Trade The Journey

Trade The Journey

Global Market Dynamics: Inflation Trends, Manufacturing Outlook, and Consumer Sentiment Analysis

Greetings, Traders! I trust you’re all making the most of your weekend and gearing up for the upcoming week. This recent week highlighted a report on retail sales indicating a deceleration in consumer spending alongside a PPI report that unexpectedly showed an increase. Following a CPI report that revealed a climb in consumer-level inflation, there was an anticipation that inflation at the producer level might have tapered off.

The PPI report is often viewed as an early indicator of consumer inflation, though it might signal price adjustments not directly correlating with wider economic inflationary trends. The retail sales report provides a snapshot of total revenues from retail outlets. Such sales are pivotal to the GDP’s PCE component and serve as a gauge for consumer confidence.

An uptick in the PPI led to higher bond yields as it became clear to the market that the Federal Reserve has grounds to maintain elevated interest rates. The Federal Reserve has acknowledged that the journey back to its inflation target would be fraught with challenges, a prediction that is manifesting as accurate. Yet, sustaining high rates over a long stretch heightens the risk of adverse outcomes.

The Federal Reserve’s consumer expectations survey revealed that while short-term inflation expectations are anticipated to stay steady, they’re expected to escalate over time. The median inflation forecast stands at 3% for the coming year, with three-year inflation expectations increasing from 2.4% to 2.7%, and five-year expectations from 2.5% to 2.9%.

Despite stagnant household income growth expectations, anticipations for household expenditure growth saw an uptick. The household financial outlook has improved, with a greater number of consumers predicting their situation will enhance significantly or moderately. Reports of unchanged or deteriorating conditions have diminished.

There’s a consistent decline in the anticipation of higher unemployment rates. Expectations surrounding job separations, encompassing the average likelihood of job loss and voluntary departure, have risen. The chance of securing employment within three months after losing a job today has seen a decrease.

The two-year yield experienced a sharp increase from an early-month low of 4.448%, surpassing a short-term hurdle of 4.697% to reach 4.720%. The two-year treasury yield reflects influences from the Federal Reserve’s monetary policy, economic indicators, inflation, and overall market sentiment.

Moreover, the ten-year yield rallied from an early March low of 4.06% to breach a recent resistance at 4.3%, now sitting at 4.310%. The trend for the thirty-year yield has been more subdued compared to the shorter end, closing the week at 4.430%.

Currency movements, influenced by shifts in yields, exhibited a similar trend, with the dollar ascending this past week to $103.064 after a previous downturn. The dollar encountered resistance at the 50 SMA, which has proven to be a formidable barrier lately. Crude oil has advanced past a stagnant phase, closing beyond the $79.47 mark to reach $80.58.

Gold peaked at $2,202.50 before descending to $2,161.50 as yields increased. Gold, offering neither interest nor dividends and seen as a refuge during turmoil, acts as an inflation buffer and is swayed by real yields, which account for inflation to reflect the genuine borrowing cost and investment yield.

Internationally, Japan and India’s markets are exhibiting strong upward trends. Japan’s Q4 GDP growth was a modest 0.1%, under the 0.3% prediction but an improvement over the previous -0.8% revision. The annual price index rose by 3.9%, igniting discussions on altering the accommodative monetary stance. Over the last month, Japan’s PPI increased by 0.2%, with a year-over-year rise of 0.6%. Investments in foreign stocks and bonds have both expanded.

The Eurozone saw a 3.2% reduction in industrial production this month, with a 6.2% decrease over the last year. Although the ECB’s stance is influenced by data, certain officials have expressed favor towards a rate reduction in June. China’s economic challenges persist, marked by a decline in outstanding loan growth and new yuan loans. Its house price index continued its downward trajectory to -1.4%. The one-year MILF rate in China remains at 2.50%.

The Week Ahead:

Tuesday: Building Permits & Housing Starts

Wednesday: Fed Interest Rate Decision, MBA Weekly Applications Index

Thursday: Initial Claims, Philly Manufacturing, Existing Home Sales

Economic Insights

The March reading of the NFIB Small Business Optimism Index saw a decrease to 89.4%, with inflation being highlighted as a primary concern by small business proprietors. These owners typically lack the loan access, bulk pricing, and financial reserves of larger enterprises. For over two years now, the index has lingered below its 50-year norm of 98.

Concerns over labor quality have diminished as the labor market achieves greater equilibrium. The proportion of owners undertaking capital investments has fallen, with 21% indicating plans for such expenditures in the upcoming six months. There was a minor dip in inventory accumulations as deficits were noted in sectors like transport, services, construction, and manufacturing.

Trends in profitability were generally negative, driven by softer sales and material costs, contributing to reduced profit margins for some owners. Those reporting increased profits cited higher sales volumes, typical seasonal variations, and elevated sale prices. Without seasonal adjustments, 16% noted a decrease in average sale prices, whereas 37% observed an increase.

January saw no change in Overall Business Inventories, though there was a 1.3% drop in sales. Manufacturer inventories decreased by 0.1%, with sales declining by 1%. Retail inventory levels went up by 0.4%, yet sales dipped by 1.1%. Inventories held by merchant wholesalers fell by 0.3%, with sales reducing by 1.7%.

February’s Retail Sales Report revealed a 0.6% increase in sales, below expectations. Year-over-year, sales increased by 1.5%. Excluding autos and parts, sales saw a 0.3% rise, also up 1.5% annually. The biggest sales boosts were in building materials & garden equipment (2.2%), autos & parts dealers (1.6%), and electronics & appliance outlets (1.5%). The most significant drop occurred in furniture & home furnishing stores, with a 1.1% decrease. Food services & drinking spots saw a 0.4% increase.

