bond ratings, which all moved from negative to neutral, because yields did not make a new high in the previous 4 months. Typically in the past this is the first step towards the longer-lived decline in bond yields which signals the end of a recession in the future.

While the spread between corporate bonds and Treasuries remains positive, all three of my yield curve indicators remain negative; despite some improvement in the past few weeks.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps down -3% w/w to 154 (137-349) ((SA))
• Purchase apps 4 wk avg. -3 to 163 ((SA)) (268 high 3/26/22, low 154 Mar 17)
• Purchase apps YoY -31% ((NSA))
• Purchase apps YoY 4 wk avg. -30% ((NSA))
• Refi apps down -7% w/w ((SA))
• Refi apps YoY down -45% ((SA))

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

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

Real Estate Loans (from the FRB )

• Up +0.1% w/w
• Up +9.8% YoY (-0.9 - 12.1).

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

Mortgage rates, like bond yields, appear to have made their peak for this cycle in October. Unlike bonds, I will not move these to “neutral” unless they get closer to their average in the last 3 years. Importantly, purchase mortgage applications have essentially bounced around close to 10-year lows in a fairly narrow range of between 155 and 180 in the 6+ months since last October.

Real estate loans turned ever more positive in the past year. This was helped by inflation in house prices; thus the turn in the indicator will be when that cools - which may be starting to happen, as we made a 3 month+ low YoY this week.

Money supply

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

• M1 m/m down -1.8%, YoY Real M1 down -14.7% (60+ year low)
• M2 m/m down -0.8%, YoY Real M2 down -9.6% (60+ year low).

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 2022. Real M1 also turned negative as of May 2022.

Corporate profits (Q1 actual + estimated earnings from I/B/E/S via FactSet at p. 29)

• Q1 99% actual + 1% estimated up +0.04 to 53.25, down -0.4% q/q
• Q2 estimated 53.28, up less than 0.1% q/q.

Source .

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. The cumulative decline since the recent Q2 peak through Q1 2023 is -6.0%. I am maintaining a negative rating so long as that is the case, and there is a quarterly decline as well. Since Q2 profits are estimated at this point to be slightly higher than Q1 profits, this indicator may change for the better in the next several months.

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

• Financial Conditions Index up +.02 (less looser) to -0.29 (-0.03 - -0.62)
• Adjusted Index (removing background economic conditions) down -.03 (looser) to -0.33 (+0.16 - -0.59)
• Leverage subindex up +0.08 (tighter) to +1.51 (+1.51 - -0.35) (new 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. The leverage index is now very negative, while the adjusted index has declined below its breakeven point, so has turned back positive. The unadjusted index is sufficiently above breakeven point to be negative.

Short Leading Indicators

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

• Miller Score (formerly "C-Score"): up 10 w/w to 294, +22 m/m (125 6/24/22 - 319 on 11/4/22)
• St. Louis Fed Financial Stress Index: down -0.1232 to -0.6017 (1.5746 3/23/23 - -.8325 9/16/22) St. Louis Fed Financial Stress Index
• BCIp from Georg Vrba: up + 14.0 to 0.0 as of 5/18/23 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. This number fell below that threshold at the beginning of August 2021, so not only is it negative, but we are now well into the “recession eligible” time period.

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. It did so in December, and then again briefly in March. Now it has decreased back below zero again.

The BCIp, which remained very positive until very recently, deteriorated sharply this year, and is below its recession-signaling threshold, although it has improved in the past few weeks.

Trade weighted US$

• Up +0.86 to 120.87 w/w, up +2.2% YoY (last week) (broad) (118.06 - 128.31) (Graph at Nominal Broad U.S. Dollar Index
• Down -0.16 to 104.04 w/w, up +1.9% YoY ( major currencies ) (graph at link) (100.79-114.78).

Ever since 2021, both measures of the US$ were well above +5% higher YoY, and so negative. Recently, both declined into the neutral range, and two weeks ago, both were positive. This week both are back to neutral.

Commodity prices

Bloomberg Commodity Index

• Down -0.44 to 99.64 (99.64-136.61) (new 12 month low)
• Down -25.3% YoY (Best: +52.3% June 4, 2022; worst -25.3% this week).

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

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

• 142.94, up 0.46 w/w (135.97-327.84)
• Down -22.4% YoY (Best +69.0% May 7, 2022).

During the Boom of 2021, commodity prices soared, and total commodities were very positive. Both total commodities (which include oil) and industrial metals have also declined into the bottom 1/3rd of their 52-week range, so have also turned negative.

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

• Up +1.8% to 4282.37.

Stocks made a new 3 month high one week ago once again this week, so this indicator remains positive.

Regional Fed New Orders Indexes

(*indicates report this week)

• Empire State down -53.1 to -28
• Philly up +13.8 to -8.9
• Richmond down -9 to -29
• Kansas City up +7 to -14
• * Dallas down -6.5 to -16.1
• Month-over-month rolling average: down -1 to -19.

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. Since last spring, these gradually declined to neutral and then negative. They are very negative now.

Employment metrics

Initial jobless claims

• 232,000, up 2,000 w/w
• 4-week average 229,500, down -2,500 w/w.

(Graph at St. Louis FRED .)

