Trade The Journey

Trade The Journey

PCE, GDP, and New All-time Highs!

Good afternoon to all my fellow traders, I trust you’ve all had an enjoyable week and are gearing up for the upcoming week, which promises a series of job data reports, climaxing with the employment situation report on Friday. The week just gone by threw us some curveballs as the economic indicators fell short of expectations, signaling a slower-than-anticipated decline in inflation and a slight dip in economic growth.

In response, yields pulled back from their recent highs, ending on a low note. The two-year yield, which started the year at 4.133%, reversed course as January’s data revealed a gradual uptick in inflation. It’s worth noting that the two-year yield is closely tied to monetary policy expectations. Initially, the market had braced for six rate cuts in 2024, but recent shifts have adjusted those expectations down to three cuts.

Diving into the nuances between the CPI and PCE, it’s crucial to understand their differing emphases and weightings. The CPI leans more towards goods, whereas the PCE places greater emphasis on services, including financial, educational, and healthcare services. The CPI captures direct out-of-pocket expenses for consumers, while the PCE offers a broader view of consumption across the economy.

CPI Component Weights:                                          

  • Housing: 42.2%
  • Food: 13.4%
  • Energy: 8.3%
  • Healthcare: 8.1%
  • Education: 6.3%
  • Transportation: 15.6%
  • Other: 6.1%

PCE Component Weights:

  • Housing: 24.3%
  • Food: 12.4%
  • Energy: 3.9%
  • Healthcare: 21.4%
  • Education: 3.2%
  • Transportation: 9.6%
  • Other: 25.2%

The Federal Reserve’s preferred inflation measure, the PCE, is analyzed further below. On the topic of yields, the two-year yield encountered resistance at 4.687% before it dialed back this week to 4.536%. The ten-year yield also saw a decrease from its recent peak of 4.3% down to 4.19%, igniting a rally in the Russell 2000, indicative of risk sentiment in the market.

The long-end thirty-year yield saw a minor pullback compared to the shorter end, finishing the week at 4.333%. Statements from Fed officials mirrored Chairman Powell’s stance of staying data-dependent, awaiting clear signs that inflation is aligning with the Federal Reserve’s goals. Similarly, the European Central Bank’s monetary policy strategy mirrored the Fed’s approach.

As the dollar weakened, commodities saw an uptick by the week’s end. Gold surpassed its 50-day simple moving average, closing at $2095, while the dollar fell below the $104 mark. Crude oil climbed to $79.97, having hovered around the $77 benchmark for most of the week. The anticipation is that OPEC+ will prolong its production reductions amid continued assaults on Red Sea shipping routes, impacting crude availability.

Globally, economic conditions are mixed, with Europe’s economy contracting, China seeking to boost growth, and Japan increasingly vocal about altering its easy monetary policy. In the Eurozone, credit to businesses and households fell as the economic sentiment indicator slightly declined. Sentiment waned among manufacturers, service providers, retailers, and builders but marginally improved for consumers, alongside a rise in consumer inflation expectations.

China disclosed its manufacturing data via the National Bureau of Statistics and Caixin, with the NBS focusing on large and state-owned enterprises as a gauge of government policy effectiveness, and the Caixin index highlighting the activity in small and medium-sized private sector enterprises. The NBS manufacturing PMI dipped to 49.1, below the 49.3 prediction, while the NBS non-manufacturing PMI climbed to 51.4, surpassing the 50.8 forecast. The Caixin manufacturing PMI rose to 50.9, meeting expectations. Amid a struggling Chinese stock market, Japan’s market is reaching new heights. After a 2.9% decline in December, Japan’s retail sector has rebounded.

Over the past month, Japan’s inflation rate remained stable, with the annual rate decreasing from 2.6% to 2.2%. The Bank of Japan is contemplating moving away from its loose monetary stance, evidenced by the yen’s appreciation and a 1.5 basis point increase in the ten-year yield to 0.710%. A shift in the Bank of Japan’s monetary policy could introduce volatility into global bond markets as investors unwind positions and gravitate back to Japanese bonds.

