Trade The Journey

Trade The Journey

Markets rise to New Highs!

Greetings to my fellow traders, I trust everyone is well and gearing up for the upcoming week. This last week saw a quiet period in terms of economic indicators and earnings announcements. Nonetheless, all eyes were on Nvidia’s earnings report, anticipated as a gauge for the AI fervor and broader market trends. Nvidia’s performance certainly lived up to expectations, but more on that shortly.

Throughout the week, several Federal Reserve officials made appearances, discussing the nuances of monetary policy and the prevailing uncertainties in both the short and long term. In particular, Fed Governor Jefferson addressed the dynamics of Monetary Policy cycles, with a special emphasis on consumer spending’s robustness. He offered insights into why spending has continued to be resilient, attributing it to habitual optimism about the future and a societal drive to match one’s peers’ economic status.

He underscored that despite a backdrop of low unemployment and layoffs, coupled with slowing inflation over the past year, there exists a viable strategy for achieving price stability without triggering the downturn typically associated with aggressive policy tightening. Selected snippets from his discourse may shed light on the Federal Reserve’s perspective regarding the future direction of monetary policy:

First, most easing cycles start because of concern about slowing economic growth. All the other easing cycles started because either there was a concern about slowing economic growth, or, in one case, because there was a concern about slowing economic growth and there were reduced inflation concerns. Excessive easing can lead to a stalling or reversal in progress in restoring price stability.

 Former Fed Chair Paul Volcker stressed this danger in a 1981 speech, when he pointed to 1967 as a year when monetary policy eased in response to concerns about slowing economic growth and reduced inflation concerns, yet inflation subsequently turned back up. Finally, another observation from reviewing past episodes is that careful easing in the July 1995 easing cycle allowed the FOMC to assess incoming data and other information to make sure that inflation was under control.

Federal Reserve Governor Lisa Cook recently addressed the theme of “Uncertainty in the Short and Long Term.” In her remarks, she highlighted the challenges expected on the path to slowing inflation, with a particular focus on the persistent issue of housing services inflation. Cook pointed out that consumers are increasingly resistant to price hikes, while labor costs are starting to stabilize, contributing to a moderation in core services inflation outside of housing.

This category encompasses a range of services including dining out, car insurance, healthcare, hotel accommodations, and air travel. Cook’s insights underline the nuanced trajectory of inflation deceleration, emphasizing the complexities involved in navigating economic stabilization amidst fluctuating consumer and labor market dynamics.

Governor Cook anticipates a further easing of inflation as improvements on the supply side and labor supply persist. However, she expresses concern over the potential cooling of labor demand. This apprehension stems from how companies might respond in terms of layoffs, which could precipitate a significant uptick in unemployment rates. The concept of the “layoff margin” refers to the critical juncture at which businesses might opt to reduce their workforce to align with diminished demand and safeguard their profit margins.

Governor Cook’s observations highlight the delicate balance between maintaining employment levels and adjusting to economic shifts, underscoring the intricate dynamics at play in the labor market’s response to evolving economic conditions.There are two risks, the possibility of easing policy too soon and letting inflation stay persistently high versus easing policy too late and causing unnecessary harm to the economy.

In his presentation titled “What’s the Rush?”, Federal Reserve Governor Waller shed light on the current state of inflation control, the gradually cooling job market, and the strong yet stabilizing real GDP. He articulated a stance of no immediate need to lower interest rates, a position reinforced by recent data.

Waller has been monitoring job vacancies over the past two years as a key metric for labor demand, alongside robust spending, wage and compensation trends, and signs of a loosening labor market. Notably, goods account for 25% of the core CPI, housing costs for 45%, and the remaining 30% covers services excluding housing.

Governor Waller mentioned the necessity of observing multiple inflation reports to determine if the recent CPI increase was merely a hiccup or indicative of a deeper issue. Historically, significant rate reductions have followed economic shocks that either led to or threatened recession, often suggesting that previous policies may have been overly stringent.

Bond yields have reacted to unexpected inflation and economic data, as well as Federal Reserve communications, indicating no rush to cut rates. The Fed Minutes highlighted the economy’s resilience, a strong job market, and diminishing inflation. Despite robust consumer spending, lower to middle-income groups feel pressured, possibly reducing their consumption levels.

There’s a rise in delinquency rates for certain consumer loans, amid increasing credit use and the popularity of buy-now-pay-later options, particularly for credit cards and auto loans. The current monetary policy is expected to exert pressure on economic activities and inflation as markets for products and labor reach equilibrium. Credit remains accessible to municipalities, households, and businesses.

Commercial real estate prices in the multifamily and office sectors have seen a downturn, and loan conditions for small businesses have tightened. Potential inflation risks include unexpectedly strong demand, overly lenient financial conditions, supply chain disruptions, wage increases, or a surge in goods prices. Conversely, risks to inflation and economic activity could stem from a significant demand reduction due to geopolitical concerns, diminished growth abroad, or a sharper than anticipated slowdown in household conditions, or if rates stay elevated too long.

The Fed has maintained the current rate, with shifting probabilities for a rate cut, now seen as a 52% chance in June for a twenty-five basis point reduction. Bond yields have been stable, with the ten-year yield briefly surpassing 4.3% but closing the week at 4.26%. This week could bring the necessary data to break out of this range.