Recently, revisions have caused major changes in this index. The all-time lows from March and April 2021, as well as the sub-200,000 readings earlier this year disappeared. This week, due to very late reporting from Massachusetts, the big increases of 3 weeks ago have disappeared as well. For now, the yellow “caution flag” remains, but it may disappear also as early as next week.

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

• Unchanged at 99 w/w
• Down -6.4% YoY.

This was extremely positive at the end of 2021. During 2022, the comparisons at first slowly and then more sharply deteriorated, and four weeks ago for this first time turned negative. It had the most negative February downturn since the inception of the index 16 years ago, and continued to a new post-pandemic low in the weeks since then as well. In the past two weeks it has improved slightly.

Tax Withholding (from the Department of the Treasury) Issues: Current and Archive

• $267.5 B for the month of May this year vs. $246.7 B one year ago, +$20.8 B or +8.4%
• $215.9 B for the last 20 reporting days this year vs. $218.8 B one year ago, -$2.9 B or -1.3%.

YoY comparisons peaked in Q1 2022. Since summer, it has oscillated between neutral and positive, and was negative on a monthly basis several times. Since the first of the year, these have generally turned positive. That was not the case for the month of April, but in May it turned sharply positive. The last 20 days exclude 1st day of the month, typically a day of heavy deposits. Nevertheless, for this week at least, it makes the report mixed or neutral.

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

• Oil down -$0.79 to $71.99 w/w, down -22.5% YoY ($66.74 - $123.70)
• Gas prices up +$0.04 to $3.57 w/w, down -$1.04 YoY
• Usage 4-week average up +3.5% YoY.

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

Gas prices are in the middle 1/3rd of their 3-year range, and so have returned to neutral. Oil is also in the middle of its 3-year range, and so it remains neutral.

Mileage driven has improved to positive.

Note: With gas and oil prices so volatile in the past 12 months, I believe the best measure is against their 3-year average. Measuring by 1 year, both have turned positive.

Bank lending rates

• 0.296 TED spread down -0.004 w/w (0.02 -.685)
• 5.19 LIBOR up +0.03 w/w (0.10130- 5.19) (graph at link) ( new 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 last spring. It has been very choppy recently, varying between neutral and negative. It turned positive again over one month ago.

LIBOR has been increasing consistently well into its negative range.

Coincident Indicators

St. Louis FRED Weekly Economic Index

• Down -0.12 to 1.05 w/w (Low 0.66 Dec 10, 2022 - high 3.72 June 4, 2022).

After a very positive 2021, this measure declined to less than half its best YoY level, thus changing to neutral. I will continue to treat it as neutral unless the number turns negative.

Restaurant reservations YoY (from Open Table) State of the Restaurant Industry | OpenTable

• May 25 seven-day average -3% YoY (Worst this year -11% 5/11/23).

I have been measuring its 7-day average to avoid daily whipsaws.

Open Table has resumed this metric. Its data indicate that during March and early April it stabilized at roughly unchanged, but in the next 5 weeks declined significantly. After whipsawing sharply for 2 weeks due to Mothers’ Day scheduling, it resumed its slightly negative trend one week ago.

Consumer spending

• Johnson Redbook up +1.2% YoY (high 15.8% in July 2022; low 1.1% April 21, 2023) United States Redbook Index - 2023 Data - 2005-2022 Historical - 2024 Forecast .

The Redbook index remained positive almost without exception since the beginning of 2021 until October. This week was the lowest YoY comparison in 2.5 years. The new link I have added above goes to a 5-year graph to best show the comparison.

I recently downgraded this metric to neutral. The 4-week average is now about 1.5%

Transport

Railroads (from the AAR )

• Carloads +3.5% YoY
• Intermodal units down -11.6% YoY
• Total loads down -4.8% YoY.

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

Shipping transport

• Harpex up +2 to 1240 (1056- 4586) https://harpex.harperpetersen.com/harpex
• Baltic Dry Index down -278 to 937 (530-3369) (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. In the past several months, comparisons have hovered near the zero line, varying between neutral and negative. This week they were neutral again.

Harpex increased to near record highs again early in 2022, but has since backed off all the way to new lows. BDI traced a similar trajectory, before rebounding sharply in the past few weeks, and remains 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 )

• Up +0.5% w/w
• Down -1.9% YoY (worst -10.0% Dec 2, 2022).

Since the end of March 2021, against terrible comparisons, this metric had been positive, typically running at a double digits higher YoY percentage growth. This past spring, after almost continuous deterioration, it turned negative, and has remained so. The YoY comparisons have improved considerably in the past few weeks. For several months it improved above -5.0% YoY, turning neutral, but then reverted to negative again. In the past four weeks it has improved again.

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 “Recession Warning” which began at the end of November for this year remains, as all three of my primary systems remain consistent with a near-term recession.

There were no material changes this week. All three timeframes remain negative. Among the important bright spots are corporate earnings, which may be bottoming, and stock prices, which have put in several new 6+ month highs.

The May jobs report on Friday was particularly bifurcated. The strong Establishment survey readings got most of the headlines, but the Household Survey was pre-recessionary. It is also interesting that restaurant reservations, among the first things to be cut during the pandemic, and a very easy item for households to cut back spending on, has continued to drift downward. Redbook also drifted back down to just above 1% YoY.

We continue to drift, more or less just above recession in the aggregate.

For further details see:

Weekly Indicators: Strong And Weak Sectors, Together Just Drifting