Upcoming Week:

  • Tuesday: Factory Orders, ISM Non-manufacturing PMI
  • Wednesday: ADP Employment change, JOLTS, Wholesale inventories, Beige Book, MBA Index
  • Thursday: Initial claims, productivity report, trade balance, and consumer credit
  • Friday: Employment situation report

Economic Insights

This past week, the housing market saw limited data. January witnessed a 1.5% rise in new home sales, marking a 1.8% increase from the previous year’s figures. With the sales pace as it stands, the market has an 8.3-month backlog of new homes. Median and average sales prices stood at $420,700 and $534,300 respectively. New home sales haven’t reached pre-pandemic peaks, largely due to the Federal Reserve maintaining elevated interest rates longer than markets predicted.

Sales performance across different price segments showed variation, with notable increases in the $300,000 to $399,999 and $400,000 to $499,999 brackets. The period also saw fluctuations in sales based on construction status, with a significant drop in sales for yet-to-begin constructions and a surge in sales for those under construction. The inventory of homes for sale at the period’s end nearly matched December’s figures.

Mortgage application data from the MBA weekly index indicated a 5.6% decrease from the last week. The refinance and purchase indexes went down by 7% and 5% respectively. Despite a general slowdown, new home applications surged by 19%, buoyed by a lag in existing inventory. The 30-year fixed rate for conforming loans dropped slightly to 7.04%, while the jumbo loan rate increased to 7.20%. The national median mortgage payment rose to $2,134 in January.

Construction (Spending Report) expenditure dipped by 0.2% from December, with a slight 0.1% increase in private construction spending. Residential spending edged up by 0.2%, while nonresidential fell by 0.1%. Single-family construction spending increased, whereas multifamily construction spending decreased. Annually, spending on single-family and multifamily constructions grew by 12.5% and 7.9%, respectively.

Public construction expenditure declined by 0.9%, with educational and highway spending dropping by 0.7% and 2.1%, respectively. Meanwhile, commercial construction spending decreased by 3.1%.

Consumer confidence dipped as reflected in both the Conference Board and University of Michigan final readings, with concerns about inflation, the job market, and political climate prevailing. Big-ticket item purchase plans decreased amidst slight upticks in interest rate hike expectations. Financial outlooks remained stable or worsened slightly, with recession expectations marginally increasing.

The University of Michigan’s Consumer Sentiment Index – Final reading for February fell to 76.9 from 78.8, despite being higher than previous months. Both the current conditions and future expectations indices saw reductions from initial estimates. Inflation expectations for the year ahead and the next five years remained steady.

Q4 GDP’s second estimate was adjusted down from 3.3% to 3.2%, with a downward revision in private inventory investment. Conversely, the GDP deflator was revised up slightly from 1.5% to 1.6%. Upward revisions were noted in personal consumption, domestic investment, exports, real final sales, and government expenditure. The PCE price index saw a minor increase from 1.7% to 1.8%, a significant drop from the previous quarter’s 2.6% rise.

Market Anticipation and PCE Release

Throughout the week, the market’s focus was keenly on the awaited PCE report following a higher-than-expected CPI announcement. The PCE price index experienced a 0.3% uptick, with the Core PCE price index increasing by 0.4%, aligning with predictions. Service prices saw a 0.6% rise, contrasting with a 0.2% decrease in goods prices. Prices for durable goods climbed by 0.2%, marking a shift after months of decline.

Prices for nondurable goods continued their downward trajectory, decreasing by 0.4%. Household consumption on services increased by 0.6%, showing movement after a period of stagnation. Prices in transportation services remained stable, whereas recreation services saw a decline. Over the last year, increases of 2.4% and 2.8% were recorded for the PCE price index and the core PCE price index, respectively, both showing a decrease from the prior month. A significant development in the PCE was a 1% increase in personal income, with disposable personal income and PCE rising by 0.3% and 0.2%, respectively.