For February, the Producer Price Index (PPI) for final demand climbed by 0.6%, a noticeable increase from January’s 0.3% and a reversal from December 2023’s slight 0.1% dip. Year-over-year, unadjusted final demand prices have ascended by 1.6%, marking the highest rise since a 1.8% increase in September 2023. The bump in February’s final demand prices primarily came from a 1.2% rise in goods, whereas services experienced a smaller 0.3% increase. Excluding food, energy, and trade services, the final demand index rose by 0.4% in February, after a 0.6% January increase, showcasing a 2.8% year-on-year elevation.

Delving deeper, the February leap in goods prices was led by a 4.4% increase in energy prices, with gasoline prices soaring by 6.8%, accounting for a third of the month’s total advance in goods prices. Service prices modestly increased by 0.3%, with services excluding trade, transport, and warehousing up by 0.5%, and transport and warehousing services by 0.9%, although trade services margins dipped by 0.3%.

Intermediate demand prices in February also saw significant shifts, indicating cost pressures in the production process before reaching consumers. Processed goods for intermediate demand surged by 1.6%, the largest since August 2023, propelled by a 6.2% increase in processed energy goods. Unprocessed goods for intermediate demand rose by 1.2%, led by a 3.6% hike in unprocessed energy materials, while services for intermediate demand marginally increased by 0.1%, with transport and warehousing services for intermediate demand up by 1.1%.

February’s Industrial production increased by 0.1%. Final product production saw a 1.4% drop in consumer goods but a 1.7% rise in business equipment. Nonindustrial supplies production went up by 0.8%, with construction output increasing by 1.9%. Material production improved by 0.5%.

Manufacturing output rose by 0.8%, with durable manufacturing up by 1% and nondurables by 0.7%. Mining output increased by 2.2%, reversing a 2.9% January decrease. Utility output fell by 7.5%, offsetting a similar January rise. Capacity utilization remained steady, though manufacturing and mining saw increases, contrary to utilities.

The Empire State Manufacturing Survey for March 2024 continued to depict a downturn in New York State’s manufacturing sector. The general business conditions index plummeted by nineteen points to -20.9, reflecting a significant activity slowdown due to a marked decline in demand, new orders, and shipments. Additionally, unfilled orders continued to drop, inventories were reduced, and delivery times remained stable.

Labor market conditions worsened, as shown by decreases in employment and hours worked. While the escalation in input prices softened slightly, selling price hikes stayed consistent. Despite present difficulties, firms maintained a guarded optimism for future improvement, though with limited enthusiasm.

February’s U.S. import prices increased by 0.3 percent, decelerating from January’s 0.8 percent rise, as noted by the Bureau of Labor Statistics, marking consecutive monthly gains since late 2023. This growth stemmed from higher prices in both fuel and nonfuel imports, despite a 0.8 percent annual drop in overall import prices. Fuel imports, especially petroleum and natural gas, climbed by 1.8 percent, though they declined by 4.1 percent yearly. Nonfuel import prices nudged up by 0.2 percent, buoyed by consumer goods, foods, and capital goods price hikes, against a 0.5 percent annual drop in nonfuel prices. Food prices, particularly for fish, meat, and bakery items, increased, as did prices for finished goods categories like consumer goods, capital goods, and automotive vehicles in February.

Export prices in February rose by 0.8 percent, slightly below January’s 0.9 percent increase, influenced by gains in both the agricultural and nonagricultural sectors. Despite these monthly uplifts, U.S. export prices fell by 1.8 percent annually, the smallest yearly decline since February 2023. Agricultural export prices recovered by 0.8 percent in February, bouncing back from a 1.0 percent January reduction, with higher prices for nuts, fruits, vegetables, and wheat, though annual prices dipped by 8.9 percent due to lower soybean, corn, and wheat prices. Nonagricultural export prices also rose by 0.8 percent, driven by industrial supplies, materials, and capital goods price increases, yet saw a 1.0 percent year-over-year drop. The nonagricultural industrial supplies and materials price index climbed by 1.6 percent, boosted by a 2.8 percent fuel price rise. Finished goods categories, including capital goods, consumer goods, and automotive vehicles, registered overall price increases in February, with capital goods leading due to higher prices for industrial machinery and telecommunications equipment.

The University of Michigan’s Consumer Sentiment index saw virtually no change in consumer sentiment and current economic conditions metrics. The consumer expectations index dipped slightly by 0.6% to 74.6%. The upcoming November election stands as a primary concern for consumers, who are reserving judgment on the economy. Year-ahead inflation expectations remained steady at 3%, with long-term inflation forecasts also unchanged at 2.9%.

Initial jobless claims came in slightly below the anticipated 210,000 mark. Continuing claims rose to 1.811 million, suggesting a slight increase in job-finding difficulties. The four-week moving average for claims marginally decreased to 208,000.

The MBA’s weekly mortgage applications surged by 7.1%. The refinancing index climbed by 12%, and the purchasing index improved by 6% from the previous week. The refinancing share of mortgage applications increased by 1.6% to 31.6%. The average rate for a 30-year fixed jumbo mortgage dropped by seventeen basis points to 7.04%. Similarly, the rate for a 30-year fixed conforming mortgage decreased by eighteen basis points to 6.84%. The total commercial and multi-family mortgage debt outstanding rose by 2.8%, with overall mortgage debt up by 0.9%.

Technical Story:

This week’s cash flow management in review:

The previous week was successful regarding cash flow management; I was able to retain enough capital to bolster my savings. Utilizing Rocket Money has heightened my awareness of bill due dates and spending patterns. Given that this is the rare month with three pay periods, I’m aiming to augment my savings and reduce my credit card balance even more.

Grade: C

Reason: Some improvement


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