Weekly Indicators: Which Trend Will Give Way First, Commodity Prices Or Interest Rates?

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

July data included new home sales, which increased to a new 2 year high, as prices were also down YoY; vs. existing home sales, which declined back close to a new post-pandemic low, which prices are up YoY. Durable goods orders declined sharply and capital goods orders declined even more sharply. Consumer sentiment as measured by the U. Of Michigan declined slightly from 2 year highs.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 6.03%, down -0.14% w/w (1-yr range: 5.13-6.59)
• 10-year Treasury bonds 4.19%, down -0.11% w/w (2.60-4.34) (new 10 year high intraweek)
• Credit spread 1.86%, down -0.01 w/w (1.76-2.42)

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

Yield curve

• 10 year minus 2 year: -0.85%, up +.16% w/w (-1.06 - 1.59)
• 10 year minus 3 month: -1.19%, unchanged w/w (-1.69 - 2.04)
• 2 year minus Fed funds: -0.25%, down -0.14% 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)

• 7.39%, up +0.02% w/w (5.05-7.39) (new 20+ year high)

With the new highs in interest rates in the past two weeks, their rating has reversed from neutral to (very!) negative. Meanwhile the short end of the interest rate curve turned flat enough to revert to neutral from negative.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps down -5% to 142 (137-260) (SA) (nearly a 28 year low)
• Purchase apps 4 wk avg. down -4 to 149 (SA) (268 high 3/26/22, low 149 8/25/23)
• Purchase apps YoY -30% (NSA)
• Purchase apps YoY 4 wk avg. -26% (NSA)
• Refi apps -3% w/w (SA)
• Refi apps YoY -35% (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 +7.4% YoY (7.4 - 12.1) (tied for one year low)

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

Mortgage rates, like bond yields, have reversed to new highs. Importantly, purchase mortgage applications which had bounced around close to 10 year lows in a fairly narrow range of between 155 and 180 in the 9+ months since last October, have sunk to close to new long term lows.

Real estate loans turned ever more positive during 2022. This was helped by inflation in house prices; the YoY peak was in December 2022 at 11.9%. As of four weeks ago this indicator declined by 1/3rd from its peak YoY% change, and so became the last real estate indicator to decline from positive to neutral.

Money supply

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

• M1 m/m down -0.3%, YoY Real M1 down -13.7%
• M2 m/m up +0.1%, YoY Real M2 down -7.0%

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

Corporate profits ( Q2 84% actual + 16% estimated from I/B/E/S via FactSet at p. 29) (no report until 9/1/2023)

• Q2 84% actual + 16% estimated up +1.21 to 53.52, up +0.4% 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. The cumulative decline since the recent Q2 peak through Q2 2023 is -5.6%. This changes the rating from negative to neutral.

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

• Financial Conditions Index down -.01 (looser) to -0.40 (-0.03 - -0.62)
• Adjusted Index (removing background economic conditions) down -.01 (looser) to -0.36 (+0.16 - -0.59)
• Leverage subindex down -0.16 (less tight) to +0.54 (+1.61 - -0.35)

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 also 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 +5 w/w to 182, -82 m/m (175 on 2/10/23- 319 on 11/4/22)
• St. Louis Fed Financial Stress Index: up +0.0077 to -0.6711 (1.5746 3/23/23 - -.8325 9/16/22) St. Louis Fed Financial Stress Index
• BCIp from Georg Vrba: down -2.9 to 50.3 as of 8/10/23 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 earlier this year, and is below its recession-signaling threshold, although it has improved in the past several months, and indeed is now above its recession warning signal level. But IM has continued its recession warning.

Trade weighted US$

• Up +0.76 to 120.94 w/w, down -1.6% YoY (last week) (broad) (118.06 - 128.31) (Graph at Nominal Broad U.S. Dollar Index
• Up +0.70 to 104.13 w/w, down -4.3% 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 in the past two months, both turned positive.

Commodity prices

Bloomberg Commodity Index

• Up. +1.24 to 105.48 (97.95 5/31/23-136.61)
• Down -15.4% YoY (Best: +52.3%; worst -25.3%)

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

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

• 141.08, up +2.30 w/w (141.65 5/22/23-179.68)
• Down -9.7% YoY (Best +69.0% May 7, 2022)

During the Boom of 2021, commodity prices soared, and total commodities were very positive. Both sets of commodities are back in the bottom 1/3rd of their 12 month range, so both are negative. (Note, importantly, that because this particular decline in commodity prices may reflect increased supply rather than destruction of demand, the message of a nearly -10% YoY decline may be very different from usual.

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

• Up +0.8% to 4405.71

Stocks made several new 3 month highs in the past three months, and now 12+ month highs, so this indicator is very positive.

