SMU Analysis: Key Market Indicators through November

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 Nov. 29, 2019.

Present Situation

Our view of the November data is that the number of indicators we regard as strong has been declining throughout 2019, but the number we regard as weak has increased only slightly. In other words, the transition has been from strong to normal. Only 6 of 36 were weak in November, while 14 were positive and 16 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 November there was a net increase of one negative and one normal and a decrease of two positives since our October update. The individual changes that occurred in November were that the price of rebar and construction employment deteriorated from positive to normal. Demand for commercial and industrial loans and the price of coking coal deteriorated from normal to negative. The net imports of sheet products improved from negative 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 Nov. 26, the value was positive 0.15, which was a deterioration from 0.21 percent a month ago (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 November.

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 November data but data that was released in November for previous months.)

Trends took another hit in November with the number of negatives increasing from 19 in October to 20, and the number of positives declining from 17 to 15. One indicator, the price of pig iron, was unchanged in November. Figure 3 shows the trend of the trends and the pre-recession situation at the far left of the chart. Eight indicators reversed direction in the November data and one transitioned from negative to unchanged. The yield spread, demand for commercial and industrial loans, the price of coking coal and the industrial production index reversed direction from positive to negative. The price of shredded scrap, net sheet imports and the price of HR coil reversed direction from negative to positive. The price of pig iron FOB Brazil was unchanged in November.

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. As a single data point, the Current Sentiment reading of +47 is up more than 20 points from early November. While showing more optimism about current market conditions, the reading is still 18 points below the level at this time last year. On a 3MMA basis, the mid-November value was positive 37.8, down from 41.3 in mid-November and from a peak of 73.8 in February 2018.

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 November 2008. The trends analysis shows that the steel market was going over a cliff at that time, but the actual values of the indicators were still good with only 23 percent registering as historically negative. As of November, there is currently a definite deterioration in the direction of trends that has been remorseless since the beginning of 2018. The number of indicators trending positive is now the lowest since we began this analysis in January 2010. Our view of the current situation is still quite good though the number of indicators having a historically high value has deteriorated since the end of 2018.

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.