The dollar has pulled back from its peak of $104.972 to $103.961, still above its 200-day SMA. The VIX index has dropped to 13.75 from 15, and the MOVE index, which tracks bond market volatility, has steadied after a recent spike, indicating a period of consolidation. Meanwhile, volatility in gold and crude oil markets increased, with gold ending the week above its 50-day SMA at $2045, and copper prices climbing as the dollar weakened. Crude oil futures hover near $76.49, exhibiting a state of backwardation, a scenario typically driven by immediate supply concerns or anticipations of increased supply or storage costs.

Globally, China reduced its five-year prime rate by twenty-five basis points to 3.95% to support the struggling real estate market, a pivotal reference for most mortgages. It previously cut the one-year prime rate and reserve requirement ratio, aiming to assist property developers amidst a debt-reliant market crisis.

In the Eurozone, construction output has improved, consumer confidence slightly increased, though remains pessimistic, and the manufacturing PMI continues its downward trend, marking eleven months of decline. Conversely, the services PMI has moved into expansion, signaling a gradual recovery, matched by a slight decrease in both CPI and core CPI. The ECB’s monetary policy approach remains data-dependent, mirroring the Fed’s strategy.

Economic data and earnings releases have been limited, but Nvidia’s earnings report stands out as a significant market event, awaited with both anticipation and concern.

NVIDIA Corporation reported a record-breaking Q4 for the fiscal year 2024, showcasing significant growth with revenues hitting $22.1 billion for the quarter, a 265% increase year-on-year, and annual revenues reaching $60.9 billion, doubling from the previous year. This growth was largely driven by the company’s data center segment, which soared to $47.5 billion for the year, attributed to the widespread adoption of NVIDIA’s accelerated computing and AI technologies, particularly the Hopper GPU computing platform and InfiniBand networking.

 The gaming segment also displayed strong performance, contributing $2.87 billion in Q4 revenue, up 56% year-on-year, fueled by robust demand for NVIDIA GeForce RTX GPUs. Meanwhile, the automotive segment crossed the $1 billion mark for the first time, reflecting a growing adoption of the NVIDIA DRIVE platform.

Looking ahead, NVIDIA anticipates revenues of $24 billion for Q1 fiscal 2025, expecting growth in data center and professional visualization segments, balanced by a seasonal dip in gaming. The company also highlighted supply chain improvements but noted that demand continues to outstrip supply, especially for new and upcoming products. Despite challenges in the Chinese market due to U.S. government export controls, NVIDIA is adapting by shipping alternative products that comply with regulations.

Upcoming Week:

  • Monday: New Home Sales
  • Tuesday: Durable Goods, Consumer Confidence
  • Wednesday: MBA Weekly Index, GDP- Second Estimate, Shiller Price Index, Wholesale Inventories
  • Thursday: Initial Claims, PCE, Pending Home Sales, Chicago PMI
  • Friday: University of Michigan – Consumer Sentiment (Final), ISM Manufacturing, Construction Spending

The Leading Economic Index (LEI) experienced a decrease, moving to 0.4% from a previous 0.2% in December. This decline was primarily attributed to the interest rate spread and a reduction in the average weekly manufacturing hours. Other factors contributing to the LEI’s dip included a downward adjustment in average consumer expectations for business confidence, a decrease in building permits, and a lower ISM index of new orders. Despite these declines, the notable improvement observed over the past six months in business confidence, permits, and new orders highlights a positive trend.

The Coincident Economic Index (CEI), on the other hand, saw a slight increase of 0.2%. Components of the CEI such as payroll employment, personal income less transfer payments, manufacturing and trade sales, and industrial production form its basis, with industrial production being the only element not contributing to the rise. Meanwhile, the Lagging Economic Index (LAG) recorded a 0.4% increase.

In terms of unemployment, initial claims surpassed expectations, dropping by 12,000 to a total of 201,000. Continuing claims also saw a reduction to 1.862 million. Although the four-week moving average has slightly increased from the 200,000 level noted in late January, the job market’s resilience reinforces the economy’s underlying strength, emphasizing the importance of forthcoming jobs and inflation reports.

Existing home sales witnessed a 3.1% increase in January, despite a 1.7% year-over-year decline. The median price for existing home sales has continued to climb over several months, reaching $379,100, with a three-month inventory at the current sales rate. The percentage of cash sales among existing home sales also rose by 3% to 32%.

Mortgage applications experienced a 10.6% decrease from the previous week, as reported by the Mortgage Bankers Association. Both the refinance index and purchase index saw declines of 11% and 6%, respectively, with the refinance share of total applications dropping significantly. The average rate for a 30-year fixed-rate conforming loan increased by nineteen basis points to 7.06%, and the rate for a 30-year fixed-rate jumbo loan rose by sixteen basis points to 7.16%. The total loans in forbearance slightly decreased by one basis point, amidst rising delinquency rates in consumer and auto loans.

Technical Story

Cash Flow Management Review:

This past week, I navigated a cash flow dilemma necessitated by an unexpected emergency involving my dog’s health, which incurred costs exceeding seven hundred dollars. A refund from a web hosting service provided some financial relief, replenishing a portion of the funds withdrawn from my savings. Additional expenses prompted a temporary halt on significant purchases. For the first time in many years, I decided against a planned trip to visit my sister, saving over a thousand dollars in expenses. In the upcoming weeks, I aim to rejuvenate my savings while diligently reducing my credit card debt.


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