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The latest smoothed annualized growth rate of the ECRI Weekly Leading Indicator in the week ended 22 January improved from -7.6% to -6.5% published last week – the 23rd consecutive week of contraction since August last year.
Sources: Dismal Scientist; Plexus Asset Management. But where is it heading? In previous articles I argued that the smoothed annualized growth rate of the WLI bottomed at -10.1% (officially adjusted from 10.2%) in the week ended October 23 last year. In light of the significant movements in investment markets over the past week, I had a look at what growth rate can be expected of this important number that will be published at the end of this week for the period ended last Friday. To get to my forecast I use different variables that seem to explain the growth in the ECRI WLI fairly accurately. (Please note that I do not have knowledge of the proprietary ECRI WLI constituents and simulate the Index using my own research.) The smoothed annualized growth rate of S&P 500 Index remains my best indicator of the ECRI WLI growth rate.
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management. The contraction in the S&P 500‘s smoothed annualized growth rate ended in the second week of January after contracting for 22 weeks in a row. Over the past week the growth accelerated to 2.9% from 0.4% a week ago. It is evident that the improved growth rate of the S&P 500 is likely to have exerted upward pressure on the smoothed annualized growth rate of the WLI over the past week.
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management. The contraction in the smoothed annualized growth rate of the yield on the U.S. 10-year Government bond index recorded its 34th week of contraction and remains close to its worst levels since January 2008.at -65%. It is unlikely that U.S. bond exerted downside pressure on the WLI growth last week.
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management. Last week also marked the 24th consecutive week of declines in the smoothed growth rate of the Economist Metal Price Index. After slumping to -35% at the end of December last year the rate of contraction eased to -22.4%. This easing probably eased the contraction in the growth rate of the WLI last week.
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.
Sources: Dismal Scientist; Plexus Asset Management. Another indicator that I value is the growth rate of initial jobless claims. Contrary to other factors that forced the contraction in the growth rate of the WLI over the past 25 weeks plus, the growth rate of jobless claims indicates contraction for 35 consecutive weeks. Assuming that jobless claims were unchanged from the previous week’s 377 000 the growth rate declined to ‑14.4% from -15.1%. Initial jobless claims needed to fall to 365 000 to continue to exhibit a faster decline in growth.
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management. I have also identified another factor that may have a major bearing on the WLI. The smoothed annualized growth rate of the yield spread between the 30-year government bond and Moody’s Baa Corporate Bond is highly correlated to the growth rate of the WLI smoothed annualized growth rate. (Please note the reverse order of the axis of the WLI in the graph below.)
Sources: Dismal Scientist; FRED; Plexus Asset Management. Last week the yield spread entered its 24th consecutive week of positive growth but eased to 38.9% from 42.5% the previous week and is significantly below the 61.2% level reached in the first week of December last year. The lower growth rate of the yield spread is likely to alleviate further downside pressure on the WLI growth rate last week.
Sources: Dismal Scientist; FRED; Plexus Asset Management. Another factor that some columnists advocate may influence the WLI is the MBA Mortgage Application Survey Purchase Index. Although there is some quantitative evidence the correlation between the smoothed annualized growth rate of the Purchase Index and the WLI, it is not very helpful in forecasting the WLI, though.
Sources: Dismal Scientist; Plexus Asset Management. M2 money supply growth is also cited as an important factor in the WLI. To my mind the Fed’s intervention since 2008 makes it an unreliable factor in forecasting the growth rate of the WLI. On balance, I therefore expect last week’s smoothed annualized growth rate of the ECRI WLI (to be published on Friday) will have eased significantly to approximately -4.5% from -6.5% the previous week. I think the easing of the contraction in the smoothed annualized growth rate of the WLI is set to continue in coming weeks, supported by further growth in especially the S&P 500, further easing in the contraction in growth in metal prices and a further contraction in growth in initial jobless claims. The Fed’s TWIST program may depress the WLI and the growth thereof due to artificial low long bond rates. A very interesting aspect came to the fore when I delved into other factors that might influence the WLI. The smoothed annualized growth rate of the U.S. dollar/euro exchange rate tracks the WLI growth rate. In fact, it tends to lead the WLI at major bottoms.
