My usual note: I look at the high frequency weekly indicators because while they can be very noisy, they provide a good Now-cast of the economy. The indicators will confirm a trend or indicate a switch in trend well before monthly and quarterly reports.
I have identified the overly strong US dollar as the primary culprit behind the shallow industrial recession, so let’s start there:
Trade-weighted US Dollar
I am going to track the broad trade-weighted US dollar at least temporarily. The US dollar appreciated from a low of 101.67 last July 1 to a high of 117.92 on March 13, an increase of 16% in less than 9 months! Since then, the US dollar has retreated by -3.6%. This only takes us back to mid-February, when US industrial production was already getting killed. Last October, just before the November industrial peak, the US dollar was weighted at 106, so we have a long way to go before some sort of equilibrium is restored.
Interest rates and credit spreads
- 4.97% BAA corporate bonds up +0.15% (1-year high)
- 2.23% 10-year Treasury bonds up +0.05%
- 2.74% credit spread between corporates and Treasuries up +0.10%
30-year conventional mortgage rate from Mortgage News Daily
- 3.93%, up +0.06% w/w (low was 3.35% in December 2012)
Interest rates for BAA corporate bonds made a 50+ year low 13 weeks ago. This was not confirmed by AAA corporate bonds. After a possible once-in-a-lifetime low of 1.47% in July 2012, Treasuries rose to over 3% in late 2013, then fell through 2014 and into 2015, where they had hovered at or below 2% before yields broke out to the upside in the last two weeks. Spreads widened in recent months, a warning of near-term weakness, and had wobbled back and forth near the neutral 2.50% range before breaking decisively negative last week, and even more so this week.