SMU Analysis: Key Market Indicators Through October

 Please refer to Table 1 for our view of the present situation and the quantitative measure of trends. Readers should regard the color codes in the present situation column as a visual summary of the current market condition. The “Trend” columns of Table 1 are also color coded to give a quick visual appreciation of the direction the market is headed. All results are the latest available as of Oct. 29, 2019.

Present Situation

Our view of the October data is that the number of indicators we regard as strong has been declining throughout 2019, but the number we regard as weak has not been increasing. In other words, the transition has been from strong to normal. Only 5 of 36 were weak in October, while 16 were positive and 15 normal. By normal we mean the current data value is in the midrange of the historical distribution.

Figure 1 shows the history of our view of the present situation data since January 2010 on a percentage basis and on the far left of the chart is the August 2008 situation immediately before the recession struck the steel business in September that year. In October, there was a net increase of one negative and a decrease of one positive since our September update. The individual changes that occurred in October were that the price of Chicago shredded and manufacturing employment transitioned from normal to negative. The net imports of long products transitioned from negative to normal and the PPI of commodities changed from positive to normal.  

We make special mention of the Treasury yield spread here because the 10-year minus two-year dipped into negative territory for three days at the end of August. Historically, a negative yield spread has been a predictor of recession within 18 months. On Oct. 28, the value was positive 0.21 percent (Figure 2). The negative duration was so short and the negativity so small that maybe we have dodged the recession prediction for now. The last time the 10/2 spread was negative was June 6, 2007.

There were no other changes in our view of the present situation in October.

Trends  

Most values in the trends columns are three-month moving averages (3MMA) to smooth out what can be very erratic monthly data. Trend changes in the individual sectors are described below together with some general comments. (Please note that in many cases this is not October data but data that was released in October for previous months.)

Trends took a hit in October with the number of negatives increasing from 15 in September to 19 and the number of positives declining from 20 to 17. One indicator that was unchanged in September became negative in October. Figure 3 shows the trend of the trends and the pre-recession situation at the far left of the chart. Seven indicators reversed direction in the October data. The Chicago Fed National Activity Index, consumer confidence, the price of iron ore, the steel buyers sentiment and net sheet imports reversed direction from positive to negative. The Broad Index value of the U.S. dollar and the price of coking coal reversed direction from negative to positive. The price of re-bar in the U.S. Midwest ex works was unchanged in September and declined in October. There were no trend reversals in the construction or manufacturing indicators.

As a reality check for this report we include here Figure 4, which is SMU’s Steel Buyers Sentiment index. Readings are developed during the twice monthly SMU market surveys. SMU Steel Buyers Sentiment is a measure of the current attitude of North American buyers and sellers of flat rolled products regarding their company’s opportunity for success in today’s market. A reading above the neutral point of zero indicates that a preponderance of buyers have a positive attitude. The index has been deteriorating since mid-February last year. The mid-October value was still positive 41.3, down from a peak of 73.8 in February 2018. This is a three-month moving average, which obscures the fact that the standalone mid-October result experienced a significant decline to the least optimistic result in nearly six and a half years. This measure is more current than the majority of the 36 indicators considered in this study, so is definitely a cause for concern.

We believe a continued examination of both the present situation and direction is a valuable tool for corporate business planning. Figures 1 and 3 both show the pre-recession situation in October 2008. The trends analysis shows that the steel market was going over a cliff, but the actual values of the indicators at that time were still good with only 23 percent registering as historically negative.

Explanation: The point of this analysis is to give both a quick visual appreciation of the market situation and a detailed description for those who want to dig deeper. It describes where we are now and the direction the market is headed and is designed to describe the situation on a specific date. The chart is stacked vertically to separate the primary indicators of the general economy, of raw material prices, of both sheet and long product market indicators, and of construction and manufacturing indicators. The indicators are classified as leading, coincident or lagging as shown in the third column.

Columns in the chart are designed to differentiate between where the market is today and the direction it is pointing. Our evaluation of the present situation is subjectively based on our opinion of the historical value of each indicator. There is nothing subjective about the trends section, which provides the latest facts available on the date of publication. It is quite possible for the present situation to be predominantly red and trends to be predominantly green or vice versa depending on the overall situation and direction of the market. The present situation is subdivided into: below the historical norm (-), (OK), and above the historical norm (+). The “Values” section of the chart is a quantitative definition of the market’s direction. In most cases, values are three-month moving averages to eliminate noise. In cases where seasonality is an issue, the evaluation of market direction is made on a year-over-year comparison to eliminate this effect. Where seasonality is not an issue, concurrent periods are compared. The date of the latest data is identified in the third values column. Values will always be current as of the date of publication. Finally, the far-right column quantifies the trend as a percentage or numerical change with color code classification to indicate positive or negative direction.