Sources: Dismal Scientist; Plexus Asset Management. More on this topic (What's this?) East Coast Asset Management's Q4 Letter: Embracing Uncertainty (market folly, 1/26/12) ECRI WLI: Is the Rot Over? (GreenLightAdvisor Views, 10/26/11) Deutsche Bank Executives Decides to Choose Asset Management Sale (ValueWalk.com, 1/12/12)  By Prieur du Plessis, on January 18th, 2012 posted in: Economy, Investment, US  2 people had their say - chime in!
When reporting on the unfolding of the credit crisis I often referred to the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The difference between the yields is indicative of investor confidence. A rising ratio indicates bond investors are growing more confident, in other words preferring more speculative bonds over high-grade bonds. On the other hand, a declining ratio indicates investors are demanding a lower premium in yield for increased risk. That shows a waning confidence in the economy. Since hitting an all-time low in December 2008, the Index was almost back to pre-crisis levels in January this year as investors grew increasingly confident. But that was when investors started focusing on sovereigns that were starting to get into trouble. Since the start of 2011 the Index has given up more than 40% of its gains. This puts us back at levels experienced during mid-2008 – just prior to confidence falling off a cliff. Based purely on this chart, one has to conclude that confidence remains fragile.
Source: Barron’s More on this topic (What's this?) The Secrets of Bond Investing (Investment U, 2/7/12) An Important Sell Signal (Comments for thetechnicaltake, 1/29/12) Bonds – Difficult Buy These Days (Intelligent Speculator, 2/8/12)
Former Governor Eliot Spitzer talks about the type of greed that could be good for America – “long-term greed.” Visit msnbc.com for breaking news, world news, and news about the economy Source: Msn.com, January 13, 2012 (hat tip: The Big Picture). 
A long-haired and bearded Paul McCulley, former PIMCO portfolio manager and now managing director of the Global Interdependence Center, discusses coordination between U.S. monetary and fiscal policy. He says we need to accept that we are in a “liquidity trap” that requires “a whole different set of economic policies”. Part 1: Source: CNBC, January 11, 2012. Part 2: Source: CNBC, January 11, 2012.
More on this topic (What's this?) The Five Stocks You Have to Own in 2012 (Money Morning, 12/23/11) The Best Emerging Markets for 2012 – Part 2 (Wall Street Daily, 12/26/11) Chart: 2012’s Fastest Growing Nations Will Be… (Investment U, 1/8/12)
I keep a close eye on a number of indicators to alert me to the possibility of the U.S. economy falling back into recession. From the PMIs to the yield spread to an economic report diffusion index all seem to indicate that the economy is on safe ground, for the moment. One of the less conventional indicators conveying the same message is Intrade’s contract for whether or not the U.S. will enter a recession this year. As shown below (courtesy of Bespoke Investment Group), the odds have recently dropped dramatically to about 25% – “the lowest level seen since mid-2011 when the European debt malaise started intensifying..
Source: Bespoke Investment Group, January 10, 2012.
More on this topic (What's this?) U.S. Economy 2012 Forecast: Where to Find the Biggest Gainers and Avoid the Biggest Losers in Thi... (Money Morning, 12/23/11) Why the U.S. Economy Will Be Weaker Than Expected in 2012 (Money Morning, 12/1/11) Unimpressed with Current Economic Data, ECRI Still Forecasts A Recession (Kirk's Market Thoughts, 11/7/11)
This post is a guest contribution by Asha Bangalore, vice president and economist of The Northern Trust Company. The Small Business Optimism Index moved up to 93.8 during December from 92 in the prior month. The improvement is noteworthy and it is the highest since February 2011. However, the level of the index is within the range seen during the recession (see Chart 1).
Of the sub-indexes, the percentage of respondents indicating that poor sales have been problematic declined to 23% in December vs. 25% in the previous month. Further reductions of this component of the survey would point to a turnaround in business conditions.
Among other highlights of the survey, only 8.0% reported credit is harder to get, one of the lowest readings for the year (see Chart 3). Somewhat contradicting the December employment report is the fact that only 1.0% of respondents indicated that they increased employment in the last three months. Overall, the December report on small businesses records more positives than negatives.
Source: Asha Bangalore, Northern Trust – Daily Economic Commentary, January 10, 2011. |
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ECRI Leading Indicator: Turning for the better?
Roach on U.S. economy, Fed policy, China, Europe
Prieur’s Readings (Jan 30, 2012)
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