The personal savings rate, measured as a percentage of disposable personal income, continued its downward trend, dropping to 3.8%, which is a decrease of a full percentage point from June.

While service spending and pricing trends continue, albeit at a reduced pace, manufacturing is on a decline. The forthcoming Monday will bring the ISM non-manufacturing report, following the recent ISM manufacturing report release last Friday.

The ISM manufacturing index, contracting for the 16th straight month, registered at 47.8%, down 1.3 percentage points from January. An index above 49.2 signals overall economic expansion, and above 50 indicates manufacturing sector growth. A reading over 47.8 typically correlates with a 1.5% real GDP change. Among the major manufacturing industries, fabricated metal products, chemical products, and transportation equipment exhibited growth.

The Manufacturing PMI slightly exceeded the twelve-month average of 47.2. New orders dipped into contraction at 49.2, though demand shows signs of improvement. Production also fell into contraction at 48.4, with manufacturers maintaining stable production levels.

Employment decreased to 45.9, reflecting a divide among employers between hiring and layoffs. The transportation sector saw employment expansion, despite some reporting a reduction in workforce, attributing 50% of reduction activities to layoffs. Supplier deliveries slightly increased to 50.1, while inventories decreased to 45.3, indicating a willingness to invest in inventory. An area to monitor is the potential for supply chains to align with growing demand, typically leading to an expansion in manufacturing inventories.

Customer inventories increased to 45.8, with customer stock levels remaining low but showing improvement. The Prices index dropped to 52.5 as raw material prices slightly rose. Steel, plastics, cement, and aluminum were key contributors to the raw material price increase. Historically, a Prices Index above 52.8 over time aligns with a rise in the BLS Producer Price Index for Intermediate Materials.

The backlog of orders index increased by 1.6 percentage points to 46.3%, remaining in contraction as both new orders and production declined. Exports saw a 6.4 percentage point increase to 51.6, and imports rose by 2.9 percentage points to 53.

Durable Goods witnessed a second consecutive monthly decline, with a significant drop in January. Orders for manufactured durable goods fell by 6.1%. Orders and shipments for computers and related products surged, likely benefiting from the AI craze. Manufacturing with unfilled orders saw an 8.2% decrease in new orders. Excluding transportation, new orders decreased by 0.3%. Shipments and unfilled orders fell by 0.9% and rose by 0.2%, respectively, with inventories also increasing by 0.2%.

Capital goods orders and shipments saw decreases of 19.4% and 3%, respectively. Inventories increased by 0.3%, a decrease of 0.3 percentage points from the previous month, while unfilled orders significantly dropped from 2.5% to 0.3%. Unfilled orders and total inventories remained stable across most sectors compared to the previous month.

This week also saw the release of the Advance International Trade in Goods, alongside wholesale and retail inventories reports. The trade deficit widened by 2.6% from December. Wholesale inventories dipped by 0.1%, marking a 2.3% decline over the year. Durable goods inventories increased by 0.4%, while nondurable goods inventories fell by 0.9%. Retail inventories rose by 0.5%, showing a 5.1% annual increase.

Initial Claims increased by 13,000 this week to 215,000, exceeding the anticipated 206,000. Continuing claims also rose, adding 45,000 to reach 1.905 million. The four-week moving average of initial claims decreased by three thousand to 213,000.

Technical Story:

Cash Flow Management Reflections:

This past week, unexpected expenses nearly depleted my savings, pushing me towards rebuilding my savings while addressing credit card debt. My savings have dwindled from $5,000 to $2,234 in just two weeks.

The rapidity with which unforeseen events can arise continues to astonish me. As Les Brown famously said, “Money isn’t everything but try living without it,” a sentiment I’m increasingly relating to. Beyond aspiring for multimillionaire status, achieving true financial freedom has become a growing goal. I’m learning the importance of maintaining a flexible budget to accommodate the unpredictable, as uncertainty remains the only certainty. In the coming week, I aim to further reduce my expenses.

Grade: C+

Reason: Dealt with uncertainty well.

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