Regional Fed New Orders Indexes

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

• Empire State down -23.2 to -19.9
• Philly up +27.9 to +12
• *Richmond up +9 to -11
• *Kansas City up +17 -3
• Dallas down -1.5 to -18.1
• Month-over-month rolling average: up +5 to -8

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 remain negative now, although they have become much “less negative” in the past month.

Employment metrics

Initial jobless claims

• 230,000, -10,000 w/w
• 4-week average 236,750, up +2,250 w/w

(Graph at St. Louis FRED)

In spring, revisions caused major changes in this index. The 4 week average has been higher YoY for 4+ months, but not at levels which have in the past triggered a “recession warning.”

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

• Up +1 to 102 w/w
• Down -4.7% 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 months it improved slightly.

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

• $235.4 B for the last 20 reporting days this year vs. $222.7 B one year ago, +$12.7 B or +5.7%

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 back positive, and it has been near its best level in 12 months for the last several months.

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

• Oil down -$1.34 to $80.04 w/w, down -3.6% YoY ($66.74 - $98.62)
• Gas prices up +$0.02 to $3.87 w/w, down -$0.01 YoY
• Usage 4-week average up +1.3% YoY

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

Despite recent increases, gas prices remain in the middle 1/3rd of their 3 year range, and so are neutral. Oil is also in the middle of its 3 year range, and so it remains neutral.

Mileage driven has remained positive in the past few months, but generally less so as the weeks progressed.

Note: given this measure’s extreme volatility in the past 24 months, I believe the best measure is against their 3 year average. Measuring by 1 year, both have turned positive.

Bank lending rates

• 0.329 TED spread w/w (0.02 -.685) - Discontinued
• 5.43 LIBOR unchanged w/w (0.10130- 5.28) (graph at link)

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 in May. As of a month ago, it appears to have been discontinued, although I am searching for another source.

LIBOR has been increasing consistently well into its negative range.

Coincident indicators

St. Louis FRED Weekly Economic Index

• Up +0.72 to 1.84 w/w (Low 0.66 Dec 10, 2022 - high 3.27 Aug 6, 2022)

After a very positive 2021, this measure declined to less than half its best YoY level, thus changing to neutral. It has remained in that range all this year so far.

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

• August 10 seven day average -6% YoY (Worst this year -11% 5/11/23)

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

Open Table’s data indicate that by early April reservations had stabilized at slightly below zero YoY, and with one 2 week exception, they have remained generally in the range of -2% - -5% since. This week’s was the worst, bar one week, in the past several years.

Consumer spending

• Johnson Redbook up +2.9% YoY (high 15.8% in July 2022; low -0.4% July 13, 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 last October. The new link I have added above goes to a 5 year graph to best show the comparison. After 3 weeks of negative readings, the 4 week average has returned to positive for the past 2 weeks, at +0.9%

Transport

Railroads (from the AAR)

• Carloads down -0.6% YoY
• Intermodal units down -4.8% YoY
• Total loads down -2.7% YoY

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

Shipping transport

• Harpex down -26 to 1072 (1056- 4586)
• Baltic Dry Index down -157 to 1080 (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 five months. In the past several months, comparisons have hovered near the zero line, varying between neutral and negative. This week they were negative 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 earlier this year, but 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 +1.1% w/w
• Up +2.2% 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. Then it improved to positive for about two months, before turning negative again for a short time. This week it is positive again.

Consumer inflation by Truflation (Independent, economic & financial data in real time on-chain)

• Up +0.16% to+2.67% YoY (High 9.98% 8/19/22 - Low 2.11% 7/14/23)

Thanks to a commenter for bringing this indicator to my attention. This is a daily update to inflation, similar to the “billion prices project” of the last decade (which required a subscription). I have not added this to my list below of the status of coincident or leading indicators, but needless to say it is an up-to-the-moment reading on this very important indicator.

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:

There were only two changes this week, one of which - Redbook consumer spending - definitively (for now!) reversed that indicator’s yearlong fade. On the other hand, interest rates, especially mortgage rates, are even worse than they have been recently.

In general, while the long leading indicators have been getting even more negative, the short leading indicators have continued to bounce, while the coincident indicators have been somewhat in confit, as restaurant reservations, one of the easiest things for consumers to cut, have faded even further.

Whether due to post-pandemic loosening of supply chain kinks, or a decided cooling of demand by China, or a combination of both, we appear to be witnessing (perhaps) a once in a century very sharp decline in commodity prices that has not been caused by a big decline in US demand, but rather a boon to the cost of US producers. The combination of the two trends discussed in this summary will not